Statement of Karl Gawell, Executive Director, Geothermal Energy Association

Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

April 19, 2007

Mr. Chairman and Members of the Subcommittee the Geothermal Energy Association (GEA) appreciates the Committee’s interest in geothermal energy and its interest in the importance of tax incentives to this emergent industry. 

The Energy Policy Act of 2005 (EPAct) has resulted in a major, positive impact on the geothermal energy industry.  In November of 2006, GEA’s survey of industry activity showed a substantial surge in developing geothermal power projects in the US.  Some 61 projects were under various stages of development, a substantial increase from earlier years.  Table 3, which is attached to this testimony, provides a summary of the survey’s results.

The survey identified new power projects in Alaska, Arizona, California, Hawaii, Idaho, New Mexico, Nevada, Oregon and Utah.  These projects, when developed, would provide just over 2000 MW of new electric power for the grid -- enough electricity to meet the needs of cities the size of Albuquerque, Portland, Sacramento and Seattle combined.

Results of the survey provide dramatic evidence that new federal and state initiatives to promote geothermal energy are paying off.  The most significant catalyst behind this new industry activity has been Congress’ decision to extend the Section 45 Production Tax Credit (PTC) to include new geothermal energy facilities, which was initiated in 2004 and completed under EPAct of 2005. 

Several provisions in EPAct were intended to promote geothermal energy development.  First, Congress made new geothermal plants eligible for the full federal production tax credit, previously available only to wind and closed-loop biomass projects.  Second, EPAct authorized and directed increased funding for research by the Department of Energy (DOE), and gave the Bureau of Land Management (BLM) new legal guidance and secure funding to address its backlog of geothermal leases and permits.[1]

If we can build and sustain the momentum that EPAct has given the industry, geothermal energy can become a major US energy source.  The untapped potential of this resource is enormous.  Today, geothermal energy provides nearly 3,000 MW of reliable electric power in the US.  Recent reports by the GEA, National Renewable Energy Laboratory (NREL), and Massachusetts Institute of Technology (MIT) all point to a much larger for geothermal energy production from a range of technology applications.[2]  Each of these studies supports the potential to achieve 100,000 MW or more from the geothermal resource base.

Geothermal’s role among clean energy technologies is important to recognize.  It is one of the few technologies that can supply, clean, reliable, low emission fuel that is also a baseload resource providing power 24 hours a day, 365 days a year.  Geothermal energy could also support our national hydrogen initiative and nation biofuels goals, both of which will require significant amounts of energy to produce alternative domestic transportation fuels.

Tax Policy Advantages of a Production Tax Credit

The structure of the Production Tax Credit is unique, and when first enacted in 1992 it represented a radical change from the Investment Tax Credit.  The move to a production tax credit makes sense from a number of policy perspectives. 

• The Production Tax Credit works – the PTC has historically been shown to stimulate new investment in wind energy;
• The Production Tax Credit encourages cost reduction and efficiency by rewarding investors based upon project output instead of total expenses; and,
• The Production Tax Credit requires production for the full period of the credit to ensure that projects are legitimate power producers and not tax credit "scams."

Congress’ decision to expand the Production Tax Credit to include geothermal and other renewable energy resources was an appropriate policy choice.[3]  As the GEA survey shows, the PTC is having the desired effect.  But, to make this truly effective, we urge Congress to extend the credit five to ten years.  We also urge Congress to allow geothermal and other baseload projects to qualify once they have binding contracts and are under construction.  Further, we urge Congress to enact a new tax incentive for geothermal exploration.   We will discuss each of these proposals in turn.

Building Upon The Energy Policy Act

The Energy Policy Act of 2005 has helped launch a new era for the geothermal industry.   But, as this Subcommittee knows, this legislation is only the beginning.  As the November survey of new projects shows, many of these are in their early stages, and they will take several years to bring to fruition.  These projects are just the beginning of what is possible.

