[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
TAX CREDITS FOR ELECTRICITY PRODUCTION FROM RENEWABLE SOURCES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 24, 2005
__________
Serial No. 109-47
__________
Printed for the use of the Committee on Ways and Means
_____
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
PAUL RYAN, Wisconsin JOHN B. LARSON, Connecticut
ERIC CANTOR, Virginia RAHM EMANUEL, Illinois
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
DAVE CAMP, Michigan, Chairman
JERRY WELLER, Illinois MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida LLOYD DOGGETT, Texas
THOMAS M. REYNOLDS, New York STEPHANIE TUBBS JONES, Ohio
ERIC CANTOR, Virginia MIKE THOMPSON, California
JOHN LINDER, Georgia JOHN B. LARSON, Connecticut
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
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C O N T E N T S
__________
Page
Advisory announcing the hearing.................................. 2
WITNESSES
U.S. Department of Energy, Energy Information Administration,
Howard Gruenspecht, Deputy Administrator....................... 5
______
CalEnergy Operating Corporation, Vince Signorotti................ 42
Carlson Small Power Consultants, William Carlson................. 32
DTE Biomass Energy, Inc. and the Solid Waste Association of North
America, Curtis T. Ranger...................................... 35
FPL Energy, Dean Gosselin........................................ 24
Integrated Waste Services Association, and American Ref-Fuel
Company, Michael Norris........................................ 39
Sharp Electronics, and Solar Energy Industries Association, Chris
O'Brien........................................................ 47
SUBMISSIONS FOR THE RECORD
Brairton, Michael, American Public Power Association, statement.. 60
Davey, Christopher, Solar Mission Technologies, Inc., Missoula,
MT, letter..................................................... 63
Edison Electric Institute, statement............................. 64
Elefant, Carolyn, Ocean Renewable Energy Coalition, Potomac, MD,
statement...................................................... 65
English, Glenn, National Rural Electric Cooperative Association,
Arlington, VA, statement....................................... 67
Geothermal Energy Association, statement......................... 69
Independent Wind Power Association, statement.................... 74
Koenig, David, American Forest & Paper Association, statement.... 75
Kolodziej, Richard, American Biogas Alliance, statement.......... 76
Kunz, Daniel and Douglas Glaspey, U S Geothermal Inc, Boise, ID,
joint letter................................................... 79
Long, Gary, Public Service of New Hampshire, Manchester, NH,
letter......................................................... 80
Market Street Energy Company, Llc, Saint Paul, MN, statement..... 81
Meyer, Richard, Ocean Energy Council, Inc., Royal Palm Beach, FL,
statement...................................................... 82
Pomeroy, Hon. Earl, a Representative in Congress from the State
of North Dakota, statement..................................... 83
Rosenberg, David, Technology Transfer Partners, Chicago, IL,
letter......................................................... 84
Smith, Ronald, Verdant Power Llc, Arlington, VA, letter.......... 84
Stover, Mark R., statement....................................... 85
Wolff, Pat, American Farm Bureau Federation, statement........... 87
TAX CREDITS FOR ELECTRICITY PRODUCTION FROM RENEWABLE SOURCES
----------
TUESDAY, MAY 24, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:03 p.m., in
room 1100, Longworth House Office Building, Hon. Dave Camp
(Chairman of the Subcommittee), presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON SELECT REVENUE MEASURES
CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
May 16, 2005
No. SRM-2
Camp Announces Hearing on
Tax Credits for Electricity Production
from Renewable Sources
Congressman Dave Camp (R-MI), Chairman, Subcommittee on Select
Revenue Measures of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on Federal tax credits for
electricity production from renewable sources. The hearing will take
place on Tuesday, May 24, 2005, in the main Committee hearing room,
1100 Longworth House Office Building, beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing.
BACKGROUND:
In 1992, Congress passed the Energy Policy Act of 1992 (P.L. 102-
486) which established an inflation-adjusted tax credit (Section 45 of
the Internal Revenue Code) of 1.5 cents per kWh for electricity
produced from certain renewable sources, specifically qualified wind
and closed-loop biomass plants. This provision has been extended and
modified several times. Most recently in the American Jobs Creation Act
of 2004 (P.L. 108-357), the credit was expanded to include electricity
produced from open-loop biomass, geothermal, solar, small irrigation
and municipal solid waste. The credit will not, without extension of
current law, be available for output from qualified facilities placed
in service after 2005.
In announcing the hearing, Chairman Camp stated, ``This hearing
will provide us with the opportunity to examine Section 45 of the
Internal Revenue Code and the impact tax credits have had on the
production of energy from renewable sources.''
FOCUS OF THE HEARING:
The hearing will focus on the history of the renewable production
tax credit and its effects on the retail electricity market. The
Subcommittee will assess the economic efficiency of current tax policy
for renewable energy production and its efficacy in promoting
economically viable new energy technology.
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Chairman CAMP. The hearing will come to order. I ask our
guests to please find seats. The Subcommittee on Select Revenue
Measures hearing will begin, and the purpose of today's hearing
is to examine the Production Tax Credit, commonly known as the
PTC, or the section 45 credit, based on the section of the
Internal Revenue Code in which it is found.
Congress enacted the PTC in 1992 to provide an incentive
for producing electricity from certain renewable sources. The
PTC originally provided 1.5 cents per kilowatt hour of
electricity produced from certain renewable sources,
specifically qualified wind and closed-loop biomass plants.
Over the years, Congress has expanded the variety of renewable
energy sources eligible for the PTC. Currently, several new
renewables, such as solar, geothermal, and open-loop biomass,
have been included in the credit.
Other potential sources of power have sought inclusion or
higher credit amounts. In fact, the trend appears to be that
energy sources previously covered by other tax incentives, such
as investment credits, are now seeking to be included in the
PTC. Congress needs to periodically assess the current
economics of renewables production and the efficacy of the PTC
in promoting both the use of renewables and the development of
new technologies. Today's hearing will be part of the
Subcommittee's examination of these issues.
The Subcommittee will first hear from Dr. Howard
Gruenspecht, representing the Department of Energy's Energy
Information Administration. He will discuss the competitiveness
of renewables eligible for the PTC and perspectives on how the
structure of the credit may affect adoption of these new
technologies.
The Subcommittee will then hear from representatives of the
renewables industries currently covered by section 45.
The goal of this hearing is to determine what the PTC has
accomplished or might accomplish. We need to understand the
economics of renewable energy sources and the prospects for
expanding their market share. With the PTC scheduled to expire
at the end of this year, I look forward to hearing our
witnesses discuss just how effective this tax incentive is in
promoting renewable power.
I yield to the ranking Member of the Subcommittee,
Congressman McNulty, for an opening statement.
Mr. MCNULTY. Thank you, Mr. Chairman. I am happy to be here
with you, Mr. Gruenspecht, and the others who will testify
later.
Mr. Chairman, if I could ask consent to place in the record
an opening statement by a Member of the full Committee who is
not a Member of the Social Security, Earl Pomeroy. I would
appreciate that.
Chairman CAMP. Without objection.
Mr. MCNULTY. I would like to ask for permission for all
Members to submit statements for the record.
Chairman CAMP. Without objection.
Mr. MCNULTY. Thank you, Mr. Chairman. I look forward to
today's hearing on the effectiveness of Tax Code section 45 in
the production of electricity from renewable sources.
It is timely that the Select Revenue Measures Subcommittee
consider this issue given that the tax credit for renewable
resources expires at the end of 2005. It is my hope that the
Subcommittee will find time to consider other critically
important tax provisions which expire at the end of this year,
for example, individual Alternative Minimum Tax Relief and the
Welfare to Work and Work Opportunity tax credit.
The production of electricity through renewable energy
sources, such as biomass, solar, wind, and geothermal,
continues to involve cutting-edge industries with creative
technologies. It is important that our tax system support
efficient energy production systems and long-range energy
conservation measures. Renewable energy sources provide an
opportunity for investing in new technologies and a better
energy future for our children.
Mr. Chairman, I commend you for holding this hearing. I
thank all of the witnesses for your valuable insights and I
look forward to working with all of you on these issues in the
future. Thank you.
Chairman CAMP. Thank you very much.
Now, Dr. Gruenspecht, you have 5 minutes to summarize your
statement. We have received your written testimony, but you may
begin at any time. Thank you for being here.
STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY
Dr. GRUENSPECHT. Thank you, Chairman Camp and Members of
the Subcommittee. I appreciate the opportunity to appear before
you today to discuss the economics of renewable energy
electricity generating technologies that are eligible for the
section 45 Production Tax Credit.
The Energy Information Administration is a statistical and
analytical agency within the U.S. Department of Energy. We
don't take positions on policy issues, but we do produce data,
analyses, and forecasts that are meant to assist policy makers
in their deliberations. Because we have an element of statutory
independence, EIA's views should not be construed as
representing those of the Department of Energy or the
Administration.
The information I am providing today is based on our
outlook for domestic energy consumption, supply, and prices
through 2025. These projections are meant to represent likely
futures, not exact predictions. Projections of energy markets
are highly uncertain, as we have all seen recently, and are
subject to many random events that cannot be foreseen. In
addition, long-term trends in technology, economic growth, and
energy resources may evolve along unanticipated paths. We do
examine a number of alternative cases to address some of these
uncertainties.
In 2003, renewable energy generation altogether accounted
for 9.4 percent of total electricity generation. Over three-
quarters of that amount was conventional hydroelectric power,
which is not eligible for the PTC. The technologies currently
eligible for the PTC accounted for 2.2 percent of total
electricity generation, as illustrated in Figure 1 of my
written testimony. While the combined generation of these
technologies is projected to more than double by 2025, their
share of total generation is projected to remain relatively
small, at 3.2 percent.
One way that we often compare generating technologies is to
estimate their levelized cost, which represents the discounted
per kilowatt hour cost of building and operating a plant. Table
1 in my written testimony compares the projected levelized
costs in 2010 for various generating technologies. A glossary
attached to my testimony explains some of the terms I am using.
As shown in the table, pulverized coal, geothermal, and
natural gas combined cycle plants have the lowest projected
levelized cost. Solar, thermal, and photovoltaic technologies
have much higher levelized costs. Wind and open-loop biomass
fall in the middle.
Levelized costs alone do not determine market outcomes, and
let me briefly touch on some of the issues that most affect the
potential use of renewable generation.
Resource limitations are one issue. For example, while the
table shows that levelized costs of geothermal are competitive
with new coal plants, there are very few geothermal sites with
costs as attractive as those in the table and they tend to be
located in remote areas. Remaining sites are more expensive.
Again, for wind, there is a lot of resource, but the
quality and location are important considerations. Some of the
best resources are located in areas that are relatively remote
or hard to develop.
A fuel availability is another issue, especially for
biomass. The supply of low-cost biomass fuel is limited, and
because biomass fuel has a lower energy content per unit of
volume than coal, transportation costs generally rule out
moving biomass over long distances.
Wind and solar are intermittent energy sources. When the
wind is not blowing or the sun is not shining, they can't
generate electricity. When these technologies are developed,
additional capacity may have to be added to back them up,
adding system costs that are not reflected in the levelized
cost table.
Transmission cost and availability also varies by
technology. All technologies require some investment to
interconnect with the transmission grid, but these costs can be
higher for some renewables because of their relatively remote
locations and small plant sizes, and it is especially true for
intermittent technologies because of their low utilization
rates.
Now let me offer some observations on the impact of the PTC
itself. There is no question that the availability of the PTC
increases the economic attractiveness of eligible technologies.
Its primary impact to date has been to stimulate wind. For
solar, the benefit provided by the PTC is not large enough to
result in its significant expected market penetration. In fact,
because of high capital costs and low capacity factors, the PTC
is less valuable to solar technologies than the Investment Tax
Credit, which they can take instead.
We have done some sensitivity analysis that looks at the
impact of a long-term extension of the PTC. That is not meant
to represent any expectation about future policy decisions.
Wind power shows the largest projected gain, followed by
geothermal, landfill gas and biomass.
We also ran a test case in which all the eligible
renewables were given the same PTC as wind for an extended
period. As you know, some of the others receive less. In that
case, wind and biomass were still the major beneficiaries.
Let me close by citing some other factors that influence
the penetration of renewable technology. It is not just the PTC
that matters, it is other market or policy developments. We
looked at a scenario that significantly raised projected
natural gas prices and total additions of renewable capacity
nearly doubled and their share of total generation in 2025
increased by a third. Biomass and wind were the big gainers.
We ran some scenarios that incorporate recent rules or
legislative proposals to regulate emissions of sulfur dioxide,
nitrogen oxides, and mercury. Those policies did not appear to
have a major impact on the penetration of renewables. However,
as discussed in my written testimony, we did find that
significant restrictions on emissions of greenhouse gasses
would result in much greater use of PTC-eligible technologies.
There is also an interaction between the PTC and State
programs to stimulate renewables. We found that many States
have included provisions in their State programs, Renewable
Portfolio Standards, mandates that limit the funding levels or
the costs they are willing to impose. That means since the PTC
lowers funding levels or costs, it reduces the likelihood that
those provisions get triggered.
Finally, we have also, in response to a request from
Congress, looked at analyses of proposals for national
Renewable Portfolio Standards. Again, these analyses suggest
that a Federal RPS could stimulate the development of new
renewable capacity. However, the stated percentage targets in
those programs are often not achieved because of a similar cap
provision that limits the price of renewable tradable credits.
If the PTC and RPS programs were both in effect, the credit
price caps are less likely to limit the deployment of renewable
technologies.
That concludes my testimony, Mr. Chairman, and I would be
glad to answer any questions that you or other Members of the
Subcommittee might have. Thank you.
