The battle over the Indiana Gasification LLC project continues, with Vectren Corp. (NYSE: VVC) and related gas distribution companies telling the Indiana Utility Regulatory Commission that the substitute natural gas (SNG) produced from the coal-fueled plant would potentially be too expensive over the long term.
In November 2011, the URC approved a 30-year agreement between the Indiana Finance Authority and Indiana Gasification under which the authority would buy the SNG, which would then be re-sold to gas companies in the state. Various parties, including Vectren, industrial gas customers and citizens groups, immediately appealed the ruling.
On April 25, filed with the commission was an appeal brief from Indiana Gas Co. Inc. and Southern Indiana Gas and Electric Co., both d/b/a Vectren Energy Delivery of Indiana Inc., Ohio Valley Gas Corp., Ohio Valley Gas Inc. and Sycamore Gas Co. Their appeal is on whether the commission’s approval of the contract is contrary to law because the contract is not a final contract as required by Indiana code, and whether the commission’s approval of the contract is contrary to law because the contract does not provide a guarantee of savings for retail end use customers as required by Indiana code.
In 2002, the Indiana Legislature declared that “the state should encourage the use of advanced clean coal technology, such as coal gasification.” In 2009, the Legislature enacted the SNG Statute, which established a new role for the authority in the sale, purchase, and delivery of SNG produced by coal gasification facilities in Indiana.
Leucadia National Corp., a New York-based developer in the coal gasification business, formed Indiana Gasification for the purpose of developing a coal gasification facility in Indiana. This $2.7bn plant is to be built in Rockport, Ind., along the Ohio River. Leucadia will contribute $800m in private capital to the project, representing approximately 30% of the cost, the Vectren brief said. The remaining debt portion of the project, totaling approximately $1.875bn, will be under a federal loan guarantee from the U.S. Department of Energy.
The contract with the authority determines the price the authority will pay for the SNG it purchases from Indiana Gasification, which will be based in part on the price of coal used to manufacture the SNG. The price at which the authority can resell the SNG in the natural gas marketplace will be determined by the then prevailing market price for natural gas. Generally, the difference between the two prices – the contract price for SNG paid by the authority and the prevailing market price for natural gas – will be passed on to Indiana’s natural gas retail end use customers as either a credit or a charge on their monthly bills from Indiana regulated gas utilities, the Vectren brief noted.
Gas end-users bear too much risk, Vectren claims
“Retail end use customers bear a ‘disproportionate allocation of down side risk’ under the Contract,” the brief claimed. “lf the Contract price for SNG is lower than the market price for natural gas, only half of the savings will be passed on to retail end use customers in the form of a credit on their gas bills, with the other half of the profit going to Indiana Gasification. If the Contract price for SNG is higher than the market price for natural gas, retail end use customers will absorb 100% of the losses in the form of a charge on their gas bills. Petitioners project that the Contract could cause consumers to pay 7% more for their gas over the life of the Contract or, in a best case scenario, save consumers 3% on their gas bills with the base case projecting a 1% savings.”
In summary, the Vectren brief said: “The plan for construction of the SNG Plant near Rockport, Indiana has been highly publicized and highly contentious. It is, after all, a multi-billion dollar undertaking with outcomes ranging from $500 million in purported savings to $4 billion in projected losses to Indiana’s gas utility customers. The parties have diametrically opposed views about the success of the project and whether it will benefit or harm the millions of customers who will be forced to ensure a market for Indiana Gasification’s product. But regardless of which side of the fence one falls in this debate, one thing is clear: the Legislature has dictated the type of contract for the sale and purchase of SNG that is within the Commission’s jurisdiction to approve. Specifically, the Legislature empowered the Commission to approve a ‘final purchase contract’ that provides a guarantee of savings for all retail end use customers during the 30-year term.”
The brief added: “Instead, the Commission approved a Contract that is not final or even legally enforceable, because material terms are yet to be negotiated in connection with the Subordination Agreement and [Utility Management Agreements], making the Contract incomplete. Moreover, the Contract does not provide the guaranteed savings for all retail end use customers mandated by the SNG Statute. Therefore, the Commission’s approval of the Contract conflicts with the clear and unambiguous language of the SNG Statute and exceeds the agency’s authority as granted by the Legislature.”
Indiana coal not a guaranteed feedstock
Indiana Gasification has not guaranteed the use of Indiana coal at the plant and critics have pointed out that a planned barge dock at the site would allow the company to easily take in coal moving by barge from other states. The coal usage, with petroleum coke also possible as a supplemental feedstock, would be up to 3.5 million tons per year.
In Indiana Gasification’s base case analysis, the thirty-year average real dollar adjusted base contract price for SNG is about $6.60/MMBtu. With a thirty-year average market price in the base case analysis of over $7.50/MMBtu and a market differential sharing provision of the SNG contract, the company told the commission that the final price of SNG would be around $7/MMBtu.
With respect to the incidental electricity to be produced by the SNG project, the developer has testified that the exercise of commission jurisdiction over Indiana Gasification’s rates and charges or financing would inhibit it from competing with other entities that generate electricity solely for wholesale sales to energy utilities. While the SNG project’s primary purpose is to produce SNG, liquefied CO2 and other non-electricity products, the incidental production of electricity should marginally contribute to extending the useful economic life of existing generation facilities. The average electricity output of the SNG facility at any point in time is expected to be in the range of 250 MW-300 MW, but all but about 13 MW on an annual average will be needed for operation of the SNG facility.