The project is huge. The plant in southern Indiana will cost $3.5 billion and gas from the plant could account for 17% of Indiana's supply. Thus, the stakes are high for both the coal and natural gas industries.
Not surprisingly for a state in coal country, Indiana has no effective renewable energy policy or renewable energy targets. There are only two token "voluntary" feed-in tariff programs in the entire state and one of those programs is being dismantled. Proposals for renewable energy feed-in tariffs in the state legislature have never made it out of committee.
Criticism of the Indiana Gasification deal mirror criticism of feed-in tariffs elsewhere: interference in the so-called "market" and the "price is too high."
When the deal was struck, gas was trading as high as $13 per mmBtu and many expected that it could go even higher.
Since then the world has changed. Industrial consumption of gas has fallen dramatically in North America as manufacturers closed their doors or cut back production. Meanwhile the shale gas bubble began inflating as the huge number of wells begun during the run-up in prices started coming online. The net result has been the collapse of gas prices to as low as $3 per mmBtu since 2008.
Fixed Prices vs "The Market"
Renewables — and nuclear for that matter — are long-lived high capital cost projects. They produce electricity at stable prices for decades. Their initial prices may be higher than competing sources or existing "heritage" plants, such as long-amortized hydro plants. However, those fixed price contracts begin to look like a good deal to consumers as the price of generation from volatile sources, such as fossil fuels, continue their inexorable increase. At some point, the cost of generation from fossil fuels on the spot market will exceed that from the fixed-price contracts. When that will occur is open to heated and politically charged debate.
Most journalists — business and energy writers alike — don't understand how markets work or specifically how markets for gas and electricity work. In the electricity market, most of the generation is produced under fixed-price contracts (Power Purchase Agreements or PPAs) or the plants are in the rate base of regulated utilities. Only a portion of generation is sold on the "spot market."
Criticism of the Indiana Gasification deal by the natural gas industry point to the current spot market price and argue that the Indiana Gasification contract was a bad deal. It's cheaper, they say, to buy the gas on the spot market than through a long-term, fixed-price contract.
To support their case, critics of the Indiana Gasification deal can site numerous reports, articles, and even the presidential candidates that say the U.S. has a "100-year supply of natural gas."
While geologists may beg to differ, this is the prevalent discourse in North America, and very few journalists know enough about the oil and gas industry to question such assertions.
Of course the same argument applies to renewables — and nuclear. North America is awash in natural gas. There's no need to worry. Our future is secure. We can all sit back and enjoy our game boys and iPads while we let the fossil fuel industry manage our future.
For those who don't follow the industry, U.S. natural gas production is no longer increasing as the industry has switched their drilling rigs to more profitable oil. Developers of unconventional natural gas, such as ExxonMobil, are complaining that they are "losing their shirts" in the shale gas boom. Translation: North Americans can expect tighter supply and higher prices for gas soon.
Full Cost Accounting?
Environmental opponents have a more extensive critique of Indiana's gasification deal.
As with other forms of fossil fuel, some portion of the "cost" of the gasification plant will be shifted "externally" to the environment in the form of air, water, and land pollution.
Indiana is infamous for its lax regulations and its "business friendly" atmosphere (an American euphemism for limiting environmental concerns). For example, it was the mining abuses in the coal fields of southern Indiana that contributed to the national movement to regulate surface coal mining in the late 1970s.
Consequently, the "tariff" or price for gas purchased from the gasification plant will not be fully transparent because the costs of pollution are not fully internalized and will be shifted to the public instead —but those are not all the costs that will be hidden in the gas tariff.
The developer of the Indiana gasification project has applied for a $2.5 billion U.S. Department of Energy (DOE) loan guarantee, according to the Sierra Club, a national environmental group. This is the same DOE loan program of Solyndra solar fame.
In the run up to the U.S. presidential election, fossil fuel and nuclear lobbyists have been attacking renewables in the U.S. because of the subsidized DOE loan program. However, these very same industries are busy trying to grab as many of the loans for themselves as possible. Some of the heat around the Solyndra scandal may not be so much about the "interference in the market" caused by the federal subsidies as incumbent industries fearing competition from renewables for the limited subsidies available.
American's have almost become immune to such irony, particularly during a presidential election that will cost $2 billion by the time it is over.
Indiana Gasification's reach for federal subsidies is not a lone outlier of the coal industry. Hydrogen Energy California is seeking nearly half a billion in a direct grant from DOE for a 300-MW Integrated Gasification Combined Cycle plant. If awarded, the grant will account for nearly 10% of the $5 billion project in the southern San Joaquin Valley, a region with some of the worst air pollution in the nation.
To summarize, the Indiana Gasification tariff may not be an accurate reflection of the true costs of the project.