Refined Coal – Things to Consider as a Result of Changes to Tax Credit Qualification

Implications:     The Emergency Stabilization Act signed into law on October 3, 2008 includes an extension of tax credits for renewable energy and refined coal.  The discussion that follows includes items to consider regarding the refined coal tax credit.

Analysis:     Refined coal (sometimes also called “beneficiated coal”) is raw coal that is altered to improve its heat content and emissions content.  There are several companies that participate in refined coal, including Evergreen Energy. 

     Refined coal has been the beneficiary of tax credits.  The Emergency Stabilization Act included an extension of tax credits for renewable energy and refined coal under Section 45 of the Tax Code.
 
     In order to qualify for the tax credits, the following must be met:   

    1.  The product needs to have a reasonable expectation that it will be used for the purpose of producing steam.
 
    2.  It reduces at least 20% of the emissions of (a) NOx and at least 40% of the emissions of (b) either SO2 or mercury released when burning the refined coal as compared to the feedstock coal   (The “at least 40% of the emissions of” was added by the Emergency Stabilization Act.)
 
    3.  It increases by at least 50% the market value of the refined coal, as compared to the value of the feedstock coal.
 
    4.  The facility must be placed in service after October 22, 2004 and before January 1, 2010.  (This was the one-year extension in the Emergency Stabilization Act.)
 
    5.  There is a 10-year period for the tax credits beginning on the date the facility is placed in service.
 
     The credit is currently about $6.00 per ton, indexed to inflation.   

    There were two items changed in this Act.
 
     The first item changed in this Act is the change to increase the percent emissions reduced of the SO2 or mercury released when burning the refined coal to 40% from the previous 20%.  This may make it more difficult for some to qualify for this tax credit from refined coal.
 
     The second item changed in the Act that is the biggest issue to the investment in refined coal projects and claiming the tax credits is the requirement the facility to be placed in service by January 1, 2010.  With only a one-year extension of the tax credits for when a facility must be placed in service, it does not provide reasonable assurance that a project can be engineered, permitted, financed, or completed before the January 1, 2010 deadline.  In addition, there is no guarantee in the future that Congress and the President will extend such credits for refined coal; greatly reducing the economic benefit of moving forward with such projects.