Statement of UTC Power

UTC Power appreciates this opportunity to submit a statement for the hearing record on the impact of energy tax policy on advanced energy technologies.

Summary

Our comments regarding energy tax incentives are based on UTC Power’s portfolio of ultra clean, highly efficient, reliable onsite power generation technology solutions.  While the technologies employed by our products are diverse, they are similar in their ability to address the nation’s need for clean, efficient, reliable, continuously available base load power.  UTC Power’s onsite power generating equipment such as our PureCell™, PureComfort™ and PureCycle® systems compete against the well established and heavily subsidized electric grid.  Distributed generation technologies such as ours offer enhanced energy security and stability. By splitting energy requirements between the electric grid and the natural gas grid, we provide our customers with an effective risk management strategy.

From a policy perspective, UTC Power as well as our supplier base and customers purchasing any of our onsite power generation products would benefit from stable, long term government policies that provide meaningful levels of incentives over a known timetable for the maximum period possible.  There are three specific federal energy tax incentives of interest to UTC Power that were included in the Energy Policy Act (EPAct) of 2005 and extended until 12/31/08:

            Sec 48 Fuel cell investment tax credit;

            Sec 48 Microturbine investment tax credit; and

            Sec 45 Geothermal production credit.

In all three cases, the volumes for products associated with these incentives are low and potential suppliers and customers are risk adverse.  Long term certainty and a meaningful level of incentive are absolutely essential.  We urge Congress to pass legislation this year that provides long term extensions (a minimum of five years) for federal incentives that will assist in the commercialization of these products; make several revisions; and clarify key implementation issues.  We support HR 550 and HR 197 that provide more specifics on the extensions and revisions to the existing incentives that we endorse. 

Company Background

UTC Power, a business unit of United Technologies Corporation (UTC) is a world leader in commercial stationary fuel cell development and deployment. UTC Power also develops innovative combined cooling, heating and power applications for the distributed energy market.  Since 1991, UTC Power has installed more than 260 fuel cell systems in 19 countries around the world.  UTC Power’s PureCell™ 200 system provides base-load power and can operate connected to or independent from the grid and also switch between modes automatically or on command. The PureCell™ 200 system operates seamlessly during grid outages.  Additionally, it is one of the cleanest power sources available today.

UTC Power also develops innovative combined cooling, heating and power applications for the distributed energy market.  One example is the PureComfort™ power solution, an ultra-efficient natural gas driven combined cooling, heating and power solution capable of satisfying energy needs with or without the grid.  It is flexible, environmentally benign and can reach efficiencies in excess of 80 percent. PureComfort™ power solutions consist of microturbines and a double-effect absorption chiller/heater from our sister UTC division the Carrier Corporation.  When a UTC Power system is integrated with a facility’s central heating or cooling system, the efficiencies can exceed 80 percent, resulting in substantial energy cost savings.

In addition, UTC Power is developing an organic Rankine cycle product known as the PureCycle® system for geothermal and other energy resources.  This technology is in the development stage.  We are partnered with Chena Hot Springs Resort outside of Fairbanks Alaska, the Department of Energy and Alaskan authorities in validating this exciting new geothermal technology. Operating with geothermal water at 165º F, this project has featured the use of the lowest temperature geothermal energy resource in the world. On April 12, 2007 we announced a series of agreements with Raser Technologies of Provo, Utah to provide up to 135 PureCycle® systems for three Raser power plants.  In total, these systems will generate approximately 30 megawatts of renewable electrical power. 

Energy Efficiency and Renewable Energy are Key to Meeting Increasing Energy Demands, But US Policies are Not Adequate to Meet the Challenge

A December 2006 Government Accountability Office (GAO) study entitled “Key Challenges Remain for Developing and Deploying Advanced Energy Technologies to Meet Future Needs” indicates: “US electricity generation will grow from 3,900 billion kilowatt hours in 2005 to 5,500 billion kilowatt hours in 2030.”

How will our nation meet this demand with minimal environmental impact?

A recent report by the American Council on Renewable Energy “The Outlook on Renewable Energy in America” states that 500 to 700 gigawatts of new renewable energy supplies could come from US renewable sources by 2025.  The American Solar Energy Society also did a study “Tackling Climate Change in the US: Potential Carbon Emission Reductions from Energy Efficiency and Renewable Energy by 2030”  and found US greenhouse gas (GHG) emissions could be reduced between 60-80% by 2050 if appropriate incentives were provided.

Advanced energy technologies such as UTC Power’s PureCell™, PureComfort™ and PureCycle® systems face significant hurdles in gaining acceptance including a risk adverse market and initial high costs driven by low volumes.  We welcome the recent actions by Congress to provide incentives for fuel cells, microturbines and geothermal energy production in the 2005 Energy Policy Act (EPAct) and last year’s action to extend these three credits until 12/31/08.  However, these efforts are not sufficient to address the challenges we face as a company, industry or nation.

