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Signature Sponsor
By Corey Paul
May 5, 2016 - Auditors of U.S. Department of Energy warned in a report “of serious doubts about the continuing viability” of the Texas Clean Energy Project, the second blow this year to the Summit Power Group endeavor after the agency suspended funding in February.
Summit officials say raising private money is now next to impossible for the multi-billion-dollar carbon capture and sequestration project.
Summit CEO Jason Crew said the DOE’s stance is “certainly ... a big headwind for us.” Company officials are pushing back on both decisions in hope that DOE officials will reverse course.
“The difficulty is when you have somebody who has been the major development partner, who in effect pulls out with no notice, it’s a challenge if not impossible to replace them at this stage,” Crew said. “It is a high risk development dollar even at this stage, and you need a partner that has that kind of knowledge of the project and also the financial capacity.”
The Office of the Inspector General released the report April 29 before finishing an audit that began in August of the Clean Coal Power Initiative, which includes the TCEP. The reason, per the report, was “to communicate our immediate concern about the Project to allow the Department sufficient time to take actions to protect taxpayer funds.”
“Due to Summit’s inability to obtain the required commercial debt and equity project financing and the adverse effect of changing energy markets on the demand for coal-based power plants, we are concerned about the viability of the Project and the Department’s continued involvement,” the report continued.
The freeze, and the report, could also put pressure on the company to act quickly to honor existing agreements with future vendors and buyers of electricity, said Jim Wood, a former deputy assistant secretary of energy who specialized in clean coal from 2009 to 2012 and the current director of the U.S.-China Clean Energy Research Center at West Virginia University who is unaffiliated with the project and criticized the DOE’s decision to halt funding.
“It’s certainly crippled,” Wood said. “I say that, and I also say they are very creative. They are very smart. They are good developers. The project makes a lot of sense for a lot of reasons.”
In all, the DOE committed about $450 million to the TCEP. It was a project meant to demonstrate carbon capture and sequestration plant that people like Wood argue is “absolutely still needed” to prove up the technology of capturing emissions from burning coal in a commercially viable way.
Crew said the DOE is "the majority development partner.” The DOE told Crew the agency would halt funding for the TCEP shortly after the company asked the agency to release $11 million on Feb. 1 for final engineering work and negotiating fixed-price contracts.
The $11 million grant, matched by $4 million private money from Summit and its partners, would allow the company to capture labor cost savings in the months after major construction contracts were already signed. Then, Crew said the company could bring the project to financial closing and begin construction soon after.
Plans call for building the plant on roughly a 600-acre site near Penwell. Local officials want the plant in part for the 150 jobs it would create in addition to work for about 2,000 construction workers. Summit officials and outside advocates favored the first-of-its-kind facility as a project supported by the government that would establish a more environmentally responsible method for burning coal, while generating power and valuable chemicals.
The plant would generate about 400 megawatts of electricity while capturing more than 90 percent of the carbon dioxide it produces by burning coal and then selling the CO2 to oil companies.
But the recent inspector general report cited a higher projected cost of the TCEP than the more than $2.5 billion that Summit officials publicly estimated. Instead, the special report found costs for TCEP nearly doubled from about $1.9 billion to about $3.9 billion, “increasing the difficulty of obtaining financing.”
Crew said the $2.8 billion that the DOE reported reflects increased costs as Summit signed agreements with the heavy industrial contractors that would build the plant, but he expected the actual construction costs to be lower after a final round of adjustments.
The remaining money in the DOE figure included conservative estimates of money that might not be spent, Crew said, including potential interest payments during construction and contingency funds.
Crew said there is an “irony” in the DOE’s decision to pull out during the final stretch because the agency is “bringing about the outcome they are trying to avoid, which is the loss of public dollars and damage to the project.”
But he stopped short of calling the TCEP a lost cause.
“We hope that the DOE will change its mind and move forward, but if we don’t we are going to reevaluate our options,” Crew said. “But I would not say the project is dead.”
Laura Miller, Summit’s director of projects in Texas, said in an email that DOE told Crew on Feb. 9 — eight days after the $11 million grant request — of the decision to immediately stop allocating grant money to the company.
Summit officials said in a letter to the DOE that labor cost reductions of up to 30 percent since the drop in oil prices could be locked in.
“Since we had never been warned by DOE that they were even thinking of abruptly discontinuing funding, this came as a great shock to us,” Miller wrote in an email. She asked Odessa officials for patience and said “we want to assure everyone that we are still actively and aggressively pursuing the project.”
Christopher Smith, the assistant secretary for Fossil Energy at the DOE, addressed Summit’s request for an $11 million advance in his response to the inspector general dated April 20. Smith described the money as “Phase II funding,” referring to the construction stage of the project.
