By Annalee Armstrong and Taylor Kuykendall

The coal sector is reeling after the federal government decided it would pull funding for one of the industry's most prominent prospects for fitting coal generation into an energy and climate policy with tight restrictions on greenhouse gas emissions.

The U.S. Department of Energy has opted to enter into a structured closeout of the $1.1 billion in funding pledged to the FutureGen 2.0 carbon capture and sequestration project originally awarded in 2010 under the American Recovery and Reinvestment Act of 2009. The agency has already invested about $116.5 million since 2010 for work on the power plant, while another $86 million has been invested in the underground storage site and some associated infrastructure.

The project, existing in various iterations since 2003, has suffered from a long line of delays and challenges. The DOE opted to pull the remainder of funding for the project, citing a desire to "best protect taxpayer interests" as the agency has determined there is insufficient time to complete the project before federal funding expires in September.

"While this is an unfortunate outcome, the department acquired valuable information and tangible benefits from the work accomplished to date," said DOE spokesman Bill Gibbons. "That progress will continue to benefit our broad clean coal portfolio, helping to further the deployment of carbon capture and storage projects and the development of next-generation technologies."

The project aimed to retrofit a coal-fired power plant in Illinois so that it could capture its carbon emissions and store them underground. The DOE will retain the rights to use the property acquired at the site for a future storage project.

“ At the end of the day, carbon capture and storage is a technology that the federal government is effectively trying to mandate, and if the federal government is going to be in the business of mandating the technology, then they also should be in the business of nurturing it through adequate financial and related support. ”

 Kipp Coddington, general counsel, North American Carbon Capture and Storage Association

FutureGen Alliance CEO Kenneth Humphreys said in a statement that though the FutureGen Alliance is committed to advancing CCS and believes there are solutions to address the impending deadline, it must comply with the DOE's decision. Humphreys said CCS is a critical piece of the effort to reduce carbon emissions.

"FutureGen 2.0 is the only project in the world that demonstrates oxy-combustion technology and fully integrates deep saline geologic storage," Humphreys said. "Our hope is that industry and government will continue to find ways to develop CCS technology for a cleaner, more secure energy future."

Coal trade associations the National Mining Association and the American Coalition for Clean Coal Electricity both reacted swiftly to the news. Despite the DOE committing over $6 billion to clean coal technology under the Obama administration, Laura Sheehan, senior vice president for communications at ACCCE, said Obama was conducting "misleading double-talk on clean coal technology."

"President Obama and his federal agencies are clearly opposed to advancing carbon capture and storage technology, despite repeated assurances," Sheehan said. "What makes this action even more disgraceful is then-Senator Obama's full-throated support for FutureGen in 2006."

Philip Gonet, president of the Illinois Coal Association, told SNL Energy that his members were banking on the project to open up demand for Illinois coal within the state's borders. About 85% of the state's coal is used outside of Illinois.

"The stimulus money had to be spent by the end of the fiscal year," Gonet noted. "Of course that's not possible, because it's not even under construction. To me, that seems like it can be fixed. Let's get an act of Congress to reauthorize it or do something with it."

U.S. coal producer Peabody Energy Corp., one of the major backers of the project and member of the FutureGen Alliance, issued a statement Feb. 4 that called on the Obama administration to reverse its decision to suspend the project.

"It makes no sense to pull the plug on $1 billion committed to America's signature near-zero emissions power project at such a critical time for these investments in technology. … We have the knowledge to advance low-carbon technologies to commercial scale and must demonstrate our leadership and our will," said Peabody Energy Chairman and CEO Gregory Boyce.

According to a letter the FutureGen Alliance sent to the DOE, the project is the only one of its kind with an investment-grade 20-year power purchase agreement valued at nearly $5 billion. The group said it has "drawn considerable support of brand-name international banks and first-tier equity partners capable of bringing $700 million in private capital" to the project.

Without action to reverse the funding withdrawal, either by the agency or Congress, the project could be the latest in a series of failed attempts to accelerate CCS technology development.

Another flop in effort to lift CCS

A recent SNL Energy report revealed that eight years after the DOE began offering loan guarantees for "innovative clean energy projects," few applicants had bothered to apply and many who did withdrew over low natural gas prices. Southern Co.'s Kemper plant, once held up as a potential roadmap to CCS technologies, has suffered from numerous cost overruns.