Consistent federal and state policies over a longer period of time will be needed to spur develop of our largely untapped geothermal energy resources.  The roller-coaster of federal and state energy policies has undermined the development of many clean technologies, including geothermal energy.  It’s worth noting the recommendation by the Western Governors’ Association’s (WGA) Clean and Diversified Energy Advisory Committee (CDEAC): “A strong, overarching theme…is the need for stable, long-term policies at both the federal and state levels….”

Energy is too often considered an issue of the moment, or the latest crisis.  But to effectively address US energy needs, the nation must adopt sustained longer-term energy policies.  We hope that the Subcommittee will consider new energy legislation this session to build upon EPAct and provide the long-term, stable policies needed through a long-term extension of the Section 45 tax credit.  We would urge the Subcommittee to support a 5-10 year extension of the placed in service deadline.

The Developers Dilemma: Short Time Period to Meet Placed in Service Requirement and Long Construction Lead Times

 The Energy Policy Act amended the Section 45 PTC to include new geothermal facilities, as well as several other renewable facilities, on the same basis as new wind facilities.  The PTC gives the developer the incentive needed to choose to invest in geothermal energy.  However, given the longer construction lead-time for geothermal plants--3 years or more--the short period the law allows for new plants to be placed in service undercuts its effectiveness.  The short timeframe means that some of the largest new geothermal facilities may not go forward because they will not be able to meet the rigid deadline. Ideally, the placed in service deadline for the Section 45 PTC should be extended an additional 5-10 years and Congress should provide geothermal facilities greater flexibility in qualifying for the credit.  If geothermal facilities that secure binding contracts and are under construction by the current deadline could be certain to qualify, substantial additional geothermal generation would be developed in the next few years. 

In 2005, I accompanied Vince Signorotti of CalEnergy when he testified before this Subcommittee about the importance of the PTC to his company’s geothermal plans.   He said:

We have a permit, so we could put shovels in the ground tomorrow. We have a customer – the Imperial Irrigation District – which strongly supports the development of geothermal power and has signed a 30-year contract for 95% of the plant’s output.  We are also ready to go with financing and construction.  However, the project is not yet commercially viable.  Put simply, obtaining a production tax credit for this facility is the difference between an economically viable project and a dream.  The present values of future production tax credits (especially if allowed for ten years of energy production) will launch this project and other geothermal projects around the country.”

The first issue we ask you to address is the eligibility period.  For geothermal projects, the placed-in-service date should be extended for an appropriate term to make the production tax credit viable.  Given the construction time of most geothermal plants, the existing one-year eligibility period does nothing to help make our plant a reality and probably won’t help other geothermal developers.  Three years is the minimum needed to benefit most geothermal developers, who, like us, must deal with multi-year lead time challenges of planning, permitting, and construction.  I therefore propose that you either extend the Section 45 placed-in-service date for at least three years or provide transition rules enabling new geothermal projects with binding contracts in place to qualify.  This modification would more realistically help to achieve Congress’ intent to provide an incentive for more geothermal development.

If Congress extends the production tax credit for geothermal energy in this manner, we will build this plant; it’s that simple.  And it will greatly increase the odds of seeing a Salton Sea 7, 8 and 9, because non-polluting, base load geothermal power is seen as an attractive substitute for coal and gas plants.  The power from our plants near the Salton Sea can be directed west to San Diego, northwest to Los Angeles, northeast to Las Vegas, or east to Arizona.  These are all areas with urgent needs for new, reliable electric power.  They are having difficulty meeting current clean air requirements and they expect substantial growth in their power demands.  While they are also subject to state or local renewable portfolio standards that mandate higher percentages of renewable energy, they are not likely to meet those standards in the absence of the production tax credit.[4]

Since that testimony, what has happened?  Instead of extending the tax credit at least three years, Congress extended the production tax credit for a period of two years.   As a result, instead of building one of the largest new geothermal power plants in the world--likely the first of several—CalEnergy has not built the power plant.  As Vince said, “it’s that simple.”

