CPUC Greenhouse Gas Modeling
Financing and Policy Incentive Assumptions
Project Financing
The new generation costs in the GHG calculator are based on IOU financing for all
generation projects. [Note: The team is in the process of updating this assumption to
reflect merchant generation.] The specific financing assumptions are listed in Table A
below. E3 assumed a book life and project life of 30 years for all resources, with book
depreciation over the project life used to calculate the return of invested capital, which
includes both capital costs and a multiplier for allowance of funds used during
construction (AFUDC – funds that the project owner must borrow during the construction
period). The AFUDC multipliers were calculated using the project staging assumptions
from the CEC’s Cost of Generation Model.1 E3 used tax depreciation to calculate the tax
component of the revenue requirement. For income taxes, actual (rather than levelized)
tax treatment at a 40% marginal tax rate was assumed. Taxes were grossed up in the
revenue requirement such that the utility achieved its allowed, after-tax return on equity.
For subsequent versions of the calculator, costs will be calculated assuming merchant
financing. This is more consistent with how resources are likely to be constructed in
California, and provides a consistent basis on which to analyze resources constructed on
behalf of both investor-owned and publicly-owned utilities.
Table A. Financing assumptions
Item
Cost of Equity
Cost of Debt
Debt-Equity Ratio
Weighted Average Cost of Capital
Term of financing
Assumption
11.74%
8.74%
Source
CEC Cost of Generation
Model
CEC Cost of Generation
Model
CEC Cost of Generation
Model
Calculated
30 years
Assumption
Technology-specific
5.73%
50%
Accumulated Funds Used During
Construction (AFUDC)
Property Taxes
1% of total capital cost
CEC Cost of Generation
Model
Assumption
Income Taxes
40% marginal tax rate
Assumption
CEC, “Comparative Costs of California Central Station Electricity Generation Technologies,” Draft Staff
Report, CEC-200-2007-011-SD, June 7, 2007
1
Capital Cost Multipliers
E3 applied a set of multipliers to capital costs in each region to reflect regional
differences in land, labor and construction costs. The multipliers were obtained from the
U.S. Army Corps of Engineers, Civil Works Construction Cost Index System (March 31,
2007). The multipliers are listed in Table B below.
Table B. Regional Capital Cost Multipliers
Resource Zone Name
Alberta
Arizona-Southern Nevada
British Columbia
California
Colorado
Montana
New Mexico
Northern Nevada
Northwest
Utah-Southern Idaho
Wyoming
Capital
Cost
Factor
1.00
1.00
1.00
1.20
0.97
1.02
0.96
1.09
1.11
1.00
0.92
Tax and Policy Incentives
Many of the generating technologies in the GHG calculator are eligible for a variety of
tax breaks and other incentives from either the federal or state governments. None of
these incentives have been included in the current round of results. This assumption is
under review for the next round of results.
Table C. Policy Incentive assumptions
Technology
Coal IGCC
Coal IGCC w/
CCS
Coal ST
Incentives
Federal
20% ITC (limited to first 4 GW of new
None.
IGCC capacity);1
Loan guarantees of up to 80% for qualifying
technologies. 2
20% ITC (limited to first 4 GW of new
None.
IGCC capacity); 1
Loan guarantees of up to 80%.2
If advanced coal technology: 15% ITC
None.
(limited to first 3 GW of new capacity); 1
CA State
Incentives
Technology
Natural Gas
CCCT
None.
None.
Natural Gas CT
None.
None.
Nuclear
1.8¢/kWh PTC (nominal $) for first 8 years
of operation if in-service by 2020 (limited
to first 6 GW of new capacity); 3
Loan guarantees of up to 80%.2
If closed loop biomass: 1.9¢/kWh PTC
(inflation-adjusted 2007$) for first 10 years
of if in service by 2008,
If landfill gas, municipal solid waste or
open loop biomass: 1.0¢/kWh PTC for first
10 years of if in service by 2008. 4
None.
Geothermal
1.9¢/kWh PTC (inflation-adjusted 2007$)
for first 10 years of operation if in-service
by 20084 OR
10% permanent ITC5;
Accelerated depreciation (5 year)6
SEP eligible7
Large Hydro
For incremental addition at existing
generator, or generation built at existing
non-hydroelectric dam: 1.0¢/kWh PTC
(inflation-adjusted 2007$) for first 10 years
if in-service by 20084
None.
Small Hydro
1.0¢/kWh PTC (inflation-adjusted 2007$)
for first 10 years if in-service by 20084
SEP eligible if ≤30 MW and no
increased water diversion7
Solar Thermal
30% ITC if in-service by 2008,
10% permanent ITC otherwise5;
accelerated depreciation (5 year)6
100% property tax exemption8;
SEP eligible7
Biogas &
Biomass
Federal
CA State
SEP eligible (if meets certain
requirements)7
1.9¢/kWh PTC (inflation-adjusted 2007$)
SEP eligible7
for first 10 years of operation if in-service
by 20084;
Accelerated depreciation (5 year)6
PTC= Production Tax Credit;
ITC = Investment Tax Credit;
SGIP = Self Generation Incentive Program;
RPS = Renewable Portfolio Standard
MSW = Municipal Solid Waste
SEP = Supplemental Energy Payments
Wind
Sources and Footnotes
Federal Policy Incentives:
1
Investment Tax Credit (ITC) for IGCC and Advanced Coal Technologies: From the
Energy Policy Act of 2005, Title XIII, Section 48A (Qualifying Advanced Coal Project
Credit), and Section 48B (Qualifying Gassification Project Credit). ITC is limited to a
national total of 4.125 GW for new IGCC capacity and to 3.375 GW for other advanced
coal-based generation technologies. Funding is also limited to a total of $800 million in
total ITCs for gasification, and $500 million in total ITCs for advanced coal technologies.
