POLY-GEN CCS PLANT DEVELOPERS HOPE TO SKIRT COST ISSUES FACING OTHER IGCC PROJECTS

Tamar Hallerman
GHG Monitor
07/20/12

As the country’s two remaining integrated gasification combined cycle coal plants under construction continue to face hurdles surrounding substantial cost overruns, developers of a new wave of IGCC projects with carbon capture and storage argue that they have found a way to skirt those issues—by producing sellable products beyond exclusively electricity. Starting in the 1990s, coal gasification was seen as the technology that would bring the industry into the 21st century. However, higher than expected costs caused many planned projects to sink prematurely, most failing to reach the construction phase. The two current IGCC projects under construction—Duke Energy Indiana’s 618 MW ‘clean coal’ Edwardsport power plant and Mississippi Power’s 582 MW Kemper County CCS project—have faced substantial cost overruns since construction has begun, to the tune of $1.3 billion and $484 million, respectively. Because of those overruns, both have received intense additional scrutiny from their state public utility commissions, as well as from members of the public and opposition groups, putting both of the projects’ futures in jeopardy at times. While both appear to be moving forward—Edwardsport is expected to come online this fall while Kemper County construction is currently at the 31 percent complete mark and moving forward—their experiences have not eased doubts about the financial viability of IGCC projects.

However, executives working on a new generation of IGCC projects that incorporate CCS are saying that they have found a way to keep costs manageable—by using the CO2 and hydrogen produced at the plant to make sellable products like urea fertilizer that can lead to additional revenue streams beyond traditional electricity sales. Two projects receiving funding from the Department of Energy’s Clean Coal Power Initiative program, Summit Power Group’s 400 MW Texas Clean Energy Project (TCEP) and SCS Energy’s 390 MW Hydrogen Energy California Project (HECA), are moving in parallel with that IGCC-poly-generation format in mind. In interviews this week with GHG Monitor, executives from both projects said that because of those revenue streams—both are planning on selling electricity, urea fertilizer and CO2 to nearby enhanced oil recovery operations—they are convinced that their projects will not face the same cost issues facing Duke and Mississippi Power. “The only reason that we can go forward without carbon legislation is because we are a poly-gen project that makes multiple products,” TCEP Project Director Laura Miller said. “What’s ironic is that of the three major products that we make, we make the least amount of money on power.”

SCS Energy CEO ‘Not Concerned’ About Potential Cost Increases

Chairman and CEO of SCS Energy Jim Croyle said that because of HECA’s poly-generation configuration and the revenue it is set to make based on its urea and CO2 sales, he is “not concerned in the slightest” about any future rise in capital costs for the project above its current $3.9 billion estimate. “Capital doesn’t matter. What matters is the relationship between revenue and capital,” he said in an interview. “The relationship between our capital and our revenue streams is really quite good. On the power side, we compete very nicely with other low carbon options that utilities have, and on the fertilizer side we can actually give a discount to market. So the capital and the revenue line up very nicely for HECA.”

Croyle said that a big issue facing SCS Energy when it considered taking over the HECA project from BP and Rio Tinto last year was the significant amount of capital needed to start up and operate an IGCC plant, particularly one with a CCS component, due in part to its high parasitic load. “But as we looked at all of these issues, it became obvious to us fairly early on that the problem was not the higher capital or operating costs, but the very inefficient use of that capital,” he said. “Power plants only make money on peak, not 12 months out of the year, so you have all of this additional capital that you’re applying to make a product that is only in demand for a limited period of time.” Croyle said that SCS chose to add on a poly-gen component in order to incorporate hydrogen to make products as the marketplace demands. “At night, when there’s low electricity demand, we can turn down the power generation and turn up the use of the hydrogen to make another product, and vice versa,” Croyle added, making HECA a more viable option because it could adjust which products it wants to sell and when, he said.

TCEP to Benefit from EPC Contract

Miller, on the other hand, said that she is also not worried about any potential future costs overruns for TCEP not only because of its poly-gen formula, but because of its signed engineering, procurement and construction (EPC) contracts with Siemens Energy Inc., the Linde Group and SK Engineering & Construction. Those contracts act as a safety net for any cost overruns above TCEP’s projected $2.4 billion estimate that may arise during project construction, Miller said, something that some other IGCC projects may not have in place. “We are in good shape because we’ve got that signed EPC contracts,” Miller said. “Our contracts stipulate that the project will cost ‘x’ billions of dollars and not a penny more and must come in on time and on budget. So we’re not worried about cost overruns because we have it in writing that there won’t be any.”

Miller said that TCEP also benefits from Texas’ deregulated electricity market structure. While projects do not have to get approval from the state’s public utility commission to build, they must also find a way to get their costs covered on their own and cannot rely on rate recovery from consumers. “Other projects in other states that have two problems—they don’t have a deregulated market, so they have to go to the PUCs in their state and ask if the cost of the project can be put into the rate base, which a lot of states are pushing back on,” Miller said. “Secondly, a lot of these other projects have not been poly-gen plants, and so it’s been especially difficult for them to find a way to cover the increased expenses of building a plant that captures carbon.” Miller added that because of TCEP’s ability to secure contracts for the CO2 and urea produced at the plant, Summit was able to sell its electricity to the city of San Antonio at a competitive market rate, which would not have been possible without other revenue streams to balance that out.

Gary Stiegel, director of the Major Projects Division at DOE’s National Energy Technology Laboratory, said that while IGCC plants with a poly-generation component can vastly improve the economics of a CCS project, the markets are finite for many of the products that can be made from the facilities. “[Poly-generation] has a future, but it’s a function of what products you produce,” he told GHG Monitor. “Many of these products such as urea only have a limited market, so you can only build a handful of these plants. You’ll either have to look for different products or a product that has a large market where several plants won’t impact the marketplace significantly.”