Unfortunately, while EPAct has spurred significant new interest in geothermal power, the legislation has failed to spur the development of geothermal’s full potential because of the short time-frame and “cliff” imposed by the current placed in service requirement.  As Todd Raba, President of MidAmerican Energy Company (MEC) explained to the Senate Finance Committee in his March 29^th testimony:

With regard to geothermal, hydro, biomass and waste-to-energy generation, the problem is more acute.  While these resources are more geographically limited than wind, they function as dispatchable, base load resources, enhancing their value.  Drilling new geothermal wells or upgrading existing hydro facilities to create incremental power expansions is highly capital intensive.  The vast majority of these projects cannot be completed within the short placed-in-service time frames under the existing PTC legislation, thus severely limiting new investments.[5]

Consider the work underway by Davenport Power LLC to develop what could be the first major geothermal power plant in Oregon.  The cascade region of Oregon and Washington appears to have substantial untapped geothermal resources, and development of the first power projects in the region would have added significance.  But, according to Todd Jaffe of Davenport, despite the fact that the company intends to begin drilling and on-site development this month, without an extension of the PTC the project may fail.

As Mr. Jaffe of Davenport Power explains:

This project (120MW) will cost in excess of $400 million. NGC is working with its investment banker in order to secure the necessary long term equity required for the project.  This commitment is needed as soon as possible since the majority of the well drilling must be financed with equity.  In order for this project to be economically successful, the project MUST receive the PTCs. Our investors are  assuming that Congress will once again extend the PTCs to cover the in-service dates thought 2011 and that the project will receive these credits for the entire 10 years. If not, NGC will not be able to secure equity funding and the project may have to terminate.[6]

In the 1980s, the combination of federal tax credits and power sales contracts issued under the Public Utilities Regulatory Policies Act of 1978 (PURPA), fueled dramatic growth in renewable power, including geothermal energy.  By the early 90s federal tax credits had been eliminated or scaled back, energy prices dropped to historic lows, and PURPA contracts ceased.  EPAct has again made the development of geothermal projects possible, again.  However, the long lead times of geothermal projects and the short term of the credit period are undercutting its potential. 

We urge the Subcommittee to support extending the credit and amending Section 45 to allow geothermal and other baseload power plants to qualify for the credit once they have secured binding contracts and are under construction.  

Exploration Incentives

As the examples above note, the early expenses of geothermal projects are particularly difficult hurdles.  Exploration is usually financed with equity, carries high risks, and takes a long time to be paid back.  The exploration technologies available today do not allow confirmation of the resource without drilling, and drilling geothermal wells is expensive, with costs ranging from a few million to over ten million dollars for a single well.  There are substantial undiscovered geothermal resources in the US, but a dramatic increase in new exploratory drilling will be necessary if potential resources are to be developed into power projects.

While the PTC helps provide incentives for power projects, it is not as effective at encouraging exploration.  Early exploration can take place a decade before any power will be produced, and can often involve an investor who is not the power developer.  The cost and risk of exploration for new geothermal resources is as high or higher than those in the oil and gas industry, and the ability to attract capital to finance geothermal exploration is far more difficult. 

Providing incentives for exploration is an important part of ensuring a continued cue of new projects.  We urge the Subcommittee to consider enacting a tax credit for 30% of the costs of exploratory drilling. 

The Critical Role of Tax Incentives

Tax incentives are critical to offset the high initial cost and risk of developing new geothermal power projects. The California Energy Commission (CEC) estimated that the initial capital cost of a typical geothermal facility was roughly $2700 per kilowatt, which is 4-6 times greater than the capital cost of a comparable-output combined cycle natural gas power plant as shown in the following table.

 Table 1: Capital Costs of Natural Gas and Geothermal Facilities

(CEC estimates 2003)

Source: Comparative Cost of California Central Station Electricity Generation Options, Magdy Badr and Richard Benjamin, California Energy Commission, 2003.

The CEC estimate does not reflect recent increases in steel and drilling costs discussed later in this statement, and does not include "site specific" costs such as permitting and transmission.  Capitol costs of new plants have been increasing substantially, as the following chart from EnergyBiz Magazine shows:

Because a geothermal facility has very low fuel costs and no fuel market volatility, in the long run, over 30-50 years, the "levelized" cost of a facility might be competitive with the long-term costs of a fossil fuel plant (considering both capitol and fuel costs).  But without the Section 45 Production Tax Credit (PTC), the initial risks, long lead times, and high capital cost will compel many investors to choose other alternatives that have shorter lead times, less risk, and lower front-end costs.

