The Kentucky Public Service Commission on Nov. 24 approved Louisville Gas and Electric (LG&E) and Kentucky Utilities (KU) to enter into refined coal purchase contracts with Clean Coal Solutions LLC covering the location of refined coal facilities at three power plants.
LG&E and KU are subsidiaries of PPL Corp. (NYSE: PPL) that do coordinated coal buying and co-own several power plants. The approved refined coal production arrangements cover the Ghent, Mill Creek and Trimble County generating stations.
Clean Coal Solutions (CCS) intends to have corporate subsidiaries install and operate refined coal production facilities at these generating stations. CCS’s refined coal production process involves chemically treating feedstock coal to reduce NOx and mercury emissions while not affecting the thermal output associated with coal combustion. LG&E/KU did not conduct competitive bidding for the facilities due to the limited number of potential suppliers, but evaluated the CCS proposal against the proposal of another supplier of a similar refined coal process. As a result of these evaluations, LG&E/KU chose CCS, which has implemented 17 similar refined coal projects in the United States, including one at the Tennessee Valley Authority‘s Paradise Generation Station in Muhlenberg County, Kentucky.
At no cost to LG&E/KU, the CCS subsidiaries will perform the installation and operation of the facilities at Ghent, Mill Creek and Trimble County under licenses granted by LG&E/KU for use of an area less than one-half acre at each site. Under the proposal, LG&E/KU will sell feedstock coal to a CCS subsidiary at the weighted average cost of coal in inventory at the specific generating station. After treatment, the resulting refined coal would be resold to the utility companies at the same price at which the feedstock coal was initially sold.
After completing the installation of the facility at each respective generating station, the CCS subsidiaries anticipate either selling or leasing the facilities to tax equity investors who would be able to use the tax credits available from the refined coal process to reduce their federal income taxes. The companies’ agreements with the CCS subsidiaries would be terminated upon the lease or sale of any of the facilities to tax equity investors, and LG&E/KU would then negotiate similar agreements with the investors. The LG&E/KU agreements with the tax equity investors would likely contain similar obligations and responsibilities as contained in their agreements with the CCS subsidiaries, but would have a longer term (expected to run to the fourth quarter of 2021, unless the existing tax credit is extended).
LG&E/KU will have the option of not proceeding with an agreement with a tax equity investor and will not guarantee or warrant the performance of any of the facilities.
The tax benefits of refined coal production currently amount to $6.60 per ton of coal. To qualify for the refined coal tax credit provided pursuant to Section 45 of the U.S. Internal Revenue Code, the refined coal must show a minimum NOx emissions reduction of 20% and a minimum reduction of either SO2 or mercury emissions of 40%, compared to the emissions levels of the feedstock coal. The provisions of the tax credit also require that a facility producing refined coal must have been in service before the end of calendar year 2011, which means that the number of qualifying facilities that can be moved to these three power plant sites is limited.