By Taylor Kuykendall

Opinion as issued by the Court of Appeals of Indiana on October 30 with reference to the appeal from the Indiana Utility Regulatory Commission.

Though the U.S. government has been offering loan guarantees for "innovative clean energy projects," including those using coal for fuel, in solicitations dating back to 2006, interest in the $8 billion program was initially limited and many applicants withdrew over low natural gas prices, government records show.

Some in the industry have praised the potential of carbon capture technologies in the long term, but many in the U.S. have panned the technology as too expensive for commercial development, particularly as a near-term solution to climate change.

With newly proposed regulations on the horizon that would essentially outlaw any new coal plant without carbon capture technology, the U.S. Department of Energy is seeking to financially back coal-based power generation and industrial gasification projects that can use coal in a way that emits less carbon dioxide. Further developing carbon capture technology was a key highlight of President Barack Obama's recently unveiled agreement with China to address climate change.

According to a status update on the fossil energy loan guarantee program provided to SNL Energy in response to a Freedom of Information Act request, developers of 11 projects have applied to the program following solicitations published in 2006 and 2008. As of the June status update, which was drafted for congressional appropriation committee members, all but three of the projects were withdrawn or failed to meet program criteria. One of the three remaining projects was on hold at the request of the applicant.

"Many of these projects withdrew or chose not to proceed due to changing market economics associated with the dramatic reduction in natural gas prices over this time period," the report states.

That high natural gas prices were a primary driver in the initial interest of the project is evident in a transcript of testimony from parties interested in the loan guarantee program presented to the DOE in June 2007. Michael Walker, then vice president of E3 Gasification, part of the Indiana Gasification LLC team, was suggesting coal gasification as a solution to concerns over high natural gas prices, which in years since has largely been solved by newly accessed gas in domestic shale plays that have caused a glut in natural gas markets.

"The loan guarantee program was initially discussed in Senate hearings as something that could help address this issue. … But the DOE guarantee is still critical to the project because the technology we are using is, you know, not commercial in a broad sense," Walker said in the 2007 testimony in regard to natural gas supply and prices. "It's been used in limited applications. And that technology risk will make financing a project much more expensive in the private markets than it could be … with a DOE guarantee."

The development of carbon capture technologies could be a key determinant of future coal demand as pressure mounts to reduce carbon emissions. The technology, however, is in a unique position in which support is limited. The industry bemoans the price tag on capturing carbon dioxide, while many environmentalists are against saving any role at all for coal mining in the economy.

Bruce Nilles, senior campaign director for the Sierra Club's Beyond Coal campaign, told SNL Energy that the organization opposes carbon capture technologies for the electric sector due to its expense and the fact that coal is "dirty from the mining through ash disposal" process regardless of whether carbon is emitted. Nilles said developing the technology for nonelectric use such as steel mills and cement industries is not opposed by the Sierra Club, but its use in the electricity sector, he said, is "expensive" and "unnecessary."

"We have opposed Kemper [a carbon capture plant in Mississippi that receives funding through another DOE program] throughout the process — until our recent settlement — and are currently opposing the FutureGen Alliance project in Illinois. The latter is particularly egregious because the current permit does not require capture of CO2 and allows high non-CO2 emissions," Nilles said. "Our goal is to have all coal and gas out of the electric sector by 2030 — so we urge the administration to focus its funding on non-fossil fuel investments and/or non-electric sector applications."

The status update shows that proposed projects have sought $22.87 billion in loan guarantees through the 2006 and 2008 solicitations for fossil fuel projects as of June, with individual requests ranging from $647 million to as much as $3.74 billion. The two remaining projects that were reported to still be undergoing due diligence are seeking a cumulative $3.44 billion in loan guarantees.

Progress on few active projects slow s

The update to Congress does not name the projects seeking the loan guarantees, and DOE officials would not release information on individual projects. However, according to Indiana regulatory filings, the requested loan amount for the project on hold but not withdrawn is consistent with funding sought by Leucadia National Corp.'s Indiana Gasification plant, which hit a bump when state lawmakers passed legislation in 2013 subjecting the plant to new project requirements likely to be difficult for the company to meet.

A project manager for the Indiana Gasification project told SNL Energy in a July interview that the project's fate was essentially in the hands of the governor. The company recently received a 12-month extension of a construction deadline, allowing the $2.8 billion project until June 27, 2015, to commence construction.

In a 2013 report, Leucadia said both its Indiana Gasification and Mississippi Gasification LLC projects had been selected for due diligence phases of the DOE loan application process. The Mississippi Gasification project, which according to a 2010 report from Synapse Energy Economics Inc, was seeking $1.69 billion in loan guarantees, appears to be one of the active applications in the due diligence phase.

In the company's 2009 annual report, Leucadia announced that its gasification projects all faced the risk "that long-term natural gas prices will remain too low to make the projects feasible." Leucadia did not respond to an SNL Energy request for comment, and the latest update on the Mississippi project found was a report from The Mississippi Press and Mobile, Ala.'s Press-Register that said the company's initial plan to locate the project at a Moss Point, Miss., site had fallen through after four and a half years of negotiating with local officials. The outlet reported in July 2013 that a manager of the project said the company would seek another location in the region.

Another of the applicants undergoing the due diligence phase, according to the update, is seeking $1.75 billion in loan guarantees. That is the same amount DKRW Advanced Fuels LLC has publicly acknowledged it is seeking in loan guarantees from the DOE for its proposed Medicine Bow project, a coal gasification and liquefaction facility in Wyoming.

Medicine Bow would be located in south-central Wyoming at the mouth of a coal mine with 180 million tons of coal reserves and would produce and sell 20,000 barrels per day of low-sulfur and low benzene regular gasoline, according to DKRW's loan application, provided in response to an SNL Energy FOIA request. A second function of the plant was redacted from one page of the application, though the company has also said it would sell carbon dioxide from the plant for enhanced oil recovery.