[The prepared statement of Mr. Gruenspecht follows:]
Statement of Howard Gruenspecht, Deputy Administrator, Energy
Information Administration, U.S. Department of Energy
Mr. Chairman and members of the Subcommittee, I appreciate the
opportunity to appear before you today to discuss the economics of
renewable energy electricity generating technologies that are eligible
for the Section 45 production tax credit (PTC).
The Energy Information Administration (EIA) is a statistical and
analytical agency within the U.S. Department of Energy. We are charged
with providing objective, timely, and relevant data, analyses, and
projections for the use of the Congress, the Administration, and the
public. We do not take positions on policy issues, but we do produce
data, analysis, and forecasts that are meant to assist policy makers in
their deliberations. Because we have an element of statutory
independence with respect to our data, analyses, and forecasting, our
views are strictly those of EIA and should not be construed as
representing those of the Department of Energy or the Administration.
However, EIA's baseline projections on energy trends are widely used by
government agencies, the private sector, and academia for their own
energy analyses.
Much of the information I am providing today comes from our Annual
Energy Outlook 2005 (AEO2005) which provides projections and analysis
of domestic energy consumption, supply, and prices through 2025. The
AEO2005 is based on Federal and State laws and regulations in effect as
of late 2004. With respect to electricity generated from renewable
energy, AEO2005 includes the extension and broadening of the PTC
through December 31, 2005, that was included in the Working Families
Tax Relief Act of 2004 (P.L. 108-311) and the American Jobs Creation
Act of 2004 (P.L. 108-357).
The projections in the AEO2005 are not meant to be exact
predictions of the future but represent likely energy futures, given
technological and demographic trends, current laws and regulations, and
consumer behavior as derived from known data. EIA recognizes that
projections of energy markets are highly uncertain and subject to many
random events that cannot be foreseen, such as weather, political
disruptions, and technological breakthroughs. In addition to these
phenomena, long-term trends in technology development, economic growth,
and energy resources may evolve along a different path than expected in
the projections. The AEO2005 includes several alternative cases
intended to examine some of these uncertainties.
Renewable Generation Today
In today's market, renewable generation accounts for 9.4 percent of
total generation; over three-quarters of it comes from hydroelectric
facilities (Figure 1). The technologies currently eligible for the PTC
account for a small share of total electricity generation. In 2003, the
combined generation of geothermal, photovoltaic (see attached
Glossary), solar thermal, biomass, municipal solid waste, and wind
plants accounted for 2.2 percent of total U.S. electricity generation.
Among these renewable sources, biomass generation, mainly from
industrial facilities, accounts for over 44 percent of the total,
followed by municipal solid waste (26 percent), geothermal (16
percent), wind (13 percent), and the grid-connected solar technologies
(1 percent). While their combined generation is projected to more than
double by 2025, their share of total generation will remain small, at
3.2 percent.
[GRAPHIC[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Economics of Renewable Generating Technologies
Many factors affect the relative economics of various electricity
generating technologies. Such factors include the costs of licensing,
permitting, and constructing each plant (often referred to as the
overnight construction costs), the time required to build each plant,
the costs of financing the construction, the projected cost of the fuel
(if any) needed to operate the plant, and other operations and
maintenance costs associated with running the plant once it is built.
Because the contribution of each of these cost components differs from
technology to technology, it is difficult to look at any one factor to
determine which technology is best for a given set of circumstances.
One approach that is often used to compare disparate technologies
is to estimate their levelized costs. Levelized costs represent the
discounted per-kilowatthour costs of building and operating a plant at
its typical operating rate (i.e., capacity factor). Table 1 compares
the projected levelized costs to develop the next plant in 2010 for
various grid-connected utility-scale renewable technologies to those
for pulverized coal, natural gas combined-cycle, and nuclear plants.
The values in the table represent the discounted costs of building and
operating each technology for 20 years. They include the costs of
building the plant, staffing and maintaining the plant, and purchasing
the needed fuel each year for 20 years. As shown, pulverized coal
plants have the lowest projected levelized costs, followed by
geothermal and then natural gas combined-cycle plants. Solar thermal
and photovoltaic technologies tend to be much more expensive than other
options, while wind and open-loop biomass are in the middle.
Table 1. National Average Levelized Generation Costs for New Plants in
2010
------------------------------------------------------------------------
Levelized
Costs (2003
Technology cents per
kilowatthour)
------------------------------------------------------------------------
Pulverized Coal 4.3
------------------------------------------------------------------------
Geothermal 4.4
------------------------------------------------------------------------
Natural Gas Combined-Cycle 4.7
------------------------------------------------------------------------
Wind 4.8
------------------------------------------------------------------------
Open-Loop Biomass 5.1
------------------------------------------------------------------------
Nuclear* 6.0
------------------------------------------------------------------------
Solar Thermal 12.6
------------------------------------------------------------------------
Photovoltaic 21.0
------------------------------------------------------------------------
*The time required to license, permit, and construct a new nuclear plant
makes it impossible to bring one on line by 2010. The costs shown are
for a plant beginning operation in 2013.
Excludes transmission costs and impact of PTC.
Source: National Energy Modeling System run, aeo2005.d102004a.
When reviewing this table, one might ask why the costs are so
different and why we are not seeing greater penetration of geothermal
plants. Furthermore, given the costs shown, why has so much natural gas
capacity been added in recent years? While pulverized coal plants are
expensive to build--typically twice as costly as a natural gas
combined-cycle plant--there is an ample supply of fairly low-cost coal
and the plants can operate nearly around the clock with annual capacity
factors exceeding 80 percent. Because they can be operated so
intensively, the recovery of their high construction costs can be
spread over a large amount of electricity production, making their per-
kilowatthour levelized costs relatively low. In contrast, photovoltaic
and solar thermal plants, which are even more expensive to build than
coal plants on a per-kilowatt of capacity basis, cannot be operated
very intensively. Their potential utilization is limited by the
availability of the sun and their annual capacity factors are generally
between 25 and 33 percent. Unlike coal plants, the levelized costs for
natural gas combined-cycle plants are driven by their fuel costs,
rather than their construction costs. If a plant is to be operated
intensively--what is referred to as baseload operation--the higher fuel
costs for natural gas plants tend to make them less economical than
coal plants. On the other hand, if a plant will be operated only
occasionally (i.e., peaking operation) or moderately, such as on hot
summer days when electricity usage is high, the very low construction
costs of natural gas plants make them an attractive option.
For nuclear plants, relatively high construction costs, high
operation and maintenance costs, and long planning and construction
periods all contribute to their higher levelized costs. For geothermal
plants, high construction costs and the site-specific characteristics
of the geothermal resource are the key drivers of their levelized
costs. At the best sites, their levelized costs can be competitive with
new coal plants, but there are only a few sites with costs as
attractive as those in Table 1, and they tend to be located in remote
areas in the far western region of the country. Once those low cost
sites are developed, the remaining sites are much more expensive. The
levelized costs for open-loop biomass technologies are most influenced
by their high capital costs and the availability of low-cost fuel. When
low-cost fuels are available, they can be reasonably competitive, but
the supply of such fuels is limited. Because biomass is dispersed and
has a much lower energy density per unit of volume than coal,
transportation costs generally rule out moving biomass over long
distances. The size of plants using biomass can be limited by amount of
biomass that can be produced at nearby locations.
For wind, the key levelized cost drivers are the construction costs
of the plants and the quality of the wind resource. The wind resource
in the country is quite large, but some of the best resources are
located in areas where their development is restricted or in relatively
remote areas where significant transmission upgrades would be needed to
access them.
Two further cautions should be raised about comparing the levelized
costs of wind and solar plants to other technologies. Wind and solar
technologies are often referred to as intermittent technologies. Unlike
the other technologies in the table, their generation is only available
when their resources are available. They can not be called upon
whenever needed. When the wind is not blowing or the sun is not
shining, they cannot generate electricity. As a result, when these
technologies are developed, additional capacity may have to be added to
back them up and ensure that consumers' electricity needs can be met at
all times. The need to add backup capacity for intermittent resources
adds system costs that are not reflected in their levelized costs. The
levelized costs shown in the table also do not include the costs of
transmission investments needed to support the capacity additions. All
technologies require some investment to interconnect to the
transmission grid, but these costs can be higher for some renewables
because of their relatively remote locations and, for the intermittent
technologies, the per-kilowatthour transmission costs can be high
because of their lower generation.
Impact on the PTC
The availability of the PTC through December 31, 2005, makes the
eligible renewable technologies more economically attractive than shown
in Table 1. For example, the full 10-year PTC available for wind plants
lowers their projected levelized costs by about 2 cents per
kilowatthour. The levelized value of the PTC is larger than the nominal
value of the PTC because it is an after-tax credit.
For solar technologies, the benefit provided by the PTC does not
appear to be large enough to cause a significant change in market
penetration. In fact, because their annual output is so limited, the
PTC is less valuable to them than the 10-percent investment tax credit
for which they are also eligible. For geothermal and biomass
technologies, planning and construction periods are so long that it
would be impossible for a new plant to be developed in time to take
advantage of the current credit. Even for wind technology, only those
plants that are well along in their development cycle will be able to
enter service in time to qualify for the credit. Short-term extensions
of the PTC are likely to have limited impact on qualifying technologies
like biomass and geothermal, which have relatively long development
periods, even if the credit were large enough to make them economical.
Throughout the history of the PTC, its primary impact has been to
stimulate the development of wind plants, albeit with the limitations
mentioned above.
As stated previously, the AEO2005 reference case assumes the PTC
will expire in December 2005, as provided for in current law. In the
AEO2005, EIA also has examined the potential impact of a longer-term
extension of the current PTC. The only qualifying technology not
represented in the extension case was closed-loop biomass. Because of
the long establishment times and relative expense of energy crops, it
was assumed that no dedicated, closed-loop biomass would be able to
take advantage of the extended credit. The PTC extension case is not
meant to represent any expectation about future policy decisions
regarding the PTC.
In the AEO2005 PTC extension case, wind power continues to show the
largest projected gains, although landfill gas, geothermal, and biomass
are also projected to experience some capacity expansion. Installed
wind capacity in 2015 is almost 63 gigawatts in the PTC extension case,
compared to 9.3 gigawatts in the reference case. In 2015, geothermal
capacity in the PTC extension case is 3.2 gigawatts, compared to 2.7
gigawatts in the reference case. Biomass capacity in 2015 is 3.4
gigawatts in the PTC extension case, compared to 2.1 gigawatts in the
reference case. In a test case where it is assumed that all of the
eligible renewables were given the PTC now available to new wind plants
for an extended period, wind and biomass technologies showed the
largest growth.
Other Factors Influencing Renewables
Other important factors that could impact the future of PTC-
eligible renewable technologies include changes in fossil fuel prices,
particularly for natural gas, changes in environmental policies, and
changes in other Federal or State policies. The AEO2005 includes a case
where it is assumed that natural gas supply options are more restricted
than in the reference case. The key impact of these supply restrictions
is higher natural gas prices, making other generating options,
including renewables, more economically attractive. In the restricted
natural gas supply case, the wellhead price of natural gas in 2025
reaches $6.29 per thousand cubic feet (2003 dollars), 31 percent higher
than the $4.79 per thousand cubic feet price in the reference case.
These higher natural gas prices cause a shift to increased use of coal
and renewables for electricity generation, while natural gas generation
is lower. Total additions of renewable capacity in the restricted
natural gas supply case are nearly double the level seen in the
reference case, and the share of generation accounted for by the
renewable technologies eligible for the PTC increases to 4.1 percent,
nearly one-third higher than the 3.2-percent share in the reference
case. Biomass, wind, and to a lesser degree, geothermal show the
greatest increases in response to the higher natural gas prices.
The AEO2005 also included a case examining the impact of the
Environmental Protection Agency's (EPA) proposed Clean Air Interstate
Rule (CAIR) which has now been finalized. The CAIR calls for the power
sector to significantly reduce its emissions of sulfur dioxide (SO2)
and nitrogen oxides (NOx). In the AEO2005 alternative case,
the CAIR was found to have insignificant impacts on renewable
generation. Similarly, in a recent analysis prepared in response to a
request from Senators James Inhofe and George Voinovich, the potential
impact of EPA's proposed Clean Air Mercury Rule (CAMR) together with
CAIR was examined. Again, it was found to have only small impacts on
renewable generation.
In contrast to these findings, several EIA analyses have shown that
renewable generation could be strongly impacted by environmental
legislation calling for significant reductions in greenhouse gas
emissions. For example, in June 2003, at the request of Senators
Inhofe, McCain, and Lieberman, an analysis of S. 139, the Climate
Stewardship Act of 2003, was prepared. S. 139 called for a two-phase
reduction in greenhouse gas emissions for most sectors of the U.S.
economy. The first phase called for reductions to the 2000 greenhouse
gas emissions level, while the second phase called for reductions to
the 1990 greenhouse gas emissions level. In our analysis, the
greenhouse gas cap and trade program called for in S. 139 significantly
increases the cost of using fossil fuel technologies that emit
greenhouse gases, which encourages increased use of renewables,
nuclear, and carbon capture and sequestration technologies. In that
analysis, total additions of renewable capacity were more than 10 times
the level seen in the AEO2005 reference case, and the share of
generation accounted for by the renewable technologies eligible for the
PTC increased to 16.8 percent, more than 5 times the level seen in the
reference case. Again, biomass, wind, and geothermal showed the
greatest increases in response to the greenhouse gas cap and trade
program.
State programs to stimulate renewables, such as power generation
standards or mandates, could also influence the impact of Federal PTC
changes. In a review of State programs through December 31, 2003, EIA
found that the Federal PTC and State renewable programs tend to
complement one another. Many of the States have provisions in their
renewable programs that limit their funding or the costs they are
willing to impose. As a result, the impacts of the State programs
likely would be lower without the Federal PTC to reduce the costs of
renewables.
