State reaches deal on coal-gasification plant

The state's finance authority said Thursday that it reached a 30-year deal to buy synthetic natural gas from a coal-gasification plant planned for southern Indiana, marking the first time the state has entered into such a venture.

Opponents called the deal an entitlement program and "socialism for corporations," but Republican Gov. Mitch Daniels said the deal will save Indiana's natural gas users money by locking in low rates and ensuring a steady supply of synthetic natural gas made from Indiana coal.

"We're out to pay Hoosiers instead of people elsewhere for the energy we need," Daniels said. "We're out to protect ratepayers against the likelihood of higher long-term gas prices. We're out to put people to work in rural Indiana. And we're out to become a leader in the high-tech field of cleaner energy. This project does all that."

Under the deal, the Indiana Finance Authority will spend an estimated $6.9 billion over 30 years to buy synthetic natural gas from Indiana Gasification LLC, a subsidiary of Leucadia National Corporation. The IFA will buy the gas once production begins — as early as 2015 — and will then sell the synthetic gas to the market, where it will be delivered to consumers through existing utilities. If contract prices are lower than market prices, the savings will be split between the company and ratepayers. If contract prices are higher than market prices, ratepayers would be protected by $150 million set aside by the company to cover higher prices.

The company will be responsible for building the $2.65 billion plant planned for the Ohio River town of Rockport in Spencer County. The state would share in profits from byproducts of the coal-gasification process such as sulfuric acid and rare gasses, and the company would give Indiana vitreous slag for free, a byproduct that can be used to build roads.

Officials said Indiana Gasification assumes all the risk for construction of the plant and its operations — so if the plant is not built or does not end up producing synthetic natural gas as planned, the state is not out anything.

"There's no risk to us," said Jennifer Alvey, the state's public finance director.

But Kerwin Olson, the program director for the Citizens Action Coalition of Indiana, questioned why the state needed to get involved at all.

"Our position from the get go has been if Leucadia wants to build this plant and sell their gas into the market, go for it," he wrote in an e-mail to The Associated Press. "But the bottom line is they can't because it is too risky and Wall St. won't finance it based on its own merits."

"The state is delivering Leucadia a market to which they are not entitled," he wrote.

Alvey said the finance authority's involvement would mean all natural gas users in Indiana would benefit, not just those from one utility company who might choose to buy the synthetic natural gas. Daniels pointed out that the contract allows the state to direct the gas for use wherever it deems necessary in a state of emergency, meaning the state could still get natural gas even if supplies were interrupted elsewhere because of a hurricane, act of terrorism or other event.

The governor's office estimates that the plant — first talked about in 2006 — would create 1,000 construction jobs, 200 full-time jobs at the plan and 300 mining jobs.

The roundabout method of using the finance authority as an intermediary partner between the state's gas utilities and the coal-gasification plant was created after utilities dropped out of negotiations for the synthetic gas contracts in 2008 amid concerns the long contracts would harm their credit.

In 2009, the Indiana General Assembly passed a law that allowed the finance authority to negotiate long-term contracts with the plant, which would turn coal into synthetic natural gas, stripping it of pollutants and carbon dioxide to create a gas similar to real natural gas.

Now that the finance authority has completed negotiations, it will file a petition with the Indiana Utility Regulatory Commission for approval of the project agreements. Indiana Gasification is negotiating a loan guarantee with the U.S. Department of Energy, and an environmental impact study must be done. Depending on the timing of those elements, construction of the plant could begin in early 2012.