Editor's Note: Please find below a Letter to the Editor in the Tuesday, January 4, 2011, Indianapolis Star by Chris Striebeck with Integrated Development Services (IDS). Striebeck with IDS is a founding member of Indiana Distributed Energy Advocates (IDEA). The original article from the Indianapolis Star follows so that you can understand the full context of Striebeck's remarks.
Our friend Paul Gipe has commented, "My take is that if a fixed price contract works for the Governor on gas, then it should work on FITs for renewable energy too."
What are your thoughts?
Laura Ann Arnold
Just when it appeared that Gov. Mitch Daniels was a politician who understands the power of free markets, he apparently forgot that "The Road to Serfdom,'' a blisteringly rational criticism of governmental planned economies by 1974 Nobel laureate F.A. von Hayek, was among his top five favorite books.
His justification for supporting a 30-year ratepayer guarantee to buy synthetic natural gas produced from the proposed Rockport-Leucadia coal gasification plant is ultimately based upon his "care about the poor people of southwest Indiana.'' That is, he'll risk the financial obligation of hundreds of thousands of ratepayers for decades to pay higher than fair-market pricing for natural gas in return for the creation of 200 jobs and the potential for lower future natural gas prices.
Despite the good bet that long-term natural gas prices will indeed increase, it is not a decision for the governor to make on behalf of natural gas customers.
As has been seen with a host of other utility-engendered plans, there is nothing "rock solid" about the cost of producing energy, except that the ratepayers bear the losses.
If the governor is really looking to produce jobs in the energy sector and elsewhere, then look at ways to decentralize and de-subsidize the energy markets. At a minimum, investigate energy policies such as a legislated feed-in tariff, which is low in transactional cost, fairly and transparently allows all energy producers a small return on investment and was shown to produce over 250,000 permanent jobs in Germany in recent years.
Such programs truly tap the endless creativity and local capital of individuals to produce the most basic requirement of everything in life and society: energy.
Chris Striebeck Indianapolis
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Daniels takes natural gas bet that others refused
Critics say his plan committing state to 30-year natural gas deal is risky for Indiana homeowners
Jan 2, 2011
Written by Ted Evanoff
Original article: http://www.indystar.com/article/20110102/BUSINESS/101020347/Daniels-takes-natural-gas-bet-others-refused?odyssey=obinsite
The proposed $2.6 billion Rockport coal gasification plant that Gov. Mitch Daniels touts as a "rock-solid" winner for Indiana was rejected two years ago by the state's natural gas utilities as unneeded.
Gas companies backed away. Bankers declined loans.
The deal collapsed -- until Daniels stepped in and put it back on track.
Now, every household in Indiana that burns natural gas is being pulled into a venture that consumer activists call risky.
If the plant to be built at Rockport can't make gas from coal cheaply enough, household bills will increase for every home in Indiana that uses the fuel.
The reason is that the bold plan the governor announced Dec. 16 makes Indiana households the safety net for the proposed plant, which would use heat, steam, pressure and oxygen to turn coal into natural gas.
Under the plan, officials say, the plant would put 200 miners to work, open a new market for the state's coal mines, moderate spikes in natural gas prices and make Indiana a leader in gasification, a time-tested process never commercialized on a mass scale.
But it is a complex wager -- a bet, really -- that natural gas prices will rise.
Indiana would rely on the Rockport investors, a company in New York called Leucadia National Corp. It is betting that gas made from Midwestern coal will be cheaper than the natural gas flowing from the ground.
When the investors raised that very idea two years ago, utility executives balked.
In Indianapolis, Citizens Gas had just secured low-priced gas. On the open market, the utility locked in a 15-year contract at a guaranteed savings of $24 million for its 266,000 households. So the gas executives weren't excited about Rockport gas.
"We weren't in position to make another commitment for a long-term purchase of natural gas," said Citizens spokesman Dan Considine. "We simply didn't have enough volume to make the purchase offered by the synthetic gas project.''
Others feared the risk. No coal mine would offer investors 30-year coal contracts. So the long-term price of Rockport gas was unknown.
Yet bankers wouldn't touch the project unless Leucadia could secure 30-year contracts on the gas it sells. Big factories turned away, knowing they could get saddled with high gas prices from Rockport.
"The clients I represent were not interested in a portion of their gas coming from" the Rockport plant, said Indianapolis lawyer John Wickes, executive director of Indiana Industrial Energy Consumers Inc., a group of manufacturers. "Their thought was the private marketplace has an ample number of sellers."
Without a buyer for the Rockport gas, banks refused construction loans. The deal languished.
"Nobody was willing to bankroll it," said Rep. Ryan Dvorak, D-South Bend, a member of the House Utilities and Energy Committee. "They were concerned it would cost more to make gas than if they just bought it on the open market. Then the governor's folks came up with this idea."
