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Audit Report: OAS-RA-13-22

June 6, 2013

The Hydrogen Energy California Project

Under the American Recovery and Reinvestment Act of 2009, the Department of Energy's (Department) Office of Fossil Energy received $3.4 billion to focus on the research, development and deployment of technologies to use coal more cleanly and efficiently.  In September 2009, the Department approved a cooperative agreement award with a Government contribution of $308 million to Hydrogen Energy California, LLC (HECA) to construct a commercial power plant to demonstrate the capture and underground storage of carbon dioxide.  The project was expected to be completed in November 2018, at a total cost of about $2.8 billion. 

In March 2011, after the Department and HECA spent approximately $75 million, HECA's original recipients notified the Department that they intended to terminate the agreement because the project did not meet their requirements for economic viability.  With the Department's assistance, HECA found new owners that believed the project could be economically viable.  In September 2011, the Department modified the cooperative agreement and increased total project cost to approximately $4 billion with a Department cost share of $408 million.  We initiated this audit to determine whether the Department effectively managed the modification of the HECA cooperative agreement and subsequent cost share activities.

Our audit found that the project is progressing; however, in our view, the Department is managing HECA at an increased risk level.  We noted that the modified cooperative agreement actually represented a substantial increase in upfront risk to the Department by allowing HECA to substantially decrease its cost share in the early stages of the project.  As such, the Department is at risk of expending $133 million for its share of project costs in the first phase without it being completed if the recipient is unable to obtain funding for the next project phase.  To help mitigate the risks identified in the HECA project, we provided suggestions to ensure similar situations do not recur and improve the management of cooperative agreements.

TOPIC: Financial Assistance