Discussions surrounding Federal energy legislation have included
proposals for the implementation of a national renewable portfolio
standard (RPS) requiring that a certain percentage of all electricity
generation or sales come from designated renewable energy sources. EIA
has no position on these proposals, but we have prepared several
analyses of RPS proposals in recent years in response to requests from
Congress. These analyses suggest that such an RPS could stimulate the
development of new renewable generating capacity. However, the stated
percentage targets in these proposals are often not achieved because
provisions that cap the price of tradable renewable credits are
triggered. If the PTC and RPS programs were both in effect, such
provisions are less likely to come into play as a factor would limit
the development of new renewable generating capacity.
This concludes my testimony, Mr. Chairman. I would be glad to
answer any questions you and the other Members may have.
Glossary
Closed-loop biomass. A closed-loop process is defined as a process
in which power is generated using feedstocks that are grown
specifically for the purpose of energy production. Many varieties of
energy crops are being considered including hybrid willow, switchgrass,
and hybrid poplar.
Combined-cycle. An electric generating technology in which
electricity is produced from otherwise lost waste heat exiting from one
or more natural gas (combustion) turbines. The exiting heat is routed
to a conventional boiler or to a heat recovery steam generator for
utilization by a steam turbine in the production of electricity. This
process increases the efficiency of the electric generating unit.
Gigawatt. 1,000,000 kilowatts or 1,000 megawatts.
Kilowatt. A unit of electricity generating capacity equal to 1000
watts.
Kilowatthour. The amount of electricity generated by operating a 1-
kilowatt generator at full load for 1 hour.
Megawatt. 1,000 kilowatts.
Open-loop biomass. An open-loop process is defined as a process in
which power is generated using feedstocks that are a waste stream.
Examples of such feedstocks include: agricultural residues (corn
stover, wheat straw), forestry residues (logging residues, dead wood),
and urban wood waste/mill residues (pallets, construction waste).
Photovoltaic. Direct conversion of sunlight to electricity through
use of photo-conversion cells, typically using conducting layers of
crystalline silicon cells.
Solar thermal. Conversion of sunlight to electricity by
concentrating sunlight to heat water or other medium (like molten salt)
for use as a preheater for the boiler fluid of a steam turbine.
Sunlight may be concentrated on tubes (trough thermal), points (dish),
or tower focal points.
Chairman CAMP. Thank you, Dr. Gruenspecht, for that
testimony. I have a couple of questions I would like to start
off with. Some have suggested that increasing the amount of
renewables-generated power will help reduce America's
dependence on foreign oil. Is that true, and what is your
opinion on that?
Dr. GRUENSPECHT. Well----
Chairman CAMP. Then, second, how will an increase in
renewables affect dependence in America on natural gas?
Dr. GRUENSPECHT. In 2003, I think oil-fired generation was
only about three percent of total generation and it is not
expected to be an important source of generation in the future.
Only about 3 percent of our total petroleum is used for
electric generation. This is a big change from the 1970s, when
about 10 percent of our total petroleum use was used for
electric generation. So, there is probably not that large a
relationship between using more of any particular fuel and
backing out oil.
Natural gas is somewhat different. Natural gas is a growing
source of generation, and as you know, many new plants have
been constructed that burn natural gas. In several analyses, we
found that programs to stimulate renewable electricity
generation could reduce natural gas use. When we did that
analysis I mentioned about the Federal Renewable Portfolio
Standard, we found that natural gas generation in 2025 would be
3.6 percent lower than it would be in our base case, and
natural gas wellhead prices were reduced somewhat. So, I would
say more of an effect on natural gas, less of an effect on oil
would be the short answer.
Chairman CAMP. At least 19 States and the District of
Columbia have implemented Renewable Portfolio Standards, and
these standards generally require a certain percentage of power
sold within the State be derived from renewable sources. Does
it make sense to have a tax credit and a mandate for production
at the same time? Does it make sense to subsidize activities
that are mandated?
Dr. GRUENSPECHT. Tough question. I guess as I mentioned in
my testimony, there are many variations in the general program
design and specific program details across the States that have
programs, and I mentioned the fact that some of the States have
cost caps, and clearly the cost caps are less likely to come
into play if the Federal PTC is available.
So, there is something to be--I guess I would not say that
because there are State programs, the PTC would have no impact.
Whether it makes sense or not is really a policy matter to be
addressed as to who should bear the costs, the consumer, as a
consumer of electricity, the consumer as a taxpayer or the
State.
Chairman CAMP. Well, I guess my question is does the tax
credit distort choices among renewables in those States that
have the Renewable Portfolio Standards?
Dr. GRUENSPECHT. It probably does have an effect. I mean,
in our levelized cost numbers, the value of the full credit
that wind and closed-loop biomass gets, the 10 years, the full
amount of the credit, compared to some of the other
technologies get a half-value full-life credit that is worth
half as much, and some of them get a half-value half-life
credit, which is worth 30 percent as much. So, there is no
question that those differences can affect the choices among
the technologies.
That said, wind is the technology that has been most
prominent, and wind, even in our table, happens to be among the
lowest-cost renewable technologies. So, I say there is some
potential for distortion in the mix of technologies, but wind
would do well under any circumstances, as it is doing now.
Chairman CAMP. Lastly, with regard to natural gas, what is
the potential contribution to the overall U.S. energy supply by
landfill gas?
Dr. GRUENSPECHT. I do not have that off the top of my head.
Can I get back to you on the record for that?
Chairman CAMP. Yes. If you could submit that later in
writing, that would be helpful.
Dr. GRUENSPECHT. Thank you.
Chairman CAMP. I just wonder, I mean, maybe this is
something you want to follow up on, but how the PTC affects the
creation of new landfill facilities in terms of the number and
economics of those projects. If you could give the Committee
that information, that would be helpful, as well.
Dr. GRUENSPECHT. Okay. I know that, initially, some of the
landfill gas facilities were responding to EPA requirements and
it is really only later, I think, with the extension and the
expansion of the PTC that that has become an issue. But I will
get back to you.
Chairman CAMP. Any significant barriers to entry for those
facilities that you know of, if you could include that in your
comments.
Dr. GRUENSPECHT. Okay. Thank you.
Chairman CAMP. Thank you. Thank you very much.
Mr. McNulty may inquire.
Mr. MCNULTY. Mr. Chairman, Congresswoman Tubbs Jones is a
Member of the Social Security Subcommittee, as well. They are
meeting right now. With your permission, I am going to allow
her to go first on our side.
Chairman CAMP. No objection. Ms. Tubbs Jones may be
recognized for 5 minutes.
Ms. TUBBS JONES. Thank you, Mr. Chairman, and to my second
fairy godfather on this Committee, thank you, Mike McNulty, for
yielding to me.
I wanted to take this opportunity to express on the record
my support for the extension of this credit, and I wonder, Mr.
Gruenspecht, have we put a dollar number on this credit, and if
we have, specifically what it is, what the dollar value of
these tax credits are. If, in fact, we have, are you able to
say to the American public, they are getting on top of that
credit this value for it?
Dr. GRUENSPECHT. I would not venture into revenue
estimation matters which are in the purview of the Committee.
Ms. TUBBS JONES. Okay.
Dr. GRUENSPECHT. In terms of the levelized cost of
renewables, which I discussed in my testimony, the credit does
make a big difference. For wind, for example, it makes about a
two cent per kilowatt hour difference in the levelized cost of
technology, lowering it from 4.8 or so down to the neighborhood
of three cents per kilowatt hour. So, that makes a substantial
difference.
Ms. TUBBS JONES. I am not trying to give you our job of
revenue. I was just curious----
Dr. GRUENSPECHT. Okay. Yes.
Ms. TUBBS JONES. I think it is a great selling point for
the credit to be able to discuss that, but let me go on and ask
you something else. The credit previously has been extended for
1 year. Now, it is asked for 2 years. Do you believe that we
would get a greater bang for our buck if, in fact, the credit
was extended for a longer period of time or not?
Dr. GRUENSPECHT. I think short-term extensions make it hard
for certain technologies to benefit from the credit because the
project development cycle for those technologies is long
relative to the period of extension. So, if the credit is
extended for a short period of time, it is very hard to get the
project in and get it in service.
Ms. TUBBS JONES. So, your answer is yes?
Dr. GRUENSPECHT. Well, my answer is it is a policy call,
but clearly, certain technologies have a hard time making use
of the short-term extension. The other side of it is obviously
the revenue costs and the fact that market conditions can
change over time.
Ms. TUBBS JONES. What would you suggest would be a
reasonable period of time for the extension, then? Come on, you
can answer. We won't hurt you.
Dr. GRUENSPECHT. No, no, I know you won't hurt me--
[Laughter.]--but it is really not the role of the Energy
Information Administration to take a position on that.
Ms. TUBBS JONES. You are a great employee of the Federal
Government.
Dr. GRUENSPECHT. I am a bureaucrat when it comes to these
types of issues, but again, it is really a trade-off between
what the different technologies can use, on the one hand, and I
guess you guys have to worry about the revenue costs and you
need to worry about possible changes in market conditions.
When we looked at long-term extensions, we did see, for
instance, more biomass coming in. Again, we did that as a
sensitivity analysis. Biomass has a harder time coming in with
short-term extensions because you can't get the projects done.
Ms. TUBBS JONES. Got you. So, in other words, in some
instances, if we have a longer credit involved, we might have
greater return on some of the research or work that has been
done.
Dr. GRUENSPECHT. You could certainly get more types of
projects in.
Ms. TUBBS JONES. Mr. Chairman, I thank you and the
Committee for allowing me to speak up, and to the second panel,
please know that it is not that I don't want to hear you, but I
have got to work on Social Security for the people in my
Congressional district.
I yield back my time. Thank you, Chairman Camp and Mike.
Chairman CAMP. Thank you very much.
Mr. Foley may inquire.
Mr. FOLEY. Thank you, Mr. Chairman. I was interested in
listening to your description of the various sources of energy,
and I recognized in all of them there are some variables, some
vulnerabilities, reliabilities, possibly. But at the end of the
day, following up on what Mr. Camp mentioned, it is trying to
free ourselves from being held hostage by what I believe are
other nations, whether it is the Saudi Arabian royalty or
Chavez in Venezuela. We seem to have a thirst, an unquenchable
thirst for crude oil, and these technologies, in my view, seem
to be the only way to ratchet backward.
Yesterday, General Electric had a two-page ad in USA Today
and it basically illuminated the fact that one wind energy unit
can supply the energy electricity for 440 households. Now,
obviously that is probably under optimum circumstances and a
number of other things, but I don't think General Electric
would spend that kind of money just touting fantasy.
My hope is that we can use the constructive dialog of the
tax element, Tax Code. It may not be the most perfect way in
which to enhance or create development, but it seems to be one
of the only ways for companies, like Florida Power and Light in
my district, to venture out and embark on this opportunity. I
think with a combination of those features, certainly there is
inherent in these products diversity.
Landfills, we are finding ourselves at capacity in so many
places, and to take that excess capacity and to make it
something else seems to be on the cutting edge, methane,
whether it is sugar cane in my case in the Glades with biomass.
It is getting rid of a product we have no other places for.
So, when you do the analysis, not just counting dollars and
tax credits, isn't it a way with the multitude of platforms we
are approaching to reduce significantly our dependency?
Dr. GRUENSPECHT. Again, it is--we don't use that much oil
for electric power generation. We do use natural gas, and
natural gas, we would be increasingly reliant on imports over
time.
I think you are correct in noting that there is a wide
variety of resources and that different areas of the country
have different resources. So, the top wind areas for generation
right now would be California, Texas, Iowa, Minnesota. North
Dakota, South Dakota have resources there. For biomass, you
have the Midwest that has a lot of agricultural residue. The
West and the Northeast and the Southeast have forestry
resources that can be used for biomass. Landfill gas, which you
mentioned, a lot of urban areas with landfills have significant
landfill gas resources. Geothermal is located mostly in the
West.
So, with the variety of renewable resources, you do have
different parts of the country that have each one. I left out
solar. Solar is obviously most attractive in the Southwest,
where you have clear skies and good insulation.
So, I guess the variety of renewable resources are
available throughout the country. It is hard to back out oil,
because not much oil is used. There is more opportunity to back
out natural gas.
Mr. FOLEY. Why has solar energy failed, really, in consumer
demand?
Dr. GRUENSPECHT. Well, our analysis shows that it is pretty
expensive. The Production Tax Credit is simply not enough to
bring solar in, whereas some of the other technologies that are
closer to conventional technologies and costs can be stimulated
by policies like the Production Tax Credit. So, I would say
with solar, it has been mostly a cost issue, although there are
attractive applications for solar in certain niches--remote
power, the highway signs you see.
So, again, there is an opportunity for some niche power,
but in terms of connecting to the electric grid, I think the
costs right now are too high. Those costs might be brought down
in the future, but for the foreseeable future, solar is much
more expensive per kilowatt hour than the other resources we
are talking about here.
Mr. FOLEY. Have you looked at the hydrogen fuel cell
technology for houses?
Dr. GRUENSPECHT. I have not.
Mr. FOLEY. Have you all analyzed them for vehicles?
Dr. GRUENSPECHT. We do look at them for vehicles. We don't
see a lot of market-driven penetration of those technologies.
The penetration of those technologies in our outlooks is driven
mostly by the mandates that exist in various parts of the
country, for example, California, for those technologies. On a
cost basis, those are not competitive.
Remember, hydrogen has to come from somewhere. Hydrogen is
an energy carrier. It is not a fuel. It is not a primary fuel.
Hydrogen is like electricity. So, taking account of the need to
create the hydrogen and then to transport it, which has some
challenges, and the cost of the fuel cell, we don't see the
economics as being that attractive right now.