The broad elements of Daniels' plan were approved by lawmakers in 2009. The measure unanimously passed the Senate, 48-0, and the House voted 90-8 to approve it. Early this year, the Indiana Utility Regulatory Commission will rule on the plan. Approval would commit the Indiana Finance Authority to buy and resell Rockport's gas for 30 years.
That would satisfy lenders and -- just as importantly -- qualify the project for federal loan guarantees. The guarantees mean U.S. taxpayers will repay up to 80 percent of the construction loans if the investors fail to repay the money.
Once the Rockport plant is running -- the target date is 2015 -- the state would buy the gas and quickly resell it on the open market to energy traders and wholesalers. Any profits would be passed on to households in the form of lower gas bills. Losses would raise the bills.
How likely are losses? No one knows. The economics turn on the price of fuel. Experts say if natural gas prices shoot up higher than Rockport's costs, Indiana would win. If coal prices climb, and natural gas prices fall or stay flat, the state's households would lose.
State officials estimate Rockport will make gas at a cost of about $7 per million British thermal units, the standard measurement for combustible materials. That includes fixed costs of $5 per million Btu for operating the plant and repaying the construction loans. An additional $2 covers coal at current market rates.
The risk is in the $7 figure. Gas has reached $11 per million Btu in recent years, but on wholesale markets today, traders pay about $4 per million Btu.
If the plant were operating now, the state would be obligated to buy the gas at $7 but would have to sell it at the $4 level, because that's the market price for the commodity set by thousands of trades across the country. Under the deal, Indiana households -- instead of the investors, as in a more conventional deal -- would pay the $3 difference.
That's the kind of math that has critics howling.
"All of the gas utilities refused to sign these contracts after two years of negotiations because it is simply too risky," contends Kerwin Olson, executive director of Citizens Action Coalition, a consumer group based in Indianapolis. "The only way this thing can get built is if taxpayers and ratepayers are put on the hook."
Daniels bristles at the critics. He said they overlook the new jobs the plant and mines would bring to the area's distressed economy.
"You either care about the poor people of southwest Indiana or you don't," he said. "My goal from the beginning has been to bring some jobs and hope to the poorest part of the state."
He notes there is a risk for households in the event gas prices fall nationwide, or coal prices surge, but he calls it slight, saying many energy forecasts call for rising natural gas prices as the recession fades.
"As a matter of good economic and public policy, this is a rock-solid program," Daniels said. "We can turn our own coal into very clean and affordable energy that we need."
Once gas prices climb, he said, Rockport would serve as a hedge and trim the bill for Indiana consumers. Homeowners now pay about $800 per year on average for the fuel. If that price shoots to $2,000, a household would save $100 a year.
Some years, the investors note, fuel on the open market will be cheaper. In case that happens, they've pledged $150 million to cushion Indiana households. That's enough cash to cover about two years.
When it's depleted, households would get stung with rising gas rates.
Household rates would not necessarily shoot up dramatically because Rockport will account for only about 17 percent of the gas burned in households statewide. But an extra $2 or $5 per month is not out of the question.
Rockport's investors, however, downplay that risk. They say more years than not, Rockport will make gas cheaper than market, and that will save Indiana money. The investors' contract with the state guarantees $100 million in savings over 30 years for Indiana households.
"If at the end of the 30-year contract, the state hasn't gotten $100 million in savings, we have to sell the plant and use the money to make good on their savings," said William Rosenberg of E3 Gasification in Cary, N.C., a partner with the project's investors.
Despite the assurances, utilities are wary of similar projects the Leucadia investors proposed in Illinois and Louisiana.
In 2008, the company pledged $400 million in savings for consumers in Louisiana.
Even so, Entergy, a major gas utility in Louisiana, declined to enter a long-term purchase agreement with the investors at a proposed gas plant there.
Issuing a statement, the utility called the $400 million in proposed savings "not an accurate projection" and asserted in 2009 alone that the deal would have raised the tab for Louisiana customers by $13 million.
"We were unable to reach an agreement with them on terms that were beneficial to our customers," said Entergy spokeswoman Kerry Zimmerman.
Since then, Leucadia has recast its venture in Louisiana, called Lake Charles Cogeneration LLC, to supply methane for industrial plants.
In Illinois, lawmakers are considering a measure that would have the state's gas utilities buy the output from a project proposed near Chicago. It would render petroleum coke, a waste produced in oil refineries, into gas.
"We aren't opposed to the facility, but we think this is going to be expensive gas," said Richard Dobson, gas supply manager at Illinois' Citizens Gas, which serves 800,000 customers.
Leucadia has urged long-term purchase contracts, but Citizens executives in Illinois are concerned that gas prices could plunge and they would be locked in to a higher price from Leucadia.
"This is an entity we barely know that is asking us to enter into a 30-year contract," Dobson said. "No one in this business does 30-year contracts."
Call Star reporter Ted Evanoff at (317) 444-6019.