“After an extensive and careful review, (Fossil Energy) determined that advancing additional federal funding at this time would not substantively increase the likelihood of the project’s success, and that no additional taxpayer funds should be put towards the project absent further progress on its unmet milestones,” Smith wrote.
A DOE spokesman said in an email Tuesday that those milestones included failing to reach financial closing and that “the IG’s ‘special report’ on the project reiterates the concerns already addressed by DOE regarding advancing additional federal funding for the project at this time.”
But Crew, in a letter to the House Commitee on Science, Space and Technology, argued the company needs the federal money to close on funding of the project.
“The OIG’s recommendation to stop DOE’s risk-tolerant financial support undermines the project at a time when TCEP’s partners from the private sector — with full understanding of the same risks and of current market conditions — have stepped up to advance the project to its final stages,” Crew wrote. “TCEP is not stalled. It is advancing and still attracting private capital. This should be the measure of ‘viability.’ ”
The inspector general recommended that the DOE require the company to secure equity and debt before releasing the $11 million requested by the company to complete contracts at fixed prices and finalize the equity and debt. Summit officials argued the auditor “has the sequence of events reversed” in a letter.
“By DOE insisting on this sequence of events, which they know is impossible to accomplish, they are knowingly and needlessly jeopardizing” $45 million in private money Summit and its partners raised for the project, along with $104 million already contributed by the federal agency.
By February, the inspector general reported the DOE had reimbursed Summit $116 million on an initial design phase of the project, where the company was supposed to schedule construction and outline costs. The inspector general report said the DOE initially agreed to paying $15 million for that phase.
Crew said such resets on a first-of-its-kind project are “not atypical” and that DOE participated in “all of these pivots” in accordance with the agreement with the company.
A second phase of the TCEP was supposed to focus on final design, construction and operations.
In an interview, Crew said the final debt and private equity agreements were always expected toward the end of first phase of the project. But there were informal agreements in place. Summit officials previously reported, for example, that all debt financing for the project would come from the Export-Import Bank of China.
Still, Crew said, “without executing these final closing activities, then we don’t have any firm commitments on equity and debt.”
Wood agreed with the company’s argument.
“If I’m equity, I stop and say that’s a risk I can’t take,” Wood said. “If that money is not going to be there, how do you close that gap? And so they put onto the project sponsor a very, very impossible job of going out and completing discussions they are having with equity partners.”
The decision to freeze funding came on the heels of President Barack Obama’s budget proposal that included a request to reprogram the remaining $240 million of funds allocated for Summit to research, a decision ultimately left to Congress while the money remains unusable in federal coffers. But it would still be up to DOE to release the money to Summit.
The inspector general reported Summit’s “inability to secure commercial debt and equity,” could be due in part to weaker demand for coal plants today, amid low natural gas prices, than when the project began.
“In the absence of commercial debt and equity financing, Summit will be unable to contribute its share of costs and move forward with the Project,” the report said. “To date, we noted significant project delays had occurred due to Summit’s inability to secure private financing. When the Project was initiated in February 2010, the plan was to have funding in place by December 2010. However, as of February 2016, more than 5 years later, the necessary financing had not been secured.”
In September, Summit missed a spending deadline that cost the company $104 million in federal stimulus money. But then Summit requested and received, with DOE approval, additional federal funding to allow the project to continue.
That came in the form of $811 million in tax credits from the Internal Revenue Service, redeemable after financial closing and the beginning of construction. At the time, Miller said the funds would “more than make up for” the lost stimulus money and help the company pursue investors.
In December, Summit signed contracts in Beijing with Chinese and Canadian heavy industrial firms to build the plant, a development company officials hailed as a “major step toward financing and construction.”
Crew, in his letter, said the private parties who agreed to the more than $4 million match of the money Summit requested from the DOE in February “would not have committed to invest in this final push if they expected the project to fail and not achieve financing”
Summit had proposed having final costs provided in May “to converge on a successful financial closing and start of full-scale construction in mid-2016. DOE’s decision to suspend additional funding has brought most of these development and prefinancing activities to a halt,” Crew wrote in the letter.
For now, the DOE has extended the cooperative agreement originally awarded to Summit in January 2010 until May 13 but at no extra cost.
“It was disappointing news to learn,” said Mike George, CEO of the Odessa Chamber of Commerce on Tuesday. “But we are still rooting for them.”
Laura Miller, director of projects for the Summit Texas Clean Energy Project, gives an update on the Summit project at a Thursday meeting of the Odessa Development Corporation |
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