 In an important way, the PTC is equalizing risk.   Given the high capital cost and risk associated with geothermal development, the PTC gives the investor the incentive necessary to consider geothermal energy on a more equal basis with conventional power projects.  In addition, by lowering the capital risk for the geothermal projects, the ratepayer and the economy benefit by avoiding price spikes and instead ensuring long-term stable prices for energy.

Also, as the Figure below indicates, only about half of the investment needed for a new geothermal facility qualifies for the Investment Tax Credit, making a 10% credit effectively a 5% credit, while an output-based credit like the PTC makes no such distinction.

 Figure 1: Typical Cost Breakdown of Geothermal Power Projects[7]

Comparative Taxation Rates

Geothermal facilities pay significant federal, state and local taxes.  A study conducted for the Department of Energy in 1998 by the Princeton Economic Research Inc  states:

"A lot more Federal income tax is being collected from geothermal electricity than from electricity produced from natural gas, on a per kWh basis.  It appears that geothermal power systems, while having been granted a number of Federal tax incentives..., nevertheless appear to bear much heavier Federal income tax loads than are borne by some natural gas power generating systems.  This is mostly because geothermal systems are much more capital intensive than natural gas power systems, and profits and income taxes are generally proportional to the size of investments."[8]

More recent analysis supports this conclusion.  Brandon Owens, who went on to become Associate Director at Cambridge Energy Research Associates, published a study entitled "Does the PTC Work?" which found: "Fossil fuel–fired technologies have a lower tax burden relative to all renewable power technologies. The difference in tax burden is most pronounced for biomass and geothermal technologies, which, in this example, pay 227 percent and 338 percent more in total taxes, respectively, than they do for gas-fired combined-cycle units on a per megawatt-hour (MWhr) basis."[9]

As Vince Signorotti pointed out in his 2005 testimony:

Providing the geothermal industry with a production tax credit does not get us off the hook on the tax front by any means.  Indeed, one recent study has shown that geothermal plants pay, on average, more than three times the taxes that gas-fired combined cycle power plants pay on a per megawatt-hour basis.^[10]  This is largely the result of geothermal’s high capital and related infrastructure costs and the fact that a much higher percentage of our costs go to labor than a comparably sized gas plant, whose highest cost item is fuel.^[11]  In fact, our pro formas show that over the next 30 years, even with the benefits of the production tax credit in place, Salton Sea Unit 6 will still pay $100 million in federal income and payroll taxes and nearly $200 million in state and local income, property, and payroll taxes.

Accounting for the Positive Values of Geothermal Energy

Today, perhaps more than ever before, Americans are aware of the costs of our energy habits.  The national security implications of our dependence on foreign sources of energy are clear.

Even more foreboding are the increasingly dire warnings about the consequences of global climate change.  While the health costs of air and water pollution drove Congress to enact landmark air and water quality laws, more action is needed by Congress to intervene in energy markets with legislation that addresses greenhouse gas emissions.

Geothermal energy is a domestic resource. Because geothermal power plants do not burn fuel like fossil fuel plants, they release virtually no air emissions.  In general, geothermal energy production results in minimal environmental impacts, which are detailed in A Guide to Geothermal Energy and the Environment available at: http://www.geo-energy.org/publications/reports.asp.   But, the marketplace price of energy does not reflect any of these values.[12]

Providing tax incentives for new production is one effective way of compensating for the marketplace’s failure to include such externalities in energy prices.

The Western Governors’ Clean Energy Initiative

As Congress considers its next steps after EPAct, we call to the Committee’s attention the recent recommendations from the Western Governors’ Association (WGA) Clean and Diversified Energy Advisory Committee (CDEAC), and specifically the CDEAC Geothermal Task Force Report and recommendations.  The CDEAC effort is unquestionably the most systematic, thorough, and contemporary examination available of the potential for geothermal energy and other clean energy technologies to contribute to the energy needs of the West.  The CDEAC effort concluded that clean technologies can meet or exceed the West’s need for new energy sources, but that sustained federal and state support is needed to achieve this goal.

