Indiana Gasification says critics, like Vectren, are flat out wrong

Indiana Gasification LLC (IG), developer of a controversial coal gasification project on the Ohio River near Rockport, Ind., lashed back Oct. 10 in a lengthy public statement designed to rebut some of its critics.

In November 2011, the Indiana Utility Regulatory Commission approved a deal for the Indiana Finance Authority (IFA) to buy most of the substitute natural gas (SNG from the project and sell it into the pipeline system. But various parties, including natural gas distribution units of Vectren (NYSE: VVC), have lashed back, saying the SNG will be too expensive over time and will cost gas users too much money.

IG said Oct. 10 that it is particularly responding to recent comments made by state Senate Minority Leader Vi Simpson, who stated recently: “I don’t think it’s appropriate for the state on behalf of the ratepayers to speculate in the natural gas market.”

IG co-developer Bill Rosenberg answered: “Under the status quo, the state leaves ratepayers 100 percent exposed to volatile swings in the commodity markets. There couldn’t be anything more risky for ratepayers than what the state already does. That’s precisely what the IG project addresses. For a fraction of supply, it replaces the economics of gas with the economics of coal, which is much more stable.”

Rosenberg said Simpson was probably referring to the fact that the state acts as the intermediary to achieve this supply diversification. “Senator Simpson said that the IG-IFA contract was against all the free market principles she believes in,” he noted. “But forcing consumers to remain captive to a state-sanctioned monopoly is hardly a free market. The IG project will bring a dose of competition that will benefit everyone.”

In a recent newspaper op-ed column, Rosenberg and IG Project Director Mark Lubbers answered recent criticisms leveled at the IG plant by Vectren. Vectren has publicized a claim that the IG project would cost ratepayers more than $1bn in the first eight years of operation when in fact the IG project guarantees consumers will save $100m over the course of its contract with the state, IG said. 

“Vectren cooked the books,” said Lubbers. “And Vectren understands completely why its analysis is flawed. They know that thinly traded futures options are no predictor of future gas prices. They know that if gas prices are as low as they say, then coal prices will also be low and the price of substitute natural gas (SNG) has to be adjusted downward. And Vectren knows that the only right way to assess the economics for the consumer is to consider the entire gas bill, not just the 17 percent of the gas bill represented by IG’s gas.”

Rosenberg said that it was “highly suspicious” that Vectren is trying to kill a plant that will provide billions of dollars in economic benefits to Indiana over the term of the contract. “Since Vectren is trying to kill the plant,” Rosenberg said, “the economic analysis that’s really needed would compare what will happen to ratepayers if they are left 100 percent captive to Vectren. And if you run those numbers you stumble into some amazing facts.”

When Vectren calculated its so-called “consumer losses,” it compared the SNG price to the Henry Hub (HH) price for regular natural gas, a price set at a major transportation center off the coast of Louisiana. But Vectren customers don’t pay that price, said IG. They pay Vectren’s cost of gas, which is the amount it pays to its unregulated subsidiary, ProLiance. IG said Vectren purchased 97% of its gas from ProLiance last year, up from 71% in 2007.

According to Vectren’s 2011 Annual Report, the average price paid by Vectren for its gas over the last five years is $7/MMbtu. On average, this is $1.37 more than the Henry Hub price, IG contended.

Rosenberg said the transportation cost from Henry Hub would only be a fraction of the $1.37 mark-up and that it wasn’t easy to tell what the rest is. “For the entire period under review, Chicago City Gate prices were within pennies of the HH price and it doesn’t cost much to move gas from Chicago to the Vectren service territory, so there’s a lot of cost to explain,” he said.

Indiana Gasification says its project will save money for consumers

IG said its project is contractually guaranteed to save consumers $100m over 30 years. “Nobody knows for certain what natural gas prices will be in five years when the Indiana Gasification plant begins commercial production, but there is significant evidence they will be much higher than today – natural gas drilling has fallen drastically because it is uneconomical, the power industry is using more and more natural gas as coal plants are replaced, and efforts are underway to begin exporting gas from the U.S.,” it added.

One claim revolves around the fact that the abundant supply of shale gas led Illinois Gov. Pat Quinn to in August veto legislation that would have forced many Illinois gas ratepayers to help finance a coal gasification plant in Chicago proposed by IG parent Leucadia National (NYSE: LUK).

“The State of Illinois in July fully approved 30-year SNG contracts between two major gas utility companies and another Leucadia affiliate, representing an economic structure similar to the Indiana Gasification contracts,” IG responded. “These contracts have been vetted by numerous state agencies, with capital costs, operating costs and rate of return fully scrutinized and approved. Governor Quinn vetoed a bill in August that would have made technical changes to some of the allocations of costs underlying those contracts. However, the current contracts do continue in effect and the governor has stated publicly that he wants the project to go forward. Previously the governor signed four other bills into law supporting the project. The Chicago project is exploring options for moving forward, and Leucadia remains committed to the project’s success.”

Another Vectren claim is that the developers of the IG plant are now seeking a federal loan guarantee similar to the infamous one provided to bankrupt solar panel maker Solyndra.

“The loan guarantee that would help finance the SNG plant is NOT ‘similar to the one provided to Solyndra,’” IG responded. “The IG loan guarantee is a Section 1703 loan guarantee (passed and signed into law in 2005). Solyndra received a loan guarantee under the Section 1705 program (passed and signed into law in 2009). Under section 1703, the project must be rated by outside ratings agencies (like S&P or Moody’s) and the borrower must pay any credit subsidy fee to cover the risk of default. In the 1705 loan guarantee program that Solyndra participated in, Congress paid for the credit subsidy that borrowers owed, inviting abuse by projects that were not credit-worthy.”

The designed annual usage in the Rockport plant would be about 3.85 million tons of Illinois Basin coal, with the possibility of substituting a portion of this with petroleum coke. SNG production would be about 47 million mmBtu (about 38 million mmBtu will be sold to the IFA). Sulfur in the feedstock will be processed into sulfuric acid, which IG will sell into the industrial market. Heat generated during the gasification process will be used to produce steam for steam turbines that can produce about 300 MW to meet essentially all on-site power needs, with utility interconnection for minor power balancing.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.