The GAO report concluded: “It is unlikely that DOE’s current level of R&D funding or the nation’s current energy policies will be sufficient to deploy alternative energy sources in the next 25 years that will reverse our growing dependence on imported oil or the adverse environmental effects of using conventional fossil energy. The report added: “In addition, the duration of certain federal tax incentive has been insufficient to stimulate investment decisions to deploy advanced energy technologies. …. The credit’s duration is key to encouraging companies and their lenders to undertake the substantial investments and build an industry over time.”  UTC Power’s experience in the marketplace confirms these conclusions.

Fuel Cell Investment Tax Credit

A fuel cell investment tax credit was established in EPAct 2005 for business and non-business property owners.  It provides a credit of $1,000 per kilowatt installed cost or 30 percent of project cost, whichever is less.  The original sunset was 12/31/07, but this was extended until 12/31/08 in the Tax Relief and Health Care Act of 2006.

UTC Power is investing more than $100M total in a 5 kW fuel cell system for the critical back up power market and a new 400 kW stationary fuel cell product that will have twice the life and double the output at half the cost of our current PureCell™ 200 kW system.  The PureCell™ Model 5 power system is currently available as a pre-production product with commercial availability in the 2008 timeframe. The PureCell™ 400 system is scheduled for market launch in early 2009.  The fuel cell tax credit is set to expire just as these products will be entering the market which generates considerable uncertainty for us, our suppliers and potential customers. Extension of the credit this year is therefore critical to the commercial success of these products. 

In addition, there are a number of issues related to implementation of this new credit that require clarification including:  the use of the federal credit in connection with state incentives; applicability to certain markets; transference of credits so non tax paying entities can access the incentives; and eligibility for customers located in U. S. territories.

Microturbine Investment Tax Credit

The microturbine investment tax credit was created at the same time as the fuel cell provision noted above for business property owners.  It provides $200 per kW installed cost or 10 percent of total project cost, whichever is less.

Our microturbine based systems provide cooling, heating and power.  These products face the same risk adverse, low volume, high cost dynamics as fuel cells.  Given the low emissions, plus high efficiencies of these systems and their ability to provide assured power, there is significant customer and public benefit in their deployment. Both fuel cells and microturbines share the same need for certainty and longevity with regard to federal financial incentives.

In addition to the clarification issues associated with fuel cells, we also would seek a technical correction to the statute explicitly stating that the microturbine credit applies to the entire combined cooling, heating and power system and not just the microturbine component. 

Geothermal Production Tax Credit

The EPAct also made geothermal energy production eligible for the Sec. 45 federal Renewable Electricity Production Tax Credit (PTC).  This incentive is adjusted for inflation and currently provides 2.0 cents per kWh for energy produced from geothermal resources.  A taxpayer may claim credit for the 10-year period commencing with the date the qualified facility is placed in service. 

Many geothermal projects take years to develop. The PTC timeframe is too short for most geothermal projects to be completed by the current placed in service deadline.  We support the Geothermal Energy Association’s position that  “To achieve sustained geothermal development, Congress should immediately amend the law to allow facilities under construction by the placed in service date of the law to qualify, and extend the placed in service deadline by at least 5 years, to January 1, 2014, before its expiration.” 

Longer Term Tax Credit Extension is Important Due to Length of Sales Cycles and Need for Certainty by Suppliers, Technology Developers, Investors and Customers

Our experience in the onsite power generation marketplace indicates that sales cycle for these advanced technologies is typically 18-24 months.  Tax credits of only two years duration therefore have limited value in supporting the commercialization of these technologies.

Volumes for our onsite power generation solutions are low in these early years of the commercialization process. This translates into initial costs that are higher than conventional technology since overhead is spread over a smaller base.  Low volumes also make it difficult to attract the needed supplier investment in capacity expansion, tooling and equipment since they face the risk of never returning a profit. These risks can be mitigated somewhat by the knowledge that federal incentives will be available to help defray the costs of initial product deployment and help promote market penetration.

Our parent company, United Technologies Corporation (UTC) is one of the nation’s largest investors in R&D ($3.2B in 2006) for products such as aircraft engines, helicopters, air conditioners, elevators and escalators that operate for decades.  We need as much certainty as possible regarding government policies, regulations and incentives so we can deploy our assets for maximum public benefit and shareholder value. 

Smaller companies including many of our suppliers don’t have these advantages and therefore are even more vulnerable than we to market changes.  Our suppliers have an even greater need for certainty if they are to make investments in tooling, facilities and equipment that will support our products. 

Conclusion

Water never boils if the heat is turned on and off.  Many have highlighted the problems associated with the uncertainties of tax credits of short duration and the “on again off again” nature of the production tax credit.  Testimony presented in a recent Senate Finance Committee hearing pointed out that five two-year tax credit extensions are not equal to one ten-year extension.  There is a compelling need for assurances that government policies with regard to support for advanced energy technologies will be stable and consistent with a long term perspective.  We urge Congress to enact the most robust and longest term extensions possible for these important advanced energy technologies so their benefits can be realized by mainstream America.