Presented by: Jeffrey G. Davis

Tax Incentives forTax Incentives forClean Coal ProjectsClean Coal Projects

Gasification TechnologiesGasification Technologies2005 Conference2005 Conference

San Francisco, CASan Francisco, CAOctober 10, 2005 October 10, 2005

Presented by:Jeffrey G. Davis

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Energy Policy Act of 2005:Energy Policy Act of 2005:Title XIII Title XIII –– Energy Tax Incentives Energy Tax Incentives

Two New Investment Tax Credits (ITC)Two New Investment Tax Credits (ITC)Section 48A: Qualifying Advanced Coal Section 48A: Qualifying Advanced Coal Project CreditProject CreditSection 48B: Qualifying Gasification Section 48B: Qualifying Gasification Project CreditProject Credit

Both are Both are ITCsITCs allowed during a taxable allowed during a taxable year for the “qualified investment” in year for the “qualified investment” in advanced coal project or industrial advanced coal project or industrial gasification project, respectively.gasification project, respectively.

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What is the What is the “Qualified “Qualified

Investment”?Investment”?

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““Qualified investment” generally is the Qualified investment” generally is the basis/cost of property meeting the basis/cost of property meeting the following requirements:following requirements:

““Eligible property”Eligible property”Part of qualifying project;Part of qualifying project;For advanced coal projects using integrated For advanced coal projects using integrated gasification combined cycle (gasification combined cycle (IGCCIGCC), necessary for ), necessary for the gasification of coal; andthe gasification of coal; andFor industrial gasification projects, necessary for For industrial gasification projects, necessary for the gasification technology.the gasification technology.

Placed in service by the taxpayer during the Placed in service by the taxpayer during the taxable year;taxable year;Constructed by taxpayer or acquired by taxpayer Constructed by taxpayer or acquired by taxpayer before first placed in service; andbefore first placed in service; andDepreciable or amortizable. Depreciable or amortizable.

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What is theWhat is theAmountAmount

of the ITC?of the ITC?

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Section 48A: Qualifying Advanced Section 48A: Qualifying Advanced Coal Project CreditCoal Project Credit

For integrated gasification combined cycle For integrated gasification combined cycle ((IGCCIGCC) projects:) projects:

ITC is 20% of the qualified investment.ITC is 20% of the qualified investment.Cap of $800 million in total Cap of $800 million in total ITCsITCs, which , which represents $4 billion of investment.represents $4 billion of investment.

For other advanced coal projects:For other advanced coal projects:ITC is 15% of the qualified investment.ITC is 15% of the qualified investment.Cap of $500 million in total Cap of $500 million in total ITCsITCs, which , which represents $3.33 billion of investment.represents $3.33 billion of investment.

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What is a “Qualifying Advanced Coal What is a “Qualifying Advanced Coal Project”?Project”?

Uses an advanced coalUses an advanced coal--based generation based generation technology to power a new electric generation technology to power a new electric generation unit or retrofit/unit or retrofit/repowerrepower an existing electric an existing electric generation unit;generation unit;Fuel input is at least 75% coal (i.e., anthracite, Fuel input is at least 75% coal (i.e., anthracite, bituminous coal, bituminous coal, subbituminoussubbituminous coal, lignite and coal, lignite and peat); andpeat); andHas nameplate generating capacity of at least 400 Has nameplate generating capacity of at least 400 MW.MW.Applicant must also show:Applicant must also show:

Expected that a majority of project’s output will be Expected that a majority of project’s output will be acquired or utilized; andacquired or utilized; andOwnership or control of a site large enough to Ownership or control of a site large enough to accommodate project.accommodate project.

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Section 48B: Qualifying Section 48B: Qualifying Gasification Project CreditGasification Project Credit

ITC is 20% of the qualified investment in ITC is 20% of the qualified investment in “qualified gasification projects.”“qualified gasification projects.”

Cap of $350 million in total Cap of $350 million in total ITCsITCs, which , which represents $1.75 billion of investment.represents $1.75 billion of investment.

Cap of $650 million of qualified investment Cap of $650 million of qualified investment per project that can be certified, which per project that can be certified, which would provide $130 million of would provide $130 million of ITCsITCs..

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What is a “Qualifying Gasification What is a “Qualifying Gasification Project”?Project”?