To coal's opponents, it comes as no surprise that these projects are failing. Dave Hawkins, director of climate programs for the Natural Resources Defense Council, said that with natural gas prices where they are, it's difficult to imagine an economic justification for any sort of new coal plants in the foreseeable future.

"The coal industry itself basically wants to have it both ways," Hawkins said. "It wants to make jargon that we shouldn't be doing anything to address climate change and yet we should be spending a lot of money on a technology whose sole purpose is to address climate change. That's a fundamentally irrational decision. There's no surprise there's very little political support for an industry that takes that position."

Holly Bender, deputy director of the Sierra Club Beyond Coal campaign, told SNL Energy that while the FutureGen project is touted as "near-zero emissions," it actually lacks widely available pollution controls, has lax permit requirements and from a "citizen enforcement perspective" is "no different than a traditional coal plant." The other major problem, Bender said, is that FutureGen is the second-most expensive coal plant in the United States, while solar and wind power are available at a cost that is orders of magnitude less expensive than FutureGen.

"Wall Street knows that solar continues to break records and report out on superlative achievements. … All you need to do is look at the decline in coal stocks over the past several years to draw the conclusion that investing in coal is risky at best," Bender said.

Joe Smyth, a spokesman for Greenpeace, told SNL Energy that the coal industry is avoiding "facing the reality that we need to quickly move away from coal." He added that alternatives like wind, solar and improved energy efficiency are better-proven investments for minimizing environmental impacts.

"Carbon capture and sequestration is a distraction from real climate solutions like renewable energy — it is too expensive, risky, and there is no way that it could be deployed at scale fast enough to significantly reduce emissions in the time frame needed to avoid the worst impacts of climate change," Smyth said. "CCS also fails to address the damaging environmental impacts of coal throughout its lifecycle, from mining to coal ash."

Sean Casten, president and CEO of Recycled Energy Development, an organization dedicated to helping manufacturers reduce greenhouse gas emissions and capture wasted energy, said there simply is no business case for investing in "clean coal" that is "not implicitly predicated on public subsidy for permanently non-competitive technology."

"The core, unavoidable problem is thermodynamics," Casten said. "There is no way to burn coal and then selectively remove pollution that does not require an increase in capital and operating costs to a base coal plant."

He said capital costs are necessarily increased to remove the pollution and means a coal plant outfitted with CCS will always be more expensive than a plant with no such controls. Other power generation sources, Casten said, comply with existing air standards and are cheaper to build and operate. The proof, he added is in the data showing that coal generation's share of U.S. electricity production has steadily fallen since the passage of the Clean Air Act.

"That's pretty decisive proof first that 'clean coal' is a lousy investment and that even if you built it, it's not going to run — and generate revenue — nearly as often as you'd like," Casten said. "And the cause is entirely due to basic physics that will never be solved no matter how much (public or private) money we throw at the problem. To (very loosely) quote the Clash, we fought the laws of thermodynamics, and the laws won."

“ I suppose it's possible that there will suddenly be a huge pot of capital willing to invest billions of dollars in an unproven technology with long construction times and regulatory-dependent cash flows. But unicorns are more likely. ”

 Sean Casten, president and CEO, Recycled Energy Development

What private investors understand, Casten said, is that coal can be cheap or coal can be clean but not both. He added that he believes that upcoming restrictions on greenhouse gas emissions can be met by the energy sector without clean coal technology.

"Even leaving aside the irreducible thermodynamic and cost problems, a bet that clean coal is going to come online fast enough to make any meaningful contribution to CO2 reduction is a bet on unicorns," Casten said. "I suppose it's possible that there will suddenly be a huge pot of capital willing to invest billions of dollars in an unproven technology with long construction times and regulatory-dependent cash flows. But unicorns are more likely."

Kipp Coddington, general counsel for the North American Carbon Capture and Storage Association, who was not directly involved with the FutureGen project, said in an interview that the private sector has been "mandated" to develop carbon capture projects, when the DOE should be shouldering the burden.

"At the end of the day, carbon capture and storage is a technology that the federal government is effectively trying to mandate, and if the federal government is going to be in the business of mandating the technology, then they also should be in the business of nurturing it through adequate financial and related support," Coddington said. "It doesn't surprise me in the least that there was not significant private sector capital pouring into the project."

