Project Developers

Project Developers

March 01, 2006

Project developers must apply to the Internal Revenue Service by October 2 to claim two new federal tax credits for “advanced” coal-fired power plants and gasification projects.

The credits pay as much as 20% of the cost of a project. They are not limited to projects that gasify coal, but can also be claimed on projects to gasify biomass, petroleum residues and other materials. Gasification means conversion into a synthesis gas composed primarily of carbon monoxide and hydrogen.

Applicants will be informed by November 30 whether they have been awarded credits.

The new US energy law enacted last August authorized a 20% investment tax credit for new IGCC (integrated-gasification combined-cycle) power plants. The credit can be claimed only on part of the plant — the equipment that is “necessary for any coal handling and gas separation equipment.” There is a 15% investment tax credit for other power projects that use “advanced” technology to generate electricity from coal. In such other projects, the credit can be claimed on the entire plant. The project can be a new power plant or a retrofit or repowering of an existing plant.

The new law also authorized a separate 20% investment tax credit for gasification projects.

Total credits are limited to $1.3 billion for advanced coal-fired power plants, of which $800 million is supposed to be set aside for IGCC plants and $500 million for other coal- fired power plants. Credits for gasification projects are limited to $350 million.

Project developers must apply to the IRS for an allocation. The IRS envisions potentially three rounds of awards in 2006, 2007 and 2008 for the advanced coal credits, but there is a risk that all of the credits will be allocated in the 2006 round. The gasification credits are expected to be fully allocated in 2006.

The IRS issued two notices at the end of February that explain how to apply and how it will choose which projects are awarded credits.

The information about credits for advanced coal-fired power plants is in Notice 2006-24. IGCC plants that have greenhouse gas capture capability and “increased byproduct utilization” will be given first claim on the $800 million in credits that have been set aside for IGCC projects. The IRS said it will award credits among priority projects to the person asking for the smallest dollar amount of credits in relation to the nameplate generating capacity on his or her power plant, then to the next in line on that basis, and so on. Credits for other projects will also be awarded using the same approach. The window for applications opened on February 21 and will close on October 2.

Developers must have their projects certified by the US Department of Energy as both feasible and consistent with US energy policy goals. Both applications to the IRS and the Department of Energy can be submitted at the same time. There is an enormous amount of information that must be submitted as part of the application. The farther along a project is in terms of having project contracts signed and financing commitments in place, the better its chances of winning an award.

IGCC and other advanced coal projects that are allocated credits must be put in service within five years after the award.

The rules for applying for gasification credits are in Notice 2006-25. Most of the rules and deadlines are the same as for advanced coal projects, except that priority will be given to projects that havecarbon capture capability, use renewable fuel, or have project teams that have successfully and reliably operated the type of project the applicant proposes to build. Gasification credits will be allocated to projects within this priority grouping first to projects asking for the smallest number of credits in relation to the amount of synthesis gas to be supplied. Gasification projects must be put in service within seven years after an award.

The IRS is expected to be heavily lobbied before the awards. Both it and the US Treasury Department have already been receiving letters from members of Congress and governors interested in particular projects in their states.


Keith Martin