Uses gasification technology that converts coal, Uses gasification technology that converts coal, biomass or petroleum residue into synthesis gas biomass or petroleum residue into synthesis gas composed primarily of carbon monoxide & composed primarily of carbon monoxide & hydrogen for direct use or subsequent chemical hydrogen for direct use or subsequent chemical or physical conversion.or physical conversion.Carried out by an “eligible entity” in applications Carried out by an “eligible entity” in applications related to:related to:

ChemicalsChemicalsFertilizersFertilizersGlassGlassSteelSteelPetroleum residuesPetroleum residuesForest productsForest productsAgricultureAgriculture

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Certification ProgramsCertification Programs

Secretary of Treasury, in consultation with Secretary of Treasury, in consultation with Secretary of Energy, must establish Secretary of Energy, must establish programs to consider and award programs to consider and award certifications for each ITC.certifications for each ITC.Deadline: February 6, 2006.Deadline: February 6, 2006.

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Certification Process for Qualifying Certification Process for Qualifying Advanced Coal ProjectAdvanced Coal Project

Application period Application period –– 3 years from program 3 years from program establishment.establishment.Acceptance of Application by Secretary Acceptance of Application by Secretary –– within 60 within 60 days of receipt of an application.days of receipt of an application.Time to Meet Criteria Time to Meet Criteria –– within 2 years from date of within 2 years from date of acceptance, applicant must demonstrate that acceptance, applicant must demonstrate that certification requirements are met:certification requirements are met:

Environmental authorizations; andEnvironmental authorizations; andBinding contract for steam turbine (unless retrofit Binding contract for steam turbine (unless retrofit or or repowerrepower).).

Issuance of Certification, then . . . .Issuance of Certification, then . . . .Time to Complete Time to Complete –– within 5 years of certification, within 5 years of certification, applicant must place project in service or certification applicant must place project in service or certification becomes invalid.becomes invalid.Should timeline be compressed???Should timeline be compressed???

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Certification Process for Qualifying Certification Process for Qualifying Advanced Coal ProjectAdvanced Coal Project

Secretary is supposed to allocate credits in Secretary is supposed to allocate credits in approximately equal amounts (based on capacity) to approximately equal amounts (based on capacity) to projects using the following primary projects using the following primary feedstocksfeedstocks::

Bituminous coal;Bituminous coal;SubbituminousSubbituminous coal; andcoal; andLigniteLignite

Priority should be given to projects that include:Priority should be given to projects that include:Greenhouse gas capture capability;Greenhouse gas capture capability;Increased byIncreased by--product utilization; orproduct utilization; orOther unspecified benefits.Other unspecified benefits.

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Certification Process for Qualifying Certification Process for Qualifying Gasification ProjectGasification Project

Issuance period Issuance period –– certificates of eligibility issued over 10certificates of eligibility issued over 10--year period beginning on October 1, 2005.year period beginning on October 1, 2005.No additional timelines.No additional timelines.

Competitive Selection by Secretary Competitive Selection by Secretary ---- applicants must applicants must demonstrate:demonstrate:

Financial viability of project without Federal funding;Financial viability of project without Federal funding;Qualified investment will be spent “efficiently and Qualified investment will be spent “efficiently and effectively”;effectively”;Existence of a market for projects’ products;Existence of a market for projects’ products;Specified fuel to be gasified comprises at least 90% of Specified fuel to be gasified comprises at least 90% of the fuels required to produce chemical the fuels required to produce chemical feedstocksfeedstocks, , liquid transportation fuels, or liquid transportation fuels, or coproductioncoproduction of of electricity; andelectricity; andCompetence of project team, with preference given to Competence of project team, with preference given to successful track records.successful track records.

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ITC Reduction ITC Reduction –– No “Double Dipping”No “Double Dipping”

Amount of qualified investment (and thus Amount of qualified investment (and thus amount of the ITC) is reduced for:amount of the ITC) is reduced for:

Subsidized energy financing Subsidized energy financing –– financingfinancingunder a Federal, state or local program a under a Federal, state or local program a principal purpose of which is to provide principal purpose of which is to provide subsidized financing for energy subsidized financing for energy conservation or production projects; andconservation or production projects; andIDBsIDBs –– proceeds of taxproceeds of tax--exempt private exempt private activity bonds.activity bonds.