Gonet, with the Illinois Coal Association, noted that the FutureGen project lacked the sort of certainty that many private investors would have liked to see.

"It's the first of its kind," Gonet said. "Everyone wants to be the fifth or the sixth one. That's why this makes sense as a public-private partnership: because of the risk involved. If the risk could be shared, it makes sense."

Coddington said the DOE's decision to withdraw funding will send a ripple through the entire CCS industry.

"It is most unfortunate and does portend a more complicated future for the development of the technology, not only in the United States but worldwide, as many parties were looking to that project as an enabler for the further development of carbon capture and storage," Coddington said. "There needs to be an understanding that these projects are apt to be noncommercial, certainly in the early years, and that is certainly the case for a project that is doing deep saline injections."

Coddington challenged the EPA's inclusion of CCS technology in the agency's upcoming 111(b) new source performance standards because the technology needs more time before it is market-ready, despite the EPA's insistence that CCS has proven to be feasible.

The EPA declined to comment on FutureGen but said the agency will be addressing CCS for new coal-fired power plants in its final rule to be released later this summer. In the agency's proposed new source rule, released in January 2014, FutureGen is detailed as one of the few CCS projects underway. The rule says the agency believes that partial CCS is "feasible" because it has been demonstrated through "an extensive literature record, fossil fuel-fired industrial plants currently in commercial operation and pilot-scale fossil fuel-fired electric generating units currently in operation."

Greenpeace protested the construction of the FutureGen Alliance coal project, calling the project a waste of taxpayer dollars with this 2009 billboard near the project site. Source: Greenpeace

In comments submitted to the EPA about the proposed rule released in December 2014, industry members complained that the EPA did not include CCS as an option for existing plants under the 111(d) rule because the agency felt it lacked information on the technology, yet in the new source rule the EPA mandated installation of CCS at new power plants and said the technology had been proven.

Coddington said the DOE's decision to halt support of FutureGen undermines the EPA's current opinion on the technology.

"That rule was already on difficult legal and factual grounds, and now I would say that foundation is even weaker," Coddington said. "EPA can mandate the use of the technology all it wants, but industry cannot deploy a technology that is not ready to be deployed, or is uneconomic. So I do not believe there is anything that EPA can do here."

In a Feb. 4 statement, National Mining Association President and CEO Hal Quinn said the department's decision was counter to its rhetoric on addressing climate change.

"This decision cannot be reconciled with the administration's proposal to require CCS as the only acceptable technology for any new coal-fueled power plant in the U.S.," Quinn said. "Last month in his State of the Union, the president called for American leadership on addressing climate change. DOE's decision signals a retreat from a transformative technology solution."

FutureGen's troubled past

"Someone should write a book about this project," Gonet told SNL Energy, noting a bumpy journey that began more than a decade ago.

The project was first proposed by the Bush administration in 2003. It was originally planned to capture carbon using integrated gasification combined-cycle technology but was canceled in 2008 as costs to develop rose.

The Obama administration in 2010 revived and restructured the program as FutureGen 2.0 and swapped technologies for oxy-combustion technology to capture the CO2 and inject it into geologic formations. The FutureGen Alliance began work on phase 1 of the revised project in October 2010. A year later in November 2011, the owner of the Morgan County power plant, Ameren Corp., announced plans to close it and discontinued its agreement with the DOE. The FutureGen Alliance began negotiating the purchase of the plant to continue development.

The project received a major boost in December 2012 when the Illinois Commerce Commission approved a power procurement plan that required utilities in the state to purchase all of the electricity produced at the 168-MW facility for the next 20 years. In February 2013, the DOE approved phase 2 of the plan, followed by the release of the final environmental impact statement in October 2013.

In September 2014, the U.S. EPA issued its approval of the construction permits for the injection wells, which the FutureGen Alliance saw as one of the last major hurdles to building the project.

FutureGen seemed headed for construction, despite a challenge to the construction permit by the Sierra Club arguing that the coal-fired power plant's construction permit failed to adequately address the project's emissions. The environmental group most recently appealed in December 2014 an Illinois Pollution Control Board decision that upheld an earlier decision by the Illinois EPA that determined the CCS plant would not lead to a significant net emissions increase.

Upon completion, FutureGen would have been the only fully integrated CCS project in the world and would have been one of 22 projects either in operation or under construction in the world. The International Energy Agency has previously called for at least 100 CCS projects by 2020.