Clean coal technology may clean up the air, but it can also clean out a company's balance sheet.
Just ask Duke Energy (DUK). It is building the nation's first large-scale integrated gasification combined cycle (IGCC) plant at its Edwardsport, Ind. station. Duke is watching cost estimates escalate by at least a billion dollars. Dukes' delivered cost for the 618-megawatt IGCC facility is now estimated to reach $3 billion, or approximately $4.9 million per megawatt. As troubling as this may sound, the investment in IGCC technology is worth it.
Nobody thinks that combined cycle technology is inexpensive. Even combined cycle (natural) gas turbines (CCGT) are costly. They have to be. Both IGCCs and CCGTs have expensive heat recovery systems that require two separate turbines and two separate generators for each plant. But the capital investment lowers production cost. Lower production costs decrease consumers' energy costs.
Combined cycle power plants have lower production costs because they are efficient. They use less fuel to produce the same amount of electric power. Because they are more efficient, they also produce fewer pollutants per megawatt-hour.
The front end distinguishes the IGCC from the CCGT. It is where the additional costs are required to process coal so it behaves like natural gas.
Duke and General Electric (GE) are using the IGCC to gasify coal and produce synthetic gas. The gasification process is complex, involves a lot of costly equipment and has a lot of moving parts. It produces a natural gas-like substance that can be burned in a combustion turbine. With all these additional processes, there is no possibility an IGCC could ever be as energy efficient as a CCGT.
The expected efficiency of IGCC varies with the quality of the coal. It is expected to be in the range of 9,000 British Thermal Units (BTU) per kilowatt-hour. In contrast, a CCGT has a heat rate of approximately 7,000 BTU (smaller heat rates are more efficient). From the point of view of production costs, the cost of delivered coal must be significantly below the cost of natural gas for the IGCC to compete.
It is not just production costs. In 2006, the Electric Power Research Institute researched the costs for new IGCCs. They combined their estimates for capital costs of $2.7 million per megawatt, with an estimated capacity factor of 85%. Estimates for operating expenses were $31.14 per megawatt-hour. IGCC owners should expect a levelized cost (the cost of electricity generated by different sources) of approximately $45 per megawatt-hour, or 4.5 cents per kilowatt-hour, EPRI said.
It appears EPRI's capital cost estimates are too low for the Duke project. Unless Duke can dispense some of its capital costs, the Edwardsport station will be locked into higher levelized costs.
Duke has absorbed some of the capital costs. In 2010 and again in 2011, Duke expensed a total of $264 million. This will lower the levelized costs for Edwardsport, but not enough to absorb all the cost overruns. The question is, will Indiana's ratepayers absorb the remaining cost overruns?
The answer should be yes. While the capital costs seem high, the production costs will be low and the power from the facility will be able to support a base load. In the end, Indiana consumers and constituents should see long-term benefits compared to most alternatives.
The cost question requires looking beyond the facility and assessing the value chain associated with the facility. Any analysis should include long-term business activities tied to state and regional coalmines, coal transportation systems and the IGCC facility. In addition to adding $10 million or more a year in local payroll, the plant creates a tax base for local and state economies. A $3 billion tax base can fund local schools, police, fire and community services, at the same time lowering individual property taxes for the local community. That new tax base will be firmly anchored in the state and the local region for decades.
There is also the issue of energy security. The U.S. needs more power supplies that can run continuously in darkness and light, in wind or stillness. The nation also needs diversity and can't afford to rely on one source of fuel to power the economy. Consumers should be willing to pay for security and diversity.
Duke should be commended. It is providing leadership to advance the nation from first generation IGCCs to better and larger designs. It is piggybacking off the experience gained by Wabash Valley Power Association and TECO Energy (TE), which has been operating 262- and 250-megawatt IGCC demonstration plants since the mid-1990s. The value proposition is worth the investment.