THE IRS TOLD OWNERS OF SYNFUEL PLANTS that make synthetic fuel from coal that they will have to agree to limit output to the “contract capacity” of a plant if they want a ruling that the plant qualifies for federal tax credits.

The federal government offers “section 29” tax credits of $1.059 an mmBtu for making “synthetic fuel from coal.” The IRS stopped ruling in the late summer last year that coal agglomeration facilities that add chemical binders to coal particles and then press the mixture in a briquetter to make pellets qualify for the tax credits. The rulings window reopened in theory in late April this year. However, no real rulings are being issued in practice. The IRS wants to impose a limit on output from such plants as a tradeoff for granting future rulings in the hope that this will stem the revenue loss to the government from the tax subsidies. Owners of the synfuel plants are still pressing for a higher limit on output. The “contract capacity” means the minimum output that the construction contract for the project said it would be capable of producing when built.

At least 73 coal agglomeration facilities claim to have been put into service in time to qualify for tax credits. Most were built by three developers: Startec, Covol and Earthco. The IRS has tentatively set the contract capacities of the units at 50 tons an hour for Startec plants, 70 tons an hour for Covol, and 150 tons an hour for Earthco. The working assumption is that the plants operate for 8,000 hours a year. Startec owners are questioning whether 50 tons an hour is the right starting point for them.

Both the output limit and the contract capacity for Startec plants are expected to be settled soon.

Keith Martin