Mr. FOLEY. Thank you.
Chairman CAMP. Thank you very much.
The gentleman from California, Mr. Herger, is a Member of
the full Committee and would like to make a brief statement.
Mr. HERGER. Thank you very much, Mr. Chairman. I thank you
and our Ranking Member, Mr. McNulty, for allowing me to sit in
on this Subcommittee and be able to make a statement.
I requested to attend today's hearing because renewable
energy generation is such an important industry in my Northern
California congressional district. In particular, my district
contains more biomass power facilities than any other district
in the United States Over the last two decades, biomass plants
have made remarkable progress in how we handle our wastewood
materials.
To that end, I would like to welcome a member of the next
panel, Mr. Bill Carlson, a constituent of mine, an expert on
open-loop biomass.
Much of the agricultural burning in the Sacramento and San
Joaquin Valleys has been eliminated, with the materials sent
for clean-up disposal in biomass plants. Perhaps most
importantly, biomass plants are an integral part of proper
forest management in our forested communities.
I personally have a long interest in opening up the section
45 wind and closed-loop biomass tax credit to open-loop biomass
dating back to the introduction of H.R. 1731 in the 106th
Congress. I was very pleased that we were able to incorporate
many of these important changes in last year's jobs bill, but
the job of creating equity for the various renewables within
section 45 is not yet complete.
Again, Mr. Chairman, I thank you and I yield back the
remainder of my time.
Chairman CAMP. Thank you very much.
Mr. McNulty?
Mr. MCNULTY. Thank you, Mr. Gruenspecht. You an expert on
these issues and I am going to ask you a more generic question.
Just about every member who has spoken so far has talked about
the need to reduce our dependence on foreign oil. I just want
to get your feeling about whether we as a government are doing
enough in that regard, and I don't think you should feel
constrained as a bureaucrat in answering that question, because
as you should well know, the President has made a point of this
in his last two State of the Union Addresses and has said we
need to do a lot more in this area. He has particularly
mentioned wind and some of the other renewables.
Certainly, we are not going to do anything visionary today.
We are talking about renewing something that already exists. I
think we have to go beyond that and talk about other things
that we should be doing in order to promote the production of
renewables.
So, I am not putting you on the spot as far as an
Administration representative is concerned. The President is on
the record in two State of the Union Addresses. I want to know
if you think Congress is doing enough in responding to that
call from the President to do more in this area, and if we are
not, what else should we be doing?
Dr. GRUENSPECHT. I guess I would say that the challenge is
weighing the goal of reducing reliance on conventional sources
of energy against the costs of alternative sources of energy.
For the most part, conventional sources of energy have some
significant economic advantages. They also raise some
significant concerns, the ones you mentioned. The real----
Mr. MCNULTY. Cost concerns.
Dr. GRUENSPECHT. Potentially, cost concerns, security
concerns. But generally, they are still economically attractive
relative to the alternatives. So, there may be a cost to be
borne in moving away from conventional sources of energy and
how much cost we are willing to bear to move how far is really
a political choice.
Mr. MCNULTY. That is why we have experts like you here, to
give us guidance on that. What do you think about that? Do you
think we are doing enough?
Dr. GRUENSPECHT. Well, I think there are policies we could
look at, both from the--on the demand side and on the supply
side that would reduce our reliance on conventional energy----
Mr. MCNULTY. Could you expand on that a little bit more?
Dr. GRUENSPECHT. I think there are some efforts to promote
greater efficiency, perhaps some efforts to increase the use of
renewable resources, and again, not just in electricity
generation, in other uses, as well. But again, there are some
costs associated with those and how much cost we are willing to
bear is, I think, an important question.
Mr. MCNULTY. Doctor, I don't know if you could answer this
now or give us the information later, but could you maybe
describe to us in general terms, and then maybe you can give us
some more specific information later on, about how the various
renewables break down by State or geographic areas?
Dr. GRUENSPECHT. Sure. I would be glad to do a little bit,
and I can add to it later. In terms of the available resource
or in terms of how much is generated right now, because you can
look at it both ways. In terms of right----
Mr. MCNULTY. I would like to get information on both.
Dr. GRUENSPECHT. Both? Okay. In terms of right now, I think
the leading wind States would be California, Texas, Iowa,
Minnesota--I am trying to look quickly down a list here--
Washington, Wyoming, Kansas, Oregon.
For wood and wood waste, you find that in a lot of places
that have pulp and paper industries, which use a lot of
biomass. That would be Georgia, Maine, California, Alabama,
Kentucky.
For municipal solid waste and landfill gas, which, again,
under the present provisions are counted as eligible for at
least reduced credit, Florida, New York, Pennsylvania,
Massachusetts, Connecticut.
So, again, as I described in response to an earlier answer,
different regions of the country tend to have different
resources that qualify for this. Again, there are some States
that don't have much right now from the wind, say South Dakota,
North Dakota that have very good wind potential. But again,
some of that potential is very far away from markets. So, there
is a trade-off there.
But I think that is a pretty good description, and I could
certainly provide you a lot more detail for the record.
Mr. MCNULTY. We would appreciate that. Thank you, Doctor.
Chairman CAMP. Thank you very much.
Mr. Thompson from California may inquire.
Mr. THOMPSON. Thank you very much, Mr. Chairman.
I would like to get you to talk a little bit about the PTC,
the Production Tax Credit, and specifically how it relates to
geothermal. I am told by the geothermal producers that a big
part of their problem are the up-front costs that are
associated with the development of geothermal energy, and that
also that PTC gives them the ability to leverage funding in
order to help meet these up-front costs.
I want to know why we can't or shouldn't restructure the
PTC to provide some long-term benefits to geothermal. In your
testimony, you talk about the inability to do that in the short
run, and I know the Administration has left that out of their
proposal. Why couldn't we and why shouldn't we design it so we
could continue to rely on geothermal and help them get to where
they need to be?
Dr. GRUENSPECHT. As I understand it, geothermal gets the
full value of the credit, but only gets it for half the period
of time. They get it for 5 years rather than 10 years. So,
clearly, if they got more of a credit, it would be more
advantageous to them.
I think, though, for geothermal, and we discussed, I think,
in response to one of the earlier questions the question of how
long the extension is and how that affects different
technologies. In addition to having a significant up-front
cost, geothermal also takes a significant period of time to
develop. So, the very short-term extensions that have become
the norm in recent years may not provide a lot of opportunity
for a technology like geothermal because you have got the
extension, you add geothermal, you would think about starting
your project, but you wouldn't be able to get your project into
service in time. So, geothermal, biomass, those type of
technologies, they are affected by the short extension and put
at a disadvantage relative to something that can be developed
more rapidly, like wind.
Mr. THOMPSON. So, how long would we have to extend it in
order to allow geothermal to benefit--or not just geothermal,
but the consumers? I think it is about 5 percent of the energy
that is developed in California comes from geothermal, so it is
more than just the industries. It is the consumers and the
ratepayers. So, how long would it have to be extended in order
to allow full benefit to accrue?
Dr. GRUENSPECHT. I need to go back and check on what we
built into our framework for the standard time it takes to
develop a geothermal project. But another thing to keep in mind
is that we don't think that there is a whole lot of geothermal
resource to be added, so a longer extension could bring some of
that on. But unlike some of the other technologies that have
what I will call flat supply curves, where you can maybe bring
on a whole lot more, geothermal, you will be limited by the
availability of the geothermal sites.
In terms of the specific length of time that it takes to
develop a geothermal project, I would like to go back and
answer that for the record.
Mr. THOMPSON. You can get us that information?
Dr. GRUENSPECHT. I think we can get you our generic
assumption. No two plants are alike, but there is no question
that the period of development for geothermal projects is
longer than a year or a year and a half, and that is typically
what the extensions have been.
Mr. THOMPSON. Thank you. Mr. Chairman, I yield back.
Chairman CAMP. Thank you.
The gentleman from Georgia, Mr. Linder, may inquire.
Mr. LINDER. Thank you, Mr. Chairman.
Dr. Gruenspecht, would any of these renewable sources of
energy be available if we did not subsidize them?
Dr. GRUENSPECHT. If you did not subsidize, it is a tricky
question. I mean, we could ask more narrowly, if you do not
have the PTC. There is a history of a variety of provisions in
this country, going back, I guess, to 1978, the Public Utility
Regulatory Policies Act, that had a policy that encouraged the
interconnection of renewables, and in some States, those
renewables were paid and avoided cost that was calculated in a
pretty generous way, and that encouraged those technologies.
So, some renewable capacity was brought on in response to those
incentives.
There are some Investment Tax Credits. There is also the
PTC. I mean, to date, the PTC has really brought on wind in a
big way. A significant fraction, you could say well over half
of the wind generation that we have could arguably be said to
have been brought on by the PTC.
Wind generation in 2003, I think was maybe between 11 and
12 billion kilowatt hours out of a total of 87 billion kilowatt
hours of generation of these non-hydro renewables. So, you had
landfill gas. You had municipal solid waste. You have the
industrial use of biomass in the pulp and paper industry, and
they generate a significant amount of electricity. So, those
technologies, I think it was not the PTC that brought those
into being, but some of those may have been brought into being
by some of the other incentives that we have.
So, I am reluctant to say that absent all subsidies, you
would be seeing all that renewable, non-hydro renewable
generation in place. I imagine some of it would come in without
any subsidy at all, but it is very hard to calculate that exact
amount.
Mr. LINDER. The non-hydro renewables is about 2 percent of
our generation.
Dr. GRUENSPECHT. About 2 percent of overall generation.
Mr. LINDER. How much do we spend on all varying kinds of
credits per year to generate two percent of our energy?
Dr. GRUENSPECHT. I am not sure. I don't have those figures,
but I can get them for you and get them for the record.
Mr. LINDER. Do we subsidize any tax credit or tax angle,
anything to do with storage, to make it more efficient to store
in battery systems, or to make it less costly on the power
lines, where we lose about 20 percent of our electricity over
lines? Are we doing anything on superconductivity?
Dr. GRUENSPECHT. I think the Department of Energy has
significant research activities in the area of
superconductivity. I know they are working with several labs,
universities, all working on reducing line losses.
Just to give you some context, I think the difference
between total generation and total consumption of electricity
is about five or six percent, and that reflects line losses.
Some of that is in transmission, the long-distance movement of
high-voltage power. A lot of it is in distribution, the local
movement of power. But there is no question that there is a
significant line loss associated with moving power from the
point of generation to the point of consumption and that
superconductivity is one of the avenues that is being explored
to deal with that.
In terms of storage, I think there may also be some
research activities there, but I am not aware of any tax
subsidies for storage.
Mr. LINDER. Thank you. Thank you, Mr. Chairman.
Chairman CAMP. Thank you.
The gentleman from Connecticut, Mr. Larson, may inquire.
Mr. LARSON. Thank you, Chairman Camp and Ranking Member
McNulty, for convening this conference. Dr. Gruenspecht, thank
you for your service to the country.
I just have a few questions here. First, could you clarify
for me, what is the goal from--I know you collect data and
statistics. What is the goal behind providing a tax credit? Is
it primarily to create a cleaner environment or to provide a
cheaper form of fuel?
Dr. GRUENSPECHT. Again, it is hard for me to go back into
the minds of the folks, and I guess this was from the Energy
Policy Act 1992, but I think there was some desire to encourage
particular technologies and I think there is a belief that some
of these technologies would get down the learning curve, if you
will, as more units were deployed. The cost would be reduced.
I think there had been some--this is really getting before
my time, but there had been some bad experience with some
investment credits for certain technologies where you received
the credit for making the investment and how well the unit
actually ran once it was put in place was of less concern.
Mr. LARSON. But the public policy argument in order for
government to become involved would either have to be a cheaper
form of energy that would provide us or a more abundant source
of energy that would wean us off of dependency on foreign
sources, and a public policy objective of a cleaner environment
by virtue of greenhouse gasses that are emitted.
Dr. GRUENSPECHT. I think those are all motivations.
Mr. LARSON. How much money do we spend in terms of tax
incentives on an annual basis?
Dr. GRUENSPECHT. I would have to get that for you for the
record.
Mr. LARSON. How much money do we spend in terms of R&D in
that area?
Dr. GRUENSPECHT. I would need to get that for you for the
record, as well.
Mr. LARSON. Would it surprise you that if we look at what
we imported in oil alone last year, we spent more than $165
billion, and with the price now at about $50 on average, we are
going to be over $200 billion in terms of oil? If you add to
that the cost of the war in Iraq, that is upward to $400
billion in those areas alone.
My question, I wanted to piggyback along the lines of the
questions that were posed earlier by Mr. Foley with regard to
hydrogen fuel cells. I understand that that is not a renewable,
but what I don't understand in terms of its meeting an
objective policy goal, why that wouldn't be also subject to
receiving a tax incentive.
Dr. GRUENSPECHT. Again, my sense is that the cost of
hydrogen fuel cells is such that even if they were to be
eligible for the PTC, it is my understanding that the PTC
itself----
Mr. LARSON. Here we have the dog chasing its tail.
Dr. GRUENSPECHT. I hear you.
Mr. LARSON. So, we are going in this spiral where the cost
of importing oil increases annually in a dramatic fashion, and
yet we are diminishing ourselves in terms of the amount of
money that we are willing to put into investment so that we can
find a source, and we are targeting the most abundant source in
the universe in hydrogen and we are not putting the money
forward that is needed to bring these to fruition.
I mean, we could put a man on the moon in 10 years, but we
can't figure out how to harness hydrogen? You have the Governor
of California that has proposed an energy highway from British
Columbia to Baja, California, and the Federal Government sits
by here, the dog chasing its proverbial tail. Why is this so?