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““Double Dipping” Allowed?Double Dipping” Allowed?

Amount of qualified investment (and thus Amount of qualified investment (and thus amount of the ITC) does not appear to be amount of the ITC) does not appear to be reduced for:reduced for:

Loan guarantees;Loan guarantees;

TaxTax--exempt government bonds; andexempt government bonds; and

Grants.Grants.

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Responsibility for Establishing Responsibility for Establishing Programs: TreasuryPrograms: Treasury

Office of Tax Policy (Office of Tax Policy (OTPOTP))Assistant Secretary of Tax Policy position is vacant.Assistant Secretary of Tax Policy position is vacant.

Nominee Philip D. Morrison is awaiting Senate Nominee Philip D. Morrison is awaiting Senate confirmation.confirmation.

Of four deputy slots, two likely related to implementation Of four deputy slots, two likely related to implementation of this program:of this program:

Deputy Assistant Secretary (Tax Policy) Deputy Assistant Secretary (Tax Policy) –– Eric Solomon Eric Solomon (acting)(acting)Deputy Assistant Secretary (Regulatory Affairs) Deputy Assistant Secretary (Regulatory Affairs) –– Eric Eric SolomonSolomon

Office of Tax Legislative Counsel (TLC) expected to do the Office of Tax Legislative Counsel (TLC) expected to do the heavy lifting.heavy lifting.

Tax Legislative Counsel Tax Legislative Counsel ---- Michael Desmond (acting)Michael Desmond (acting)IRS expected to be heavily involved in the establishment IRS expected to be heavily involved in the establishment and operation of the ITC programs.and operation of the ITC programs.

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Treasury’s Mandate toTreasury’s Mandate toConsult with EnergyConsult with Energy

Statute requires Treasury to consult with Energy in Statute requires Treasury to consult with Energy in establishing the program and certifying projects.establishing the program and certifying projects.

As recently as last week, Treasury had not begun to As recently as last week, Treasury had not begun to consult with Energy.consult with Energy.

Treasury believes 180Treasury believes 180--day deadline will be met, but day deadline will be met, but Treasury anticipates using most of the 180 days.Treasury anticipates using most of the 180 days.

What will be the role of Energy?What will be the role of Energy?Energy policy arguably already established by Congress Energy policy arguably already established by Congress in enacting Energy Policy Act of 2005.in enacting Energy Policy Act of 2005.As ITC program, Treasury arguably should maintain As ITC program, Treasury arguably should maintain control, which appears to have been intent of taxcontrol, which appears to have been intent of tax--writing writing committees.committees.

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Staging the Certification ProcessStaging the Certification Process

Should applicants be required to demonstrate satisfaction Should applicants be required to demonstrate satisfaction of certain requirements as a prerequisite to advancing to of certain requirements as a prerequisite to advancing to the next stage?the next stage?

Save Resources Save Resources ---- applicants would not have expend applicants would not have expend resources to fully design project and prepare complete resources to fully design project and prepare complete application unless some indication project ultimately application unless some indication project ultimately may be certified.may be certified.Remove Uncertainty Remove Uncertainty –– other participants dealing with other participants dealing with applicant would have greater confidence that project applicant would have greater confidence that project would be taken from design to construction to would be taken from design to construction to operation.operation.

Section 48A has some element of staging Section 48A has some element of staging –– i.e., i.e., environmental permits and turbine contract.environmental permits and turbine contract.

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Future of the ProgramsFuture of the Programs

Impact of Hurricanes Katrina and Rita on the oil and natural Impact of Hurricanes Katrina and Rita on the oil and natural gas markets highlight the need for programs like this.gas markets highlight the need for programs like this.

Many industry participants are actively pursuing these Many industry participants are actively pursuing these opportunities.opportunities.

To be successfully, industry needs to push Treasury and To be successfully, industry needs to push Treasury and Energy for rapid implementation.Energy for rapid implementation.

Both Both ITCsITCs are limited in size, as a result of their revenue are limited in size, as a result of their revenue impact. If successful, there will be great arguments for impact. If successful, there will be great arguments for extending and expanding these programs.extending and expanding these programs.

QUESTIONS?QUESTIONS?

The vision to see, the resources to achieve.The vision to see, the resources to achieve.