Indiana Gov. Mitch Daniels recently unveiled plans to build a $1.5 billion coal gasification plant in the Hoosier state, which would be the first in the country to make pipeline quality natural gas from eastern coal. Several sites are being considered and the governor said all of them are in the southwestern corner of the state.

The plant, which is scheduled to be online in 2011, is being developed by Indiana Gasification LLC and will include a methanation process to produce pipeline quality substitute natural gas (SNG), which has an identical molecular structure to that of natural gas.

It would produce 40 billion cubic feet of pipeline quality SNG annually, which is enough to supply 15 to 20% of Indiana’s residential and commercial gas demand. Its use is projected to save consumers more than $3.7 billion over the next 30 years versus the price of conventional natural gas, according to a study by Carnegie-Mellon University faculty.

According to the letter of intent for 30-year supply contracts signed by utilities in late October, about two-thirds of the SNG produced by the new plant would be purchased by Indiana’s three largest gas utilities, Vectren Corp., NIPSCO (Northern Indiana Public Service Co.), and Citizens Gas to help meet residential and commercial gas demand. NIPSCO would purchase the remainder of the gas to fuel electric generation for its service territory to meet seasonal demands.

The governor said the plant developer and the three utilities, which provide 80% of Indiana’s residential and commercial supply, have agreed to permit any of the smaller commercial and municipal gas utilities to participate in the transaction on the same terms they have negotiated.

The project is negotiating with several coal producers for a long-term contract for Indiana coal.

The schedule for the project called for the filing of a joint petition on Oct. 27 with the Indiana Utility Regulatory Commission to seek approval for the gas purchase contracts and meeting a deadline of later this year for applying for federal loan guarantees available under the Energy Policy Act of 2005.

The plant will use GE Energy’s gasification technology, which converts hydrocarbon feedstock into synthesis gas, a mixture of hydrogen and carbon monoxide. Gasification is one of the key technologies used in integrated gasification combined cycle.

Rather than producing electricity as the primary output, the project’s methanation processes will produce SNG. The plant will operate with extremely low emissions of regulated air pollutants and will isolate carbon dioxide (CO2) so that it can be captured. The project will work with the Indiana Geological Survey to develop a CO2 sequestration demonstration project.

According to project leaders, efficient financial engineering is crucial to producing the gas at a low price. The project owner would contribute 20% of the project costs and the remainder would be financed with debt backed by a federal loan guarantee. This structure, along with the long-term contracts to supply coal and purchase the gas should result in a gas price in the $6 per decatherm range (2006 dollars). That is 22% less than the average price of natural gas delivered to Indiana over the past three years.

The Carnegie-Mellon University faculty study projects that Indiana gas and electric consumers could expect to save more than $3.7 billion just in the reduced costs of natural gas over 30 years compared to conventional pipeline sources. Other expected benefits include reduced natural gas price volatility.

Along with the filing of a joint petition with the IURC, a number of other steps are necessary for the project to proceed: (i) Indiana Gasification will file an application with the Department of Energy later this year to obtain a federal loan guarantee under the 2005 Energy Policy Act to back $1.2 billion of debt; (ii) final terms of the gas purchase contracts will be negotiated; and (iii) legislation in the 2007 Indiana General Assembly that would assure the state’s regulatory approval may be relied on by the financial markets, similar to language that already exists for electric plants.

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