The CDEAC Geothermal Task Force made the following specific recommendation;

 Geothermal Priority Recommendations

            1. Federal and state tax credits are important to reduce the risk and high capital cost of new projects. The federal production tax credit (and clean renewable bonding authority) should be made permanent, or at least extended ten years.

Such changes would make the PTC an effective and equitable stimulus for new investment in geothermal power and result is substantial economic, energy security, and environmental benefits.

The production tax credit is helping to spur renewed geothermal energy development, but much more is possible.  We urge Congress to take the next steps and enact a long-term extension of the production tax credit, modify placed in service treatment for baseload power plants, and provide an incentive for new geothermal exploration.  Together, these measures would help unleash the potential of this renewable energy resource.

_ _ _ _ _ _ _

 Table 3: Developing Geothermal Projects by State and Status (November 2006)*

*Unconfirmed projects are not counted in the state or final total.

Total US Geothermal Projects Identified as Under Development – Confirmed and Unconfirmed – 11/10/2006

 61 Projects      2,141.7 MW-2,376.7 MW

[1] The EPAct research initiatives have been totally undercut by Administration efforts to terminate geothermal energy programs at DOE, and regulations for the the leasing provisions have yet to be completed by the Department of the Interior, however.

[2] “An Assessment of Geothermal Resources Development Needs, by Daniel Fleischmann, GEA, January 2007 (http://www.geo-energy.org/publications/reports.asp); Geothermal—The Energy Under our Feet, by Bruce Green and Gerald Nix, National Renewable Energy Laboratory, November 2006 (http://www.nrel.gov/docs/fy07osti/40665.pdf); The Future of Geothermal Energy, An Assessment by an MIT-led interdisciplinary panel, January 2007 (http://web.mit.edu/newsoffice/2007/geothermal.html),

[3] We believe Congress also intended the new Clean Renewable Energy Bond provision in EPAct to promote geothermal energy, among the renewable technologies, and have supported the CREBS provisions as well.  

[4] Testimony of Vince Signorotti, Vice President, CalEnergy Operating Corporation, House Ways and Means Subcommittee on Select Revenue Measures, May 24, 2005.

[5] Testimony of Todd M. Raba, President, MidAmerican Energy Company, Before the Committee on Finance, United States Senate, March 29, 2007.

[6] Personal Communication, Todd Jaffe, Davenport Power LLC, March 15, 2007.

[7] Factors Affecting Costs of Geothermal Power Development, Cedric Nathanael Hance, August 2005, available at: http://www.geo-energy.org/publications/reports.asp

[8] Entingh, Daniel J. (December 15, 1998). "Review of Federal Geothermal Royalties and Taxes." Princeton Economic Research, Inc., page 4.

[9] Owens, Brandon (July 2004). "Does the PTC Work?" PR&C Renewable Power Service, page 9.

[10]  “Does the PTC Work?,” by Brandon Owens (PR&C Renewable power Service, July 2004), pp. 10-12.

[11]  One study has shown that “job creation from geothermal energy is 11 times higher than from natural gas.”  “Renewables Work: Job Growth from Renewable Energy Development in California,” by Brad Heavner and Susannah Churchill, June 2002 (http://www.calpirg.org/reports/renewableswork.pdf). 

[12] One assessment of the marketplace value of the environmental externalities of geothermal energy production concluded that geothermal power production prevents emissions of 32 thousand tons of NOx, 78 thousand tons of SO_2,  and 16 million tons of CO₂ per year, which were worth $243.7 million in equivalent air emissions value, or roughly 1.6 cents/kWhr of geothermal electricity produced.  “Promoting Geothermal Energy: Air Emissions Comparison and Externality Analysis,” Alyssa Kagel and Karl Gawell, The Electricity Journal, August/September 2005, Vol. 18, Issue 7.