The proposed substitute natural gas (SNG) plant in Rockport, Ind., which is being developed by Indiana Gasification, an affiliate of New York-based holding company Leucadia Corporation, is estimated, based upon current natural gas prices, to cost the State of Indiana nearly $1.1 billion in its first eight years of operation. These costs will be passed on by the State and will be borne by Hoosier natural gas customers, including the 680,000 customers served by Vectren Energy Delivery of Indiana (Vectren), as well as the natural gas customers of most of the other gas utilities in Indiana.
As proposed, the developers of the SNG plant, which is designed to convert coal to pipeline-quality natural gas, reached a deal with the State of Indiana in 2011 via the Indiana Finance Authority (IFA) to buy all of the plant's manufactured gas and then resell it into the open market. Under a 30-year agreement, if the manufactured gas does not sell in the open market at a price above the contract price that is projected to escalate each year for the contract period, then Indiana's natural gas customers, including those of Vectren, will see a charge on their monthly natural gas bills to make up the shortfall. The SNG plant developers have provided a projected average SNG price discounted to 2008 dollars over the entire contract term, but they have refused to publicly say what the actual price of the manufactured gas will be each year. In the event the plant's manufactured gas beats the current market price, customers would share in that gain.
"The concept of this plant originated at a time, in 2006, when natural gas prices were at record highs and there were national fears that we were going to run out of natural gas," said Mike Roeder, vice president of corporate communications and government affairs. "Since 2009, the available supply and price of natural gas has changed dramatically. Thanks to the emergence of shale gas, our nation's natural gas supply has grown to record levels, which has caused the price of natural gas to hover near record lows. More importantly, multiple independent forecasts conclude that prices are likely to remain low for the next two decades and beyond. Given the current and projected market price for natural gas is now substantially lower than the SNG plant's projected contract price for the manufactured gas, the project no longer makes economic sense, especially when Hoosier natural gas customers carry the risk to absorb the state's gas market losses throughout the 30-year contract term."
The plant alone is expected to cost nearly $3 billion to build, and the developers of the SNG plant are now seeking a federal loan guarantee, similar to the one provided to Solyndra, the bankrupt solar panel manufacturer, to help with construction of the plant and a 440-mile pipeline to transport the plant's carbon dioxide output, the cost of which is not yet public.
The state legislature required that Indiana Gasification guarantee savings for customers before the plant could go forward. Indiana Gasification has publicly said that the requirement that they provide a guarantee only means they promise they will make a commitment and not that they actually fulfill their commitment. In furtherance of their "promise," Indiana Gasification has proposed to fund an account of $150 million. Given the forecasted low price of natural gas and the fact that Indiana gas customers are allocated 100 percent of the market losses the State incurs, this account will likely be exhausted within about the first year of the SNG plant's operation after which customers will start to see a new line item charge on their bill to ensure the losses are refunded to the State of Indiana that will then make the developer whole. It is expected that the developer will make a profit even if the State loses money.
Based on the expected losses from the State's resale of the SNG in the first eight years:
"Put simply, this is a tax on all natural gas customers," Roeder said. "Using today's gas futures prices from the New York Mercantile Exchange (NYMEX prices), we can purchase gas many years into the future below the expected SNG price."
Other similar projects around the country are being abandoned due to the fundamental change that has occurred in the natural gas marketplace. Proposed SNG plants in Illinois and Mississippi have experienced setbacks and some have even been canceled. As an example, Leucadia, which had planned to develop an Illinois plant, abandoned it after the state rejected a proposed law that would have required gas utilities and their customers to take the output from the plant. (Click here for that news article.)
"We continue working on behalf of all natural gas users in a court proceeding where we are challenging the contract between Indiana Gasification and the IFA," added Roeder. "Predictably, the project has received state environmental permits, but the project has many more hurdles to clear, including the federal loan guarantee that puts additional risk on all taxpayers. Given the current state of the natural gas marketplace, this project is contrary to market forces, would cost Hoosiers billions, will hurt future economic development activity in the state, and, as currently structured, makes no sense to proceed with at this time."
Although the plant received state regulatory approval to move forward last fall, Vectren, consumer advocates, environmental organizations and other natural gas utilities in the state continue to work on behalf of Hoosiers to ensure they are protected from bearing these costs. These groups, including Vectren, have also appealed the contract's approval to the Indiana Court of Appeals.
Among issues under consideration by the court include:
Indiana Gasification and the IFA have requested oral argument before the Indiana Court of Appeals. All parties are now awaiting dates to be set.
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