“Our goal is to have all coal and gas out of the electric sector by 2030 — so we urge the administration to focus its funding on non-fossil fuel investments and/or non-electric sector applications.”

 Bruce Nilles, senior campaign director for Beyond Coal, Sierra Club

"We believe that our project will provide the most economic demonstration of coal gasification technology in that we are producing gasoline which traditionally has a high margin over crude oil compared with other projects that produce synthetic natural gas and/or electricity which have generally lower spreads relative to [West Texas Intermediate crude oil]," DKRW wrote in its 2009 application for the loan guarantee. "This project will also demonstrate that carbon capture and sequestration technologies can be implemented today using technologies that have been in use for the past 30 years to capture CO2 … and sequester it in oil fields that are suited for enhanced oil recovery."

In the application, DKRW also points to support that Obama has shown for coal technologies, a line perhaps unfamiliar in a political landscape now tinged with references to the administration's " war on coal."

"President Obama supports the full utilization of other domestic sources of energy including coal," DKRW's application stated then. "Specifically, President Obama, as a Senator has supported more [research and development] and loan guarantees for the coal-to-liquid fuel industry, among other approaches."

The DKRW project is being combated by WildEarth Guardians, an environmental group that recently wrote to the DOE to ask it to reject the company's loan guarantee application. Arch Coal Inc., a project partner on Medicine Bow, recorded an other-than-temporary impairment charge of $57.7 million in the third quarter of 2013 after the project failed to progress to the next stage of development, saying it was appropriate "given the absence of a specific path forward."

DKRW did not respond to requests for information on its project.

Can a loan program achieve DOE goals?

The loan guarantee program originates from the Energy Policy Act of 2005. That legislation created a program intended to reduce the investment risk on new projects that would avoid, reduce or sequester greenhouse gases and employ new or significantly improved technologies as compared to current commercial technology by backing it with government funding.

A DOE official told SNL Energy that the solicitation is part of an "all-of-the-above approach" to energy. While the official declined to comment on specific projects or provide information on the number of applicants to any of the solicitations, the official did say a representative of the DOE's Loan Programs Office participated in several industry events this year and that the DOE is pleased with the response so far to the latest ongoing solicitation.

Peter Davidson, executive director of the DOE's Loan Programs Office, wrote in a recent post on the DOE website that loan guarantees "can be an important financing tool" for technological innovation in the coal space. He said the agency was "poised to help" coal technologies "on the edge of widespread development."

"Coal remains an important part of the nation's all-of-the-above energy strategy and advanced fossil energy technologies will play a large role," Davidson wrote. "The department is working with the industry to support those innovative technologies from the lab to commercial scale. "

However, as politicians such as Sen. Joe Manchin, D-W.Va., have pointed out, the program has yet to actually issue any loan guarantees for coal projects from prior solicitations. Manchin even hinted at potential legislation that would require the DOE to allow available funding for advanced fossil fuel projects to be distributed for development projects.

"I will do everything in my power to continue pushing all relevant federal agencies to live up to their responsibilities to ensure the reliability of our national electricity system," Manchin said in a September press release that also called for accelerating the loan guarantee process. He added, "It is long past time that these agencies recognize that we will rely on fossil fuels for decades to come, and rather than simply forcing plants to close, we need to figure out how to help them run more efficiently."

Despite materials from Manchin's office suggesting that a bill to address the unused loan guarantee funds would be filed this fall, it does not appear such legislation has been introduced by Manchin. A request for more information on the proposed legislation was not returned by Manchin's press office.

“Coal remains an important part of the nation's all-of-the-above energy strategy and advanced fossil energy technologies will play a large role.”

 Peter Davidson, executive director, U.S. Department of Energy Loan Programs Office

According to one document provided as a result of SNL Energy's FOIA request, aside from the three projects on hold or being reviewed, the DOE also recommended Tenaska Inc.'s Taylorsville Energy Center, an Illinois project eventually nixed by the company, for the second stage of the application project. Another project by Secure Energy Decatur LLC was turned down due to concerns that the company had not demonstrated that its project offered reasonable assurance of full repayment of the guaranteed loans.

The DOE maintains an online listing of published environmental impact statements that includes notices of environmental assessments of the Medicine Bow, Mississippi Gasification, Taylorsville and Indiana Gasification projects. The agency has also posted an EIS for a since- canceled TX Energy Inc. coal project.

The limited use of the loan guarantee program even prompted the Congressional Research Service to publish a report suggesting that members of Congress consider why loan guarantees have yet to have been issued.

"The [U.S. EPA] proposals to regulate CO2 from new and existing coal-fired power plants have arguably introduced more uncertainty into the future of coal," that report stated. "Whether the 2013 and 2014 EPA proposals will create demand for loan guarantees, or have the opposite effect, is not clear."

A new Congressional Budget Office report titled "Federal Policies and Innovation" questions whether the government should be sponsoring facilities that are leading the way on reduction or capture of carbon emissions from coal-fired power plants. By taking on some of the risk, the DOE hopes to stimulate a cost reduction in the technology and make it more commercial-friendly.

"At least one problem with this strategy is that DOE's program is not nearly large enough to reduce the costs of building such plants, given normal patterns of industrial cost reduction," the November CBO report states. "The federal government would have to spend perhaps tens or hundreds of billions of dollars to make a substantive impact on a number of industries on the basis of procurement alone; that kind of additional discretionary spending is unlikely to be forthcoming."

In 2013, the DOE launched another solicitation for federal loan guarantees for advanced fossil energy projects. The final deadline for the last second-stage submission of that solicitation is scheduled for Jan. 29, 2016.