With all the data and information that we have collected, the
best thing that we can come up with is this incremental death
by a thousand slashes, that we get nowhere and we are not
putting nearly enough money into any form of incentive that is
going to make a major breakthrough. Where is our investment in
our infrastructure in that case?
Dr. GRUENSPECHT. Well, again, I think the impact that the
PTC would have for hydrogen would be very limited. It is also
my understanding that the Federal Government effort in the
hydrogen area is mostly through the R&D programs of the
Department rather than through tax policy and tax incentives.
So, the focus on hydrogen is on R&D. I believe the
Administration is very committed to hydrogen R&D, particularly
as it relates to vehicles. So, fuel cells obviously have
stationary applications as well as vehicle applications, but
there is tremendous amount of work underway.
Mr. LARSON. There is no sense of urgency and it is
extraordinarily frustrating to a number of Members of Congress,
and I assure you my constituents in the Northeast, as we look
out and we see spiraling costs and a government that is chasing
its tail in Washington, D.C.
Chairman CAMP. Thank you very much.
The gentleman from Indiana, Mr. Chocola, may inquire.
Mr. CHOCOLA. Thank you, Mr. Chairman. Dr. Gruenspecht,
thanks for being here today.
Just following up a little bit on Mr. Linder's questions, I
think you testified that about 2.2 percent of electric
generation comes from renewable energy sources----
Dr. GRUENSPECHT. From the non-hydro renewable. The hydro is
another seven percent or so, the large dams, but those are not
eligible for the PTC.
Mr. CHOCOLA. But those sources eligible for the PTC is
about 2.2----
Dr. GRUENSPECHT. About 2.2 percent now.
Mr. CHOCOLA. It has been in place since 1992-1993?
Dr. GRUENSPECHT. The PTC has been in place since--I think
it was put in by the Energy Policy Act 1992, but it only
applied to wind and closed-loop biomass. Over time, it has been
expanded to many of these other sources.
Mr. CHOCOLA. Have you or the Administration done any
analysis of what the potential is of energy sources that
qualify for the PTC if it is made permanently extended? Do you
have any idea how much----
Dr. GRUENSPECHT. We have done, as I mentioned in my
testimony, we have done the long-term sensitivity analyses of
suppose you extended the PTC for a long period of time. What
would it do? It does have a large impact on the amount of wind
that gets added and it also has an impact on the amount of
biomass that gets added. So, the wind and biomass are the big
gainers. But again, it still remains a relatively small
fraction of overall power generation.
Mr. CHOCOLA. So, what percentage do you think it has the
potential to get to?
Dr. GRUENSPECHT. Well, the potential is high. I mean, it is
just how far the PTC would get it. Let me cite the highest one
that I am familiar with. In looking at some policies to control
greenhouse gas emissions--I think it was a bill proposed by
Senators McCain and Lieberman--we had these renewables that
qualify for the PTC growing to over 16 percent of total
electricity generation in 2025. In our base case, it grows from
2.2 percent to 3.2 percent. So, there are definitely scenarios
of the world where you can get a much larger proportion of
overall generation to come from these non-hydro renewables.
But it isn't just the PTC that does that. It is some other
policies, as well. We also looked at a scenario with higher
natural gas prices, and again, that increased the generation of
these technologies significantly. So, it is really the size of
the incentive that matters, it is the market environment that
matters in terms of the price of natural gas, and it is the
policy environment that matters. I guess it is all three of
those together. But there certainly is some significant
potential if those stars would all align in a certain way.
Mr. CHOCOLA. Obviously, at least in part, the purpose of
this hearing is to determine the effectiveness of the PTC. Have
you or the Administration kind of outlined any criteria on how
Congress should judge the effectiveness of it?
Dr. GRUENSPECHT. We have not outlined those criteria. I
think we have worked with some of the staff on the Joint Tax
Committee who have asked us to look at certain things, do some
analyses for them. But we have not independently outlined those
criteria.
Mr. CHOCOLA. Would you have any suggestions today on what
we should consider?
Dr. GRUENSPECHT. I think it is probably the standard issues
that you look at for tax policy. You want to look at are there
people who qualify for the credit who are getting paid for what
they would do anyway? Is the program effective in its goals? I
guess one has to decide what the goals are, and I think one of
the other questioners listed a whole set of different goals,
being emissions reduction, being technology cost reduction,
being displacement of imported fuels. Depending, again, on what
mix of goals you would have, we would be able to calculate
impacts as to how those goals were affected.
Mr. CHOCOLA. Thank you. Thank you, Mr. Chairman. I yield
back.
Chairman CAMP. Thank you very much.
Thank you, Dr. Gruenspecht, for your testimony. This will
conclude the first panel and we will begin the second panel. I
appreciate very much your being here today.
Dr. GRUENSPECHT. Thank you very much, Mr. Chairman.
Chairman CAMP. The second panel today will include Mr. Dean
Gosselin, Mr. William Carlson, Mr. Curtis Ranger, Mr. Michael
Norris, Mr. Vince Signorotti, and Mr. Christopher O'Brien.
Thank you all very much for being here. Before we begin,
each of you will have 5 minutes. Your written statements, we
have and will be part of the record. We would ask you to
summarize your testimony in 5 minutes.
Before we begin, Mr. Foley from Florida would like to make
an introduction.
Mr. FOLEY. Thank you, Mr. Chairman, and I would be
delighted to introduce Dean Gosselin, who is the Vice President
of Business Development for Florida-based FPL Energy, a
subsidiary, along with Florida Power and Light, of the FPL
Group.
FPL Energy is a significant player in the development and
use of alternative energy. It is among the Nation's leading
generators and producers of electricity from clean and
renewable sources, such as natural gas, wind, solar,
hydroelectric, and nuclear. In the wind energy generation in
particular, FPL Energy produces more energy from wind than any
other company in the United States. With 44 wind farms in 15
States--California, Iowa, Minnesota, Pennsylvania, Texas,
Washington, Kansas, New Mexico, North and South Dakota,
Oklahoma, Oregon, Wisconsin, West Virginia, and Wyoming--its
wind power portfolio consists of more than 2,700 net megawatts,
making FPL Energy accountable for nearly 40 percent of the
total wind energy generated in the United States in 2004.
It is my pleasure to introduce Mr. Gosselin.
STATEMENT OF DEAN GOSSELIN, VICE PRESIDENT, BUSINESS
DEVELOPMENT, FPL ENERGY, LLC, JUNO BEACH, FLORIDA
Mr. GOSSELIN. Thank you for the opportunity to address this
House Ways and Means Subcommittee. My name is Dean Gosselin and
I am Vice President of Business Development for Wind Power at
FPL Energy. Thank you, Chairman Camp and Ranking Member
McNulty, for the opportunity to speak with you today. Also, I
would like to thank Mr. Foley, who has always been a supporter
of the wind industry and under whom FPL is a constituent.
FPL Energy is the largest owner and operator of wind energy
facilities in the world, with more than 3,000 megawatts of wind
turbines in operation and under construction in 15 States. FPL
Energy is a subsidiary of the FPL Group, which is also the
parent of Florida Power and Light Company, an investor-owned
electric utility that serves approximately 4.1 million
customers in Florida.
FPL Energy is committed to clean energy sources and
strongly believes that among all of the renewable energy
technologies, wind energy is the most economically viable and
has the greatest potential to add significant new clean
electric power across a broad range of geographic regions in
the United States.
We ask that the House of Representatives take swift action
to extend the Production Tax Credit for a long term. Without an
extension of the Production Tax Credit, only a very
insignificant amount of utility-scale wind power will be
developed.
For wind energy, the PTC currently provides an inflation-
adjusted 1.9 cents per kilowatt hour tax credit for electricity
produced by the wind for the first 10 years of a project's
life. The PTC stimulates new wind development by helping to
drive down costs to consumers, making wind energy an economical
and viable source of clean, renewable energy.
The current cost of wind energy production varies between
5.5 cents per kilowatt hour and 9.5 cents, prior to factoring
in the PTC. The significant range in price exists because the
cost depends on a number of independent variables: Location,
turbine costs, access to transmission, labor costs,
construction costs, and wind resource. Moreover, and most
importantly, the on and off nature of the PTC has prevented the
industry from realizing the manufacturing efficiencies that we
would have expected would otherwise allow production costs for
wind energy to continue to fall.
Currently, inefficient peak production demands are being
forced upon manufacturers during PTC extension periods, with
subsequent cutbacks during PTC expiration periods. The entire
supply chain is being whipsawed, adding significant costs due
to inefficient planning, procurement, and supply deployment
that would be eliminated if a long-term PTC extension was in
effect.
The most significant factor contributing to the remarkable
reduction in U.S. wind energy production costs over the last
two decades has been the dramatic improvement in turbine
efficiency. With the support of the PTC, we anticipate that
research and development will continue to drive down wind
energy costs. Future generations of wind turbines are just one
part of the solution.
The industry also requires improved efficiencies in
manufacturing. Approximately three-fourths of the capital costs
of a wind project is represented in the cost of the turbine and
the tower. Turbine and tower costs are substantially a function
of the costs of their material, labor, and transportation
component. The cost of steel is a major determinant of
installed costs. If you would refer to Attachment 3 of my
written comments, steel prices, you will see that steel prices
have increased by more than 120 percent since early 2003.
Additionally, because Europe continues as a predominant
source of turbine components, the decline in the value of the
dollar relative to the Euro is also a significant factor in
increased installed costs. Since January 2002, the U.S. dollar
has lost more than 30 percent against the Euro, and in
Attachment 4 of my written testimony, you will see a graph on
that, as well.
The industry has predicted that the PTC would lead to
increased manufacturing efficiencies as more of the European
component supply shifts to manufacturing in the U.S. However,
the on and off nature of the PTC has precluded any significant
shift in the supply to the U.S. The last 4 years illustrate the
problem that the wind industry faces as a result of this on and
off nature of the credit. Again, Attachment 2 of my written
testimony has a graph, as well.
In 2001, 1,696 megawatts of wind energy were installed. The
credit expired at the end of 2001 and was not reinstated until
late spring of 2002. Only 410 megawatts of wind energy were
installed in 2002. In 2003, 1,687 megawatts of wind energy were
installed. But in 2004, only 389 megawatts were installed after
the credit lapsed at the end of 2003, not to be extended until
much later in the year. We believe that this unpredictability
leads to a 20 percent or greater inefficiency in energy
production costs for the domestic wind energy market.
The industry has often been asked, what will it take for
the industry to survive on its own without the benefit of the
Production Tax Credit? We are often reminded that at one time,
the industry responded, give us 5 years and we will make it.
Unfortunately, in this instance, two plus one plus one plus one
does not necessarily equal five predictable years. Instead, it
represents not the sum total of years the credit has been in
place, but rather periods of uncertainty, when new wind
construction stopped, jobs were eliminated, and costs were
driven up. Business thrives on the known and fails on the
unknown. The unpredictable nature of the credit has prevented
the needed investment in U.S.-based facilities that will drive
economies of scale and efficiencies.
Since its inception in 1992, the PTC has proven itself to
be an excellent investment. It has done what it was designed to
do, serving as a catalyst that has stimulated significant
development in investment across the United States of the most
viable renewable energy source, wind power. But the starts and
stops associated with the short-term extensions have inhibited
the success and have forestalled the long-term viability of the
wind industry to stand alone without the PTC.
The wind industry cannot transition to PTC independence
unless Congress enacts a long-term extension. United States
energy companies, including FPL Energy, will then do their part
and make the investments necessary to ensure the long-term
growth of wind energy in our National energy mix. Thank you.
[The prepared statement of Mr. Gosselin follows:]
Statement of Dean Gosselin, Vice President, FPL Energy, Juno Beach,
Florida
Introduction
FPL Energy, LLC is the largest developer and operator of wind
energy facilities in the nation with more than 3,000 megawatts of wind
turbines in operation or under construction in fifteen states:
California, Iowa, Kansas, Minnesota, New Mexico, North Dakota,
Oklahoma, Oregon, Pennsylvania, South Dakota, Texas, Washington, West
Virginia, Wisconsin and Wyoming. FPL Energy is a subsidiary of the FPL
Group Inc., which is also the parent of Florida Power & Light Company,
an investor-owned electric utility that serves approximately 4.1
million customers in Florida.
FPL Energy is committed to clean energy sources and strongly
believes that, among all of the renewable energy technologies, wind
energy is the most economically viable and has the greatest potential
to add significant new, clean electrical power across a broad range of
geographic regions in the United States.\1\
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\1\ See Attachment 1, ``The Benefits of Wind Energy.''
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Wind energy has long been both a bi-cameral and a bipartisan issue
that has the broad support of both Republicans and Democrats in both
the House and Senate. Further, the current Administration has included
an extension of the PTC for wind in all of its budget proposals, and in
its National Energy Policy.
Despite this overwhelming support--as it has a number of times in
the recent past--the PTC is again set to expire at the end of this
year. As such, it is imperative that the House of Representatives takes
not only swift action to extend the PTC, but also to extend it for a
long term. Without an extension of the PTC, only a very insignificant
amount of utility scale wind power will be developed in the United
States after 2005.\2\
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\2\ See Attachment 2, ``Annual Wind Energy Capacity Additions,''
which demonstrates the boom/bust cycle of installed capacity that
results from the expiration of the PTC.
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Background on the Wind Energy PTC
The wind energy PTC, enacted as part of the Energy Policy Act of
1992, provides an inflation-adjusted 1.5 cents/kilowatt-hour (kWh)
credit--now 1.9 cents--for electricity produced with wind equipment for
the first ten years of a project's life. The credit is only available
if the wind equipment is located in the United States and electricity
is generated and sold to a third party. The credit applies to
electricity produced by a qualified wind energy facility placed in
service before January 1, 2006.