Technologies to retrofit or re-power existing coal plants may also qualify as an advanced
coal technology, provided that the fuel input is at least 75% coal. To be designated as an
advanced coal project, new non-IGCC plants must have: (a) heat rate of 8530 Btu/kWh or
better [subject to some adjustments] (b) SO2 removal of 99% or higher, (c) NOx
Emissions of 0.07 lbs/MMBTU, (d) Particulate emission of 0.015 lbs/MMBTU, and (d)
Mercury removal of 90% or higher. IGCC technologies used for generators using
petroleum residue or biomass may also qualify for the gasification ITC. Application must
be submitted to DOE by 2006 and online date must be within 7 years; ITC value is
reduced proportionally for plants also receiving incentive loan guarantees.
2
Federal Loan Guarantees for Innovative Technologies: Coal facilities with IGCC or
carbon sequestration, and certain advanced nuclear technologies may qualify for federal
loan guarantees of no more than 80% of project cost under then Energy Policy Act of
2005, Title XVII, Section 1702-1704. IGCC plants must meet certain performance and
emissions requirements to qualify, and have one of a number of defined innovative
components, including a CO2-capture ready design.
3
Production Tax Credit (PTC) for Nuclear: From the Energy Policy Act of 2005, Title
XIII, Section 45J (Credit for Production from Advanced Nuclear Facilities). “Advanced
Nuclear” is deemed to be any nuclear reactor design approved by the Nuclear Regulatory
Commission after 1993. The credit is limited to the first 6 GW of new nuclear capacity
in the U.S., and is limited to $125 million per GW annually. If more than 6 GW are
under construction before January 1, 2014, the production will be shared among the new
reactors on a proportional basis (e.g., if 9 GW of new capacity are under construction by
that date, the PTC will be set to 1.2¢/kWh (= 1.8¢/kWh * 6 GW / 9 GW). [Allocation
described in EIA, “Assumptions to Annual Energy Outlook 2007”, p. 88.].
4
Investment Tax Credit (ITC) for Solar, Geothermal: Also known as the business
energy tax credit, from United States Code (USC) Title 26 (Internal Revenue Code), §
48. Expanded by the Energy Policy Act of 2005, House Resolution (H.R.) 6, and
extended to cover all installations before January 1, 2009 by the Tax Relief and
Healthcare Act of 2006 (H.R. 6111), Section 207. Energy Policy Act of 1992 created a
permanent 10% ITC for solar, geothermal, and qualifying biomass generation. Energy
Policy Act of 2005 temporarily raised this ITC to 30% for solar technologies installed
between 2006 and 2008. Credit is reduced if generation is subsidized by other state or
federal level financing incentives.
5
Production Tax Credit (PTC) for Qualifying Biomass, Geothermal, Wind, and Hydro:
Officially the Renewable Electricity Production Credit (REPC), from United States Code
(USC) Title 26 (Internal Revenue Code), § 45. Originally enacted as part Energy Policy
Act of 1992 to apply to installations of wind and qualifying biomass during or before
2001. Renewed for 2006-2007 under the Energy Policy Act of 2007, and extended to
geothermal and qualifying hydro generation as well. Extended through end of 2008
under the the Tax Relief and Health Care Act of 2006 (H.R. 6111). “Closed-loop
biomass” is defined as “any organic material from a plant which is planted exclusively
for purposes of being used at a qualified facility to produce electricity.” If the reference
energy price exceeds 8 cents/kWh in the year, the PTC is reduced proportionally to as
low as 3 cents/kWh.
6
Accelerated Depreciation: USC, Chapter 26, § 168 (2005). Under the Modified
Accelerated Cost-Recovery System (MACRS), business can recover their investments
more quickly through accelerated depreciation on solar, geothermal, wind and
photovoltaic generation assets, reducing their corporate income tax. These renewable
technologies are classified as “5-year property”. For more information, see IRS
Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for
Form 4562.
California Policy Incentives:
7
Supplemental Energy Payments (SEP): Facilities must be are new or repowered on or
after January 1, 2002, and may receive payments for up to 10 years. RPS eligible
generators that win contracts with IOUs in California can apply to the CEC to receive
SEPs to cover the difference between the MPR (market price referent) and the accepted
bid price, subject to funding availability.
8
CA Property Tax Exemption for Solar Systems: From CA Revenue & Tax Code § 73.
AB1099 in 2005 extended this section to apply to all systems installed before January 1,
2009.
Further description of Federal and state policy incentives:
North Carolina Solar Center & Interstate Renewable Energy Council, Database of State
Incentives for Renewables & Efficiency (February 2007 Update).
http://www.dsireusa.org/Index.cfm?EE=0&RE=1
U.S. Energy Information Administration, “Assumptions to the Annual Energy Outlook
2007,” Report # DOE/EIA-0554(2007),
http://www.eia.doe.gov/oiaf/aeo/assumption/index.html.