Why the PTC Is Imperative to the Continued Growth of the Wind Energy
Industry
The Wind Energy PTC stimulates new wind development by helping
drive down costs, making wind energy an economical and viable
source of clean, renewable power
The cost competitiveness of wind generated electric energy has
increased dramatically since the inception of the industry in the early
1980's. The wind turbine technology of the early 1980's was in its
infancy and the cost of wind energy was extremely high. Since that
time, driven by the PTC, the wind industry has succeeded in reducing
its production costs by a remarkable amount. As a result, with PTC, the
cost of wind energy is much more competitive with fossil fuel
generating sources.
In 2001, FPL Energy testified before this Subcommittee. At the
time, industry production costs had been reduced to approximately 4.5
cents/kWh prior to factoring in the PTC. With respect to the PTC and
its effect on the industry, FPLE's testimony stated the following:
With the continued support of the PTC, the wind industry
expects that its costs will continue to decline as wind turbine
technology continues to improve and the industry is able to
realize more efficient manufacturing economies of scale.
Through further turbine development and manufacturing
efficiencies, the wind energy industry anticipates that the
cost of wind energy will continue to be reduced until wind can
compete head-to-head with fossil fuels without the need for any
incentives.
This generally accepted assumption was not entirely correct.
Technology has, indeed, improved. However, the production costs have
actually increased since 2001 due to, hopefully, temporary increases in
material costs and the devaluation of the U.S. Dollar relative to the
Euro.
Consequently, the current cost of wind energy production is
anywhere between 5.5 cents/kWh and 9.5 cents/kWh prior to factoring in
the PTC. The significant range in price exists because the cost depends
on a number of independent variables--location, wind capacity factors,
turbine costs, access to transmission, labor costs, construction costs,
etc. Moreover, and most importantly, the on and off nature of the PTC
has prevented the industry from realizing the manufacturing
efficiencies that we had expected would otherwise allow production
costs to continue to fall.
Today, the most important factors in the wind industry are: (1) the
improvements in technology, (2) rising installed costs, (3) the
continued need for manufacturing efficiencies, and (4) the effect of
the PTC on each of the above.
Research & Development
The most significant factor contributing to the remarkable
reduction in U.S. wind energy production costs over the last two
decades has been the dramatic improvement in turbine efficiency. Since
the early 1980s, the industry has developed numerous generations of new
and improved turbines, with each generation improving upon its
predecessor. As a result, better blade designs, improved computer
controls, and extended machine component lives have been achieved,
which in turn have reduced the life-cycle costs of energy generated by
wind turbines. Proven machine technology has evolved from the 50
kilowatt machines of twenty years ago to the 3 megawatt machines of
today that have the capacity to satisfy the energy demands of as many
as 1000 homes.\3\ Moreover, new turbines in the range of 3 to 5
megawatts are currently under testing and development; they are
expected to further improve the technology's efficiency and reduce wind
power costs.
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\3\ One megawatt (MW) (or 1,000 kw) of current technology installed
wind capacity serves approximately 300 to 350 homes.
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With the support of the PTC, the wind industry anticipates that
research and development will continue and wind energy costs will
decline. These future generations of wind turbines are just one piece
of the puzzle. Improved technology alone will not sufficiently lower
costs to allow the industry to directly compete with fossil fuel
generated power--the industry also requires improved efficiencies in
manufacturing.
Installed Costs
Installed costs include material (steel, copper, and fiberglass)
costs, labor costs, currency exchange rates, and tax incentives. These
costs have increased from below $1,000/kW to install in 1999 to $1,100/
kW in 2003, and up to $1,500/kW and higher in 2005. The cost will most
likely continue to increase over the next few years. One should note
that the majority of the demand on revenue of a wind project is
associated with servicing the capital required to build a project. By
comparison, gas-fired generation facilities require less than one
quarter of revenues to service capital.
Approximately three-fourths of the capital cost of a wind project
is represented in the cost of the turbine and the tower. Turbine and
tower costs are substantially a function of the costs of their
material, labor, and transportation content. Thus, the cost of steel is
a major determinant of installed costs. Steel prices have increased by
more than 120% since March of 2003.\4\ Fiberglass (another key turbine
component) costs have also risen dramatically with the increase of
petroleum.
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\4\ See Attachment 3, a chart delineating steel prices.
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Additionally, because Europe is still the predominant source of
turbine components--even the principal domestic producers rely to a
large extent on imported components--the decline in the value of the
Dollar relative to the Euro is also a significant factor in increased
installed costs. Since January 2002, the U.S. Dollar has lost 32.5
percent against the Euro.\5\
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\5\ See Attachment 4, accompanying chart showing the Dollar against
the Euro.
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Another factor to explain the increased cost of production is the
lapse of the bonus depreciation tax incentive. When in effect, bonus
depreciation represented a value of approximately $3 per megawatt-hour
(or 0.3 cents/kWh). Its lapse in January of 2004 (except for certain
binding contracts) effectively increased installed costs facing
developers today.
In comparison to the wind energy production of 5.5 cents/kWh and
9.5 cents/kWh, a modern gas fired combined cycle plant operating with a
feedstock of $6.00/mmbtu natural gas at a 7500 mmbtu/MWh heat rate can
produce a kilowatt-hour of electric energy for approximately 4.5 cents
plus approximately 1.0 cent for capital cost recovery.
Manufacturing Efficiencies
As I stated earlier, the industry predicted that the PTC would lead
to increased manufacturing efficiencies as more and more of the
European companies committed to manufacturing in the U.S. However, the
on again off again nature of the PTC has precluded any significant
manufacturing efficiencies.
The last four years illustrate the problem that the wind energy
industry faces as a result of the on again-off again nature of the
credit. In 2001, 1,696 MW of wind energy were installed. The credit
expired at the end of 2001 and was not reinstated until late spring of
2002. Accordingly, only 410 MW of wind energy were installed in 2002.
In 2003, 1,687 MW of wind energy were installed, but in 2004, only 389
MW were installed after the credit lapsed at the end of 2003, not to be
extended until much later in the year.
Under these circumstances, it is difficult to persuade businesses
to invest in the U.S.-based production capacity, the R&D programs, and
even the management capability that will lead to persistent gains in
productivity and increased efficiency in wind power energy production.
Emblematic of this is that, at present, only GE and Mitsubishi
currently price wind turbines in U.S. Dollars. Other major suppliers
(e.g., Vestas, Siemens, Gamesa, Nordex, Enercon, and Suzlon) still
predominantly price based on the Euro, indicating their inability to
commit to U.S. manufacturing of equipment. While unfortunate, this is
understandable, given the unpredictability of the credit. The current
strength in the Euro versus the U.S. Dollar only amplifies the problems
faced by domestic developers.
We believe that this unpredictability leads to a 20% or greater
inefficiency in energy production costs for the domestic wind energy
market. These inefficiencies make the PTC an even more important
revenue stream for wind developers: up to one third of a project's
value comes from the PTC; another third from power sales, and a third
from the five year MACRS depreciable period. Unless and until the
domestic industry can attain a level of sustained predictability that
can justify needed investments in U.S.-based manufacturing capacity, it
will continue to be dependent on the PTC. It should be noted that the
rates of return on wind projects, typically 9 to 12%, are very much in
line with returns for conventional generating projects.
Transmission Complications
A final concern specific to wind energy developers are transmission
costs. Wind-rich areas are typically far from load centers, often
requiring transmission payments to multiple utilities (``pancakes
rates''). The more congested the grid becomes, the more transmission
costs increase. The cost can be anywhere from 0.3 to 0.5 cents/kWh for
each system crossed, sometimes totaling more than 1.0 cent/kWh to
deliver power over the whole distance when transmission capacity is
available. Obviously, when transmission is limited, wind developers can
also encounter situations where there is zero available transmission
capacity.
Conclusion
The industry has often been asked, ``What will it take for the
industry to survive on its own without the benefit of the PTC?'' We are
often reminded that, at one time, the industry response was, ``Give us
five years, and we will make it.''
Unfortunately, in this instance 2 + 1 + 1 + 1 does not necessarily
equal 5. Instead, it represents, not the sum total of years the credit
has been in place, but rather the four periods of uncertainty when new
wind construction all but stopped, jobs were terminated, and costs were
exacerbated and subsequently remobilized. Business thrives on the known
and fails on the unknown. The unpredictable nature of the credit has
prevented the needed investment in the infrastructure that would
facilitate economies of scale and efficiencies. In fact, the opposite
effect occurs since businesses rush to complete projects and suppliers
are forced to restart stopped manufacturing facilities and, thus,
forced to recoup two years of costs in one year.
Further, and just as important, the unpredictable nature of the
world plays a dramatic role in all industries, but particularly in the
energy industry. An increase in fossil fuel prices does not necessarily
make wind energy more competitive, rather the increase leads to
commensurate increases in materials, such as steel, fiberglass, oil,
labor, and transport. Because there has been no long-term extension of
the PTC, most of the technology and parts are imported from Europe. Of
course, the U.S. Dollar's slide against the Euro exacerbates this
already difficult situation. And, without such an extension, this
vicious cycle will not only not end, but may actually worsen.
Since its inception in 1992, the PTC has proven itself to be an
excellent investment by the Congress. It has done what it was designed
to do and has served as a catalyst that has stimulated significant
development and investment across the United States of the most viable
renewable source of energy: wind power. But, the stops and starts
associated with the short-term extensions have somewhat abrogated the
success and have forestalled the long-term independent viability of the
wind industry. The wind industry cannot transition to PTC independence
unless Congress enacts a long-term extension. U.S. energy companies,
including FPL Energy, will then do their part and make the investments
necessary to ensure the long-term role of wind energy in our national
energy mix.
Benefits of Wind Energy
Wind Power is Green Power That Can Contribute to the Reduction
of Greenhouse emissions
Wind-generated electricity is an environmentally friendly form of
renewable energy that produces no greenhouse gas emissions or ground
water pollution. In fact, a single 750KW wind turbine can displace, by
replacing the combustion of fossil fuels, up to 1,500 tons of CO2
emissions per year.
Significant reductions of greenhouse gas emissions in the United
States can only be achieved through the combined use of many new,
energy-efficient technologies, including those used for the production
of renewable energy. The extension of the PTC will assure the continued
availability of wind power as a clean, renewable energy source.
Wind Power has Significant Economic Growth Potential
Wind energy has the potential to play a meaningful role in meeting
the growing electricity demand in the United States. Wind power
projects currently operating across the country generate approximately
7,000MW (0.5% of America's total generation) of electric power--enough
energy to serve as many as 2.5 million homes. Wind will never--and
probably should never--displace all other conventional generation
sources, but it can--and should--be an essential component of a diverse
generation portfolio, which will, of course, lessen our dependence on
foreign oil and avoid harmful emissions. With an extension of the PTC
and the appropriate commitment of resources to wind energy projects,
the American Wind Energy Association estimates that wind energy could
generate power to as many as 10 million homes by the end of the decade.
Wind Power Projects Can Serve as a Valuable Source of
Supplemental Income for Farmers and ranchers and New Economic
Growth Opportunities for Rural Areas
Some of America's most productive farming and ranching regions are
also some of the most promising areas for wind development. Since wind
projects and farming and ranching are fully compatible--wind plants can
operate with little or no displacement of crops or livestock--lease
payments made by wind developers can serve as a valuable source of
stable, additional income for ranchers and farmers. In Iowa, for
example, existing wind farms currently pay well over $1,000,000/year in
rent.
Also, importantly, wind projects bring valuable new economic
opportunities to areas, often rural, where wind projects are located,
including increased local tax bases, new manufacturing opportunities
and construction and ongoing operational and maintenance jobs. A 100 MW
project, for example, requires an investment typically amounting to
nearly $150 million. In addition to the millions of dollars in revenue
to the local economy, wind projects generally create an average of 150
new construction jobs with a peak need of 350 workers. For ongoing
long-term operations, wind projects provide 8 to 15 new full-time jobs
and 4 to 7 new part-time jobs.
Continued Growth of Domestic Wind Industry Will Provide
Economic Benefits to Other Sectors of the U.S. Economy
In addition to the benefits cited above which wind plants provide
for farmers, ranchers and the rural communities where wind farms are
sited, the U.S. wind industry provides many economic benefits to other
sectors of the U.S. economy. For example, FPL Energy had its steel wind
towers manufactured in Texas, Louisiana, and North Dakota; wind
turbines assembled in Florida, Illinois and California; transformers
manufactured in Wisconsin and Pennsylvania; and wind turbine components
manufactured in Georgia, Washington, Iowa and Colorado.
International Growth Can Benefit the U.S.
The global wind energy market has been growing at a remarkable rate
over the last several years and is the world's fastest growing energy
technology. The growth of the market offers significant export
opportunities for United States wind turbine and component
manufacturers. The World Energy Council has estimated that new wind
capacity worldwide will amount to $150 to $400 billion worth of new
business over the next twenty years. The current worldwide market for
wind turbines is approximately $5 billion per annum, and growing
rapidly. Unfortunately, most of this manufacturing capacity, and its
attendant job creation, is currently located in Europe. Experts
estimate that as many as 157,000 new jobs could be created if United
States wind energy equipment manufacturers are able to capture just 25%
of the global wind equipment market over the next ten years. Only by
the continued support of its domestic wind energy production through
the long-term extension of the wind energy PTC can the United States
hope to develop the technology and capability to effectively compete in
this growing international market.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman CAMP. Thank you very much, Mr. Gosselin. I do want
to mention that all of your complete statements will be in the
record, and if you could summarize. Next, Mr. William Carlson,
who is a principal in Carlson Small Power Consultants.
STATEMENT OF WILLIAM CARLSON, PRINCIPAL, CARLSON SMALL POWER
CONSULTANTS, REDDING, CALIFORNIA, ON BEHALF OF USA BIOMASS
POWER PRODUCERS ALLIANCE
Mr. CARLSON. Thank you, Chairman Camp and Members of the
Subcommittee We appreciate the opportunity to speak today and
we thank you all for your leadership on this important topic.
The USA Biomass Power Producers Alliance, who I represent,
represents 65 of the Nation's approximately 100 open-loop
biomass power facilities. Each of the renewable technologies
represented here today is valuable and we applaud Congress for
expanding the section 45 credit in H.R. 4520 to incorporate a
broad portfolio of renewable energy technologies. I advocate
here that any extension of the tax credit be coupled with
changes that mirror the rates and durations of the section 45
provisions included in last Congress's energy bill.
The section 45 tax credit expansion for open-loop biomass
has sparked an interest in biomass not seen since the mid-
1980s. Unfortunately, that interest is, as Mr. Greenspan would
say, irrational exuberance. While the newly-enacted tax credit
for open-loop biomass is very helpful to both new and existing
plants, the current rate and duration of the credit will not
fundamentally change biomass's prospects.
In a typical competition among renewables for utility
contracts, biomass loses and will continue to lose as things
stand. Most solicitations are dominated by technologies which
receive higher tax credit rates and durations. New biomass
plants can compete only if placed on equal footing with respect
to the tax credit.
Unlike other renewable technologies, biomass has costs and
benefits related to its fuel supply. We gather, process, and
transport our wood fuel at a cost of nearly three cents per
kilowatt hour. However, biomass provides the public with very
significant environmental benefits not achieved by other types
of renewables, with a value estimated by the DOE at over 11
cents per kilowatt hour. We eliminate 96 percent of pollutants
versus open-fuel burning, avoid landfill disposal, and aid in
forest restoration and fire prevention.
In other ways, we are typical of other renewables, with
large capital and operating costs. Capital costs run up to
$2,500 per kilowatt, or about 2.5 to three cents per kilowatt
hour. Operating costs are 1.5 to 2.5 cents. Biomass has few
economies of scale, since a large plant requires more fuel and
thus a larger gathering area. It is a rare biomass plant
producing power for less than seven cents, with most falling in
the 7.5 to 8.5 cent range.
In the current wholesale power market, rising natural gas
prices have pushed prices to 4.5 to five cents per kilowatt
hour in many areas of the country. Renewables are typically
able to do slightly better, getting perhaps five to 5.5 cents.
In New England, States have imposed aggressive Renewable
Portfolio Standards, or RPSs, creating a market for renewable
credits that give a higher premium over wholesale prices of
three to five cents. This is why in Maine and New Hampshire,
entrepreneurs are contemplating restarting several closed
biomass plants. Elsewhere, there is interest in biomass, but
few concrete proposals for new plants.
There are only certain locales to sensibly site a plant,
and then they must be spread so they don't compete for fuel.
Also, virtually no plant can be up and running before the
expiration of the placed-in-service date just 7 months from
now.
Some have overcome these challenges by utilizing the small
pool of relocated existing equipment, obtaining a captive fuel
supply, or by winning a biomass-only utility contract offering
that addresses a serious local need, such as forest
restoration.
We forecast perhaps ten new biomass facilities over the
next 5 years. Any greater expansion of the biomass industry
must weight equity with other renewables in terms of the credit
level, duration, and a placed-in-service date extension. These
are fundamental requirements for biomass to successfully
compete against other renewables for market share.
Existing plants, 30 percent of which are now closed,
utilize the current credit to keep from closing. These plants
typically have their energy priced at the utility's avoided
cost, which is a non-renewable lower-cost source, such as coal
or natural gas. They face the end of their contracts and
shortly having to bid into RPS auctions, but at the lowest
credit level and with most having a current credit discounted
by yet another 50 percent due to tax rules for facilities with
past tax-exempt financing.
We urge Congress to adopt a section 45 proposal like that
offered by Chairman Thomas in last year's House version of H.R.
6. There, existing open-loop plants receive two-thirds of the
full credit for 5 years, while new plants receive the full
credit for the full ten-year duration. That proposal would
create a vibrant biomass industry. Absent such a proposal and a
placed-in-service date extension, the biomass industry will
continue to struggle.
When I appeared before this Subcommittee 4 years ago, I
operated five biomass plants. Two of those plants have closed,
along with about eight others nationally.
Again, thank you for the opportunity, for your leadership,
and for expanding section 45, and we urge you to support
legislative changes to allow biomass to successfully compete
alongside other renewable technologies.
Finally, we have been contacted by Congressional offices
subsequent to the publication of the JCT pamphlet for this
hearing, which adds a fuel source that is not described in the
Code or in the conference report under the misapprehension that
our group may be advocating a legislative correction to add
this fuel, lignin, to the list of eligible fuel types. For the
record, we are not aware of any open-loop biomass facility
operators advocating such a change. Thank you.
[The prepared statement of Mr. Carlson follows:]
Statement of William Carlson, Chairman, Carlson Small Power
Consultants, Redding, California
Chairman Camp, Ranking Member McNulty, and Members of the
Subcommittee:
Thank you for the invitation to testify today, and thank you all
for your leadership and interest in this important topic.
I appear today on behalf of the USA Biomass Power Producers
Alliance (USABPPA), a trade organization that represents 65 of the
nationwide total of approximately 100 open-loop biomass power
facilities in the United States. (We do not represent facilities
engaged in producing electricity from closed loop biomass or animal
waste nutrients). We believe in the value of each of the renewable
technologies represented here today, and we applaud the Committee and
the Congress for expanding the Section 45 credit in last year's
American Jobs Creation Act to incorporate a broad and diversified
portfolio of renewable energy industries. My purpose here is to
advocate that any extension of the Section 45 tax credit be coupled
with changes that mirror the rates and durations of the Section 45
provisions included in last Congress's energy bill.
Since its recent enactment, the Section 45 tax credit for
electricity produced from open-loop biomass, combined with other
renewable programs, has sparked a surge of interest in biomass not seen
since the mid 1980's. Unfortunately, much of that interest might well
be described, as Mr. Greenspan said of the stock market, as
``irrational exuberance.'' While the newly enacted tax credit for
electricity produced from open-loop biomass is very helpful to both new
and existing plants, the rate of the credit, and the number of years
that the credit is available to new facilities, will not fundamentally
change the economics of biomass in the current energy markets.
In a typical competition among renewables for contracts under a
utility renewable Request for Proposal (RFP), open-loop biomass loses,
and can be expected to continue to lose as things stand. Most RFP's are
dominated by Section 45 technologies which receive higher tax credit
rates. In open competitions such as these, which are growing in
popularity among utilities, the only chance that new biomass plants
have to compete effectively is if Congress places them on an equal
footing with respect to the Section 45 tax credit.
Please allow me to explain the economics of our industry. Unlike
other renewable energy technologies, open-loop biomass has costs and
benefits that relate to its fuel supply. We must pay to gather, then
process and transport our wood fuel to the plant site at a substantial
cost, typically totaling the equivalent of 2.5--3.0 cents/Kwh. Our
fuel is especially expensive to transport to the plant because its
energy density during transport is only about \1/3\ that of coal.
However, biomass provides the public with very significant
environmental benefits that are not achieved by other types of
renewable fuels. Combusting biomass fuel in a controlled setting
eliminates 96 percent of pollutants versus open field burning, avoids
landfill dumping, and aids in forest restoration and fire prevention.
In other ways, biomass is typical of other renewables, having a
large capital cost component and an ongoing operation and maintenance
cost. In our case, capital costs run $2,000-2,500 per installed
kilowatt, which equates to about 2.5-3 cents/Kwh over a 20-year
contract at today's interest rates. Operating costs will run upwards of
2.5 cents/Kwh for a small plant and as low as 1.5 cents/Kwh for a very
large plant. This technology has few economies of scale, however, since
building a large plant increases the amount of fuel required, quickly
exhausting nearby fuel sources and requiring the operator to pay higher
prices for fuel trucked from farther away. It is a rare biomass plant
that can produce power for less than 7 cents/Kwh with purchased fuel,
with most falling in the 7.5---8.5 cents/Kwh range.
We must now relate these costs to the current electric power
market, both for bulk wholesale power, and for renewables. Rising
natural gas prices have raised the value of bulk power to the point
where, in many areas of the country, the wholesale price is now 4.5-5
cents/Kwh. Renewables are typically able to do better than this in the
market, getting perhaps 5-5.5 cents/Kwh. In certain markets,
particularly New England, the states have imposed aggressive Renewable
Portfolio Standards (RPS), creating a market for Renewable Energy
Credits (RECs) that give a premium over bulk power prices of 3-5 cents/
Kwh. This is why, in Maine and New Hampshire in particular,
entrepreneurs are contemplating restarting a few closed biomass plants.
The current Section 45 credit is also a factor in these restart
decisions.
Elsewhere in the country there is some interest in biomass, but
very few concrete proposals to build new biomass plants. This is
principally due to the fact that, unlike other technologies, there are
only certain locales at which it makes sense to site an open-loop
plant, and even there they must be spread out far enough that they
don't compete with each other for the same fuel. Also, even in the
relatively small number of situations where the circumstances would
support building a new facility, almost no one will be able to get a
facility up and running before the expiration of the tax credit's
placed in service date at the end of this year. In a couple of
instances, enterprising individuals have risen to these challenges by
utilizing a small pool of existing equipment from closed plants that
are being relocated, by obtaining a captive fuel supply for most of
their needs, or by winning a ``biomass only'' utility contract offering
designed to address a serious local need (forest restoration)--they are
the exception, not the rule.
Currently the industry forecasts the possible addition of a total
of approximately 10 new biomass facilities over the next five years.
Any greater expansion of the biomass industry to address the nation's
energy and environmental problems under a new PURPA contract or in a
state mandated RPS auction will not occur unless biomass achieves
equity with other renewables in terms of the credit level and duration,
and the Section 45 credit placed in service date is extended. These
changes are fundamental requirements for biomass to have a chance to
successfully compete against other renewables for a share of an RPS.
Existing plants, which have seen an erosion of their number by over
30 percent in the last 15 years, are utilizing the current credit to
keep from closing. These plants typically have their energy priced at
the utility's avoided cost, which is usually a non-renewable lower cost
alternative source, such as a coal or natural gas unit. While under
contract, they are prohibited from participating in developing REC
markets, but instead receive an earned capacity payment. Many of them
face the prospect of their contracts ending and shortly having to bid
into RPS auctions, but at the lowest level Section 45 credit, with the
loss of their current capacity payment, and with a majority of the
industry having their current Section 45 credit discounted by yet
another 50% due to tax rules applied to facilities with past tax-exempt
financing.
USABPPA urges Congress to adopt a Section 45 proposal like that
offered by Chairman Thomas in last year's House version of H.R. 6, the
energy bill. In that legislation, the existing open-loop plants
received two-thirds of the full credit for 5 years, while new plants
received the full credit for the full 10-year duration. This level and
duration of tax credit would create the conditions for a vibrant
biomass power industry, tackling and solving many of the nation's
energy and environmental problems. Absent adoption of such a proposal,
and without an extension of the placed in service date, the open-loop
biomass industry will continue to struggle.
When I last appeared before this subcommittee four years ago, I
testified that I operated five biomass plants. Since that time, two of
those plants have closed, along with approximately 8 others across the
country. Again, I thank you for your leadership on this issue, I thank
you for the recent expansion of Section 45 accomplished last year, and
I urge you to support legislative changes that would allow open-loop
biomass to successfully compete alongside other renewable technologies.
Chairman CAMP. Thank you very much, Mr. Carlson. Now, Mr.
Curtis Ranger, who is President of DTE Biomass Energy from
Michigan. You have 5 minutes.
STATEMENT OF CURTIS T. RANGER, PRESIDENT, DTE BIOMASS ENERGY,
ANN ARBOR, MICHIGAN, ON BEHALF OF THE SOLID WASTE ASSOCIATION
OF NORTH AMERICA
Mr. RANGER. Thank you, Mr. Chairman and Members of the
Subcommittee. I am Curtis Ranger, President of DTE Biomass
Energy of Ann Arbor, Michigan, and I appreciate your invitation
to be here today on behalf of DTE. I am also representing the
Solid Waste Association of North America, also known as SWANA.
I have submitted a written statement on behalf of DTE and SWANA
regarding the Federal tax credit support for electricity
production from landfill gas and I would like to spend a few
minutes elaborating on my written statement.
We support the Administration's fiscal year 2006 budget
proposal which recommends a continued investment in the
development of renewable energy resources. Federal tax credits,
both section 29 and 45, have spurred investments in projects
that produce electricity from landfill gas.
Congress has a history of supporting alternative energy
resources. Through 1996, landfill gas was included as a fuel
under section 29. These tax credits worked as Congress
intended. According to the EPA, 380 landfill gas projects
operate today. Most of these came to fruition under the section
29 tax credit. These projects generate over nine billion
kilowatt hours of electricity per year and deliver over 73
billion cubic feet per year of landfill gas to direction use
applications. This is equivalent to nearly 40 million barrels
of oil.
Many of these projects operate today without tax credit
support. For example, DTE's first project in Riverview,
Michigan, used innovative landfill gas combustion turbine
technology in 1988. This project's tax credits expired in 2002,
yet the facility continues to generate over 7,000 kilowatts of
power daily. When the landfill closes in 2017, this facility
will continue to supply the energy needs of nearly 5,000
Michigan homes well beyond 2030.
A medium-sized landfill typically generates about 1,500
cubic feet per minute of methane gas. When collected and
converted to electricity, that gas could supply 4,000 kilowatts
of power and meet the electrical needs of over 3,000 American
homes. Landfill gas projects use reciprocating engine
generators or combustion turbines. Micro-turbine technologies
are being used at smaller landfills in niche applications.
Other technologies, like Sterling and Organic Rankine Cycle
engines, and fuel cells are still in the development stage.
A typically landfill gas-fired electric generating facility
costs about $1,200 per kilowatt and has operating expenses of
1.8 cents per kilowatt hour. As described in the Joint Tax
Committee's report prepared for today's hearing, electricity
rates vary by region. Assuming electricity can be sold for 3.7
cents per kilowatt hour, an investor in such a facility might
expect a 6.5 percent return on investment. With the current
section 45 tax credit of 0.9 cents per kilowatt hour, that same
facility might earn 10 percent. While interesting, that return
is unlikely to spur many projects.
On the other hand, if the rates were what the other
renewables receive, for example, 1.8 cents per kilowatt hour,
or if a ten-year credit period were provided, investors might
expect returns between 12 and 15 percent. That would likely
attract investments in new facilities with the fuel risk
inherent to our landfill gas industry.
Under the JOBS Act of 2004, Congress took another helpful
step by recognizing landfill gas as a renewable energy
resource. While we appreciate the continued tax credit support,
the tight December 31, 2005 deadline will restrict many
opportunities. Previously, Congress recognized the long
gestation period required for landfill gas projects. For
example, under section 29 projects, our industry had up to 18
months to execute contracts and another 18 months to construct
facilities. Currently, only well-advanced projects will meet
the deadline. If Congress extends the deadline, more projects
will come online.
If landfill gas were afforded the same provisions as other
renewable energy resources, such as a 5-year placed-in-service
deadline and a ten-year tax credit period, Congress could help
in the development of more projects.
I want to thank the Chairman for his past support and I
appreciate your Committee's time in working with Treasury to
ensure there was an understanding of the application of the
anti-double-dip rule between section 29 and section 45 tax
credits for landfill gas projects. Clarity on this matter will
support investments and avoid issues during future audits with
the IRS.
In the case of emerging technologies, like landfill gas-
fired micro-turbines, this tax credit support can be just the
encouragement an investor needs. This tax incentive is not a
windfall to landfill gas developers, but it would encourage us
to make sizeable investments in certain areas of the country.
Mr. Chairman, I appreciate this opportunity to present the
views of DTE and SWANA. An extension of the deadline to
construct new facilities is critical to ensure that Americans
realize the energy and the environmental benefits available
from landfill gas. Thank you.
[The prepared statement of Mr. Ranger follows:]
Statement of Curtis T. Ranger, President, DTE Biomass Energy, Inc. and
the Solid Waste Association of North America, Ann Arbor, Michigan
Mr. Chairman, and members of the subcommittee, I am Curtis Ranger,
President of DTE Biomass Energy, Inc. (``DTE'') of Ann Arbor, Michigan.
I appreciate your invitation to testify on behalf of DTE and the Solid
Waste Association of North America (``SWANA'') regarding federal tax
credit support of electricity production from landfill gas. I have been
responsible for DTE's landfill gas-to-energy business for over two
decades, and I have served as Chairman of SWANA's Advocacy Committee
since 1999. SWANA is a national association of over 7,300 solid waste
management professionals, companies and government agencies dedicated
to advancing environmentally acceptable and economically sound
municipal solid waste management practices. DTE is a member of SWANA
and is a leading company in developing landfill gas-to-energy projects
with 31 facilities in 14 states.
We support the Administrations' Fiscal Year 2006 budget proposal,
which recommended a continued investment in the development of
renewable energy resources as a means of bolstering our nation's energy
security. Federal tax credits, both Section 29 and Section 45, have
spurred investments in projects that produce electricity from landfill
gas, which is collected from decomposing organic waste in our nation's
municipal landfills. We commend you for holding this hearing on
renewable energy policy to help educate Congress about how renewable
energy resources can support our nation's energy self-sufficiency goals
and help achieve its important environmental goals.
Congress has a long history of supporting the development of
alternative energy resources. This support dates back to the non-
conventional fuel tax credits originally enacted in 1980. Through 1996,
Congress saw fit to include landfill gas as a fuel under the Internal
Revenue Service (``IRS'') Section 29 Code and enacted several
extensions for constructing landfill gas-to-energy projects. I am very
pleased and proud to report to you that these tax credits have worked
as Congress intended. According to the Landfill Methane Outreach
Program (``LMOP'') of the Environmental Protection Agency (``EPA'') 380
landfill gas-to-energy projects operate today in an industry that was
non-existent in the late 1970's. Most of these projects came to
fruition primarily due to the Section 29 tax credits.
Today, these projects generate over 9 billion kilowatt-hours of
electricity per year and deliver over 200 million cubic feet per day of
landfill gas to direct-use applications. This amount of energy is
equivalent to nearly 40 million barrels of foreign oil.
Even more encouraging is the news that many of these projects,
which were developed with tax credit support, still operate today
without tax credit support. For example, the first Michigan project to
use landfill gas-fired combustion turbine technology was installed by
DTE in 1988 at the City of Riverview landfill. While the Riverview
Project's Section 29 tax credits expired in 2002, this facility
continues to generate over 7,000 kilowatts of power daily, operating at
a nearly 90% production capacity. When the landfill closes around 2017,
this site will continue to supply the energy needs of nearly 5,000
Michigan homes and businesses well beyond the year 2030.
It all started largely because of the availability of landfill gas
tax credits, which encouraged the project investors to take a chance on
relatively unproven technology and uncertain fuel supplies. Similar
stories have played out at many other landfill gas-to-energy projects
in America.
For example, a medium sized landfill typically generates over 1,200
cubic feet per minute of methane gas. When collected and converted to
electricity, that landfill gas could annually provide 3,000 kilowatts
of power, supplying the electrical needs of nearly 3,000 American
homes. This electricity can be generated for on-site use or sold into
the electrical grid through a variety of technologies, such as
reciprocating engine generators, combustion turbines, micro-turbines,
Stirling engines (external combustion engine), Organic Rankine Cycle
engines, and fuel cells. Most landfill gas fired electric projects use
reciprocating engine generators or combustion turbines, but micro-
turbine technologies are being used at smaller landfills and in niche
applications. Other technologies, like the Sterling and Organic Rankine
Cycle engines and fuel cells are still in the development phase.
A typical landfill gas-fired electric generating facility costs
about $1,000,000 per megawatt to install with typical operations and
maintenance (O&M) expenses averaging 1.8 cents per kilowatt-hour. As
was described in the Joint Tax Committees report prepared for today's
hearing, electricity rates vary by region. As a result, the existing
landfill gas credit encourages an attractive rate of return in some
parts of the country.
Given that all landfills generate methane, it makes environmental
sense to capture and use the gas to generate electricity rather than
waste it into the atmosphere. According to EPA estimates, each ton of
methane captured and used in a landfill gas-to-energy project is
equivalent to capturing 21 tons of carbon dioxide. That means the 380
existing landfill gas projects are reducing the nation's greenhouse gas
emissions by the equivalent of about 60.7 million metric tons of carbon
dioxideper year. The EPA equates the greenhouse gas reduction benefits
of a typical 4 megawatt landfill gas project to the planting of over
60,000 acres of forest per year, or the removal of the annual carbon
dioxide emissions from over 45,000 cars.
Under the American Jobs Creation Act of 2004, Congress took another
helpful step by recognizing landfill gas as a renewable energy
resource, eligible for IRS Section 45 tax credits. While we appreciate
the continued support, this effort to spur more landfill gas-to-
electricity projects will fall short of its mark. The tight December
31, 2005 deadline provided in the JOBS Act restricted many
opportunities for negotiating and executing contracts, designing and
permitting facilities and procuring and installing equipment. In the
past, Congress recognized the long gestation period required of
landfill gas-to-energy projects. For example, under Section 29
projects, our industry was afforded up to 18 months to execute the
necessary contracts and then another 18 months to construct the
facilities. Congress understood that the construction season in many
parts of the country is limited to a few months each year. This factor
alone has inhibited many new projects from moving forward under the
existing timetable established for the Section 45 tax credits.
Currently, only well advanced projects will meet the deadline for
Section 45 tax credits provided in the JOBS Act. If the rest of the
industry behaves like DTE, I suspect that less than 20 new, Section 45
tax credit eligible projects will be on-line by year-end. Simply put,
many taxpayers are effectively precluded from pursuing landfill gas
developments because they are unwilling to legally bind themselves to
spending considerable resources on building new renewable energy
projects with only a wing and a prayer's chance of realizing tax credit
benefits.
If Congress enacts an extension of the current December 31, 2005
placed in service deadline many more projects could come on-line. Based
upon the EPA estimates that over 500 landfill gas-to-energy projects
can still be developed, and based upon DTE's experience, extension of
the construction deadline by three years would enable the landfill gas
industry to build up to 150 more projects. Furthermore, if the landfill
gas industry was afforded the same provisions as other renewable energy
resources, such as, a 5 year placed in service deadline and a 10-year
tax credit period, Congress could enable the development of most of the
EPA's 500 viable candidate sites.
An extension of the construction period is extremely fair to all
renewable energy project developers. The resulting new projects will
not disrupt the retail electricity market due to their small, but still
meaningful market shares. Congress would continue to demonstrate its
support of sound public policy by encouraging the development of
America's energy resources that deliver significant environment
benefits. Good public policy should dictate that all renewable energy
projects should be treated equitably, including the rate of return on
investment.
Furthermore, I want to thank the Chairman for his past support of
including landfill gas-to-electricity projects as qualifying facilities
under Section 45. I also want to express my appreciation for your
committee's time in working with Treasury to ensure there was an
understanding of the application of the anti-double dip rule between
Section 29 and Section 45 tax credits for landfill gas-to-energy
projects. Clarity on this matter will support investments and avoid
issues during future audits with the IRS.
DTE stands ready, willing and able to invest its fair share in new
landfill gas-to-electricity projects. While I realize that Congress
must balance the cost of its tax incentives, the value of the Section
45 tax credit represents only 30% of the total project capital costs.
In the case of emerging technologies like landfill gas-fired micro-
turbines, this tax credit support can be just the encouragement an
investor needs. While this tax incentive is not a windfall to landfill
gas project developers, it does encourage us to make sizeable
investments in certain areas of the country. The potential 150 new
projects represent over $450 million in new capital that would create
construction and operating jobs throughout the United States. The
relatively small federal tax share would be more than offset by the new
taxes generated from these projects and by the environmental benefits
America would realize in using its own internal resources.
Mr. Chairman, I do appreciate this opportunity to present the views
of DTE and SWANA regarding the need for federal tax credits to support
renewable energy production from landfill gas. An extension of the
placed in service deadline for constructing new facilities under the
Section 45 tax credit is critical to ensuring that America can realize
the benefits available through landfill gas-to-electricity projects. If
Congress confirms its support of landfill gas as a renewable energy,
many landfill gas development companies will deliver on a promise to
build environmentally beneficial projects that will help improve
America's reliance upon domestic energy resources.
Chairman CAMP. Thank you very much, Mr. Ranger. Now, Mr.
Michael Norris, who is Director of Business Development for
American Ref-Fuel Company.
STATEMENT OF MICHAEL NORRIS, DIRECTOR OF BUSINESS DEVELOPMENT,
AMERICAN REF-FUEL COMPANY, MONTVALE, NEW JERSEY, ON BEHALF OF
THE INTEGRATED WASTE SERVICES ASSOCIATION
Mr. NORRIS. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Michael Norris and I serve as Business
Development Manager for American Ref-Fuel. I am testifying
today on behalf of the Integrated Waste Services Association,
the national trade association for America's waste energy
industry.
The IWSA was pleased to have our trash combustion
facilities included as a qualified facility for purposes of
receiving the section 45 Production Tax Credit last year.
Inclusion of waste-to-energy continues more than 20 years of
recognition as a source of renewable energy under Federal law.
The Federal Power Act, the Public Utility Regulatory Policies
Act, the Federal Energy Regulatory Commission regulations, and
the Biomass Research and Development Act of 2000 all recognize
waste-to-energy power as renewable energy, as do 15 States, the
U.S. Department of Energy, and the U.S. EPA.
A tax credit for new waste-to-energy facilities or new
generating units at existing facilities continues the Federal
Government's policy to encourage clean, renewable electricity
and promotes energy diversity while helping cities meet
challenges of trash disposal.
Waste-to-energy facilities generate clean, renewable energy
through the combustion of municipal solid waste in specially-
designed power plants equipped with the most modern pollution
control equipment in the power generation industry. Trash
volume is reduced by 90 percent, therefore conserving landfill
capacity. The remaining residue consistently meets strict EPA
standards for reuse. America's 89 waste-to-energy plants
operate in 27 States and generate 2,700 megawatts of
electricity while safely disposing of 95,000 tons a day of
trash.
Our industry meets the power needs of nearly 2.3 million
homes and serves the trash disposal needs of more than 36
million people. The 30 million tons of trash combusted in our
facilities each year has an energy value of 48 million barrels
of crude oil worth more than $2 billion.
America's waste-to-energy facilities meet some of the most
stringent environmental standards in the world and employ the
most advanced emissions control equipment available. In
February of 2003, EPA wrote that America's waste-to-energy
plants produce electricity with less environmental impact than
almost any other source of electricity. In addition, a study
published by multiple authors, including an official from the
EPA, determined that waste-to-energy technology annually avoids
33 million metric tons of carbon dioxide, a greenhouse gas that
would otherwise be released into the atmosphere.
I would like to provide you with a brief description of the
economics of a typical waste-to-energy facility. The facility's
revenues come from two sources, fees paid by disposal of trash
and fees paid by the facility generating energy. New facilities
or new units at existing facilities require significant capital
investment. A new unit is a new boiler unit built at an
existing facility, which is oftentimes more economical and
politically feasible than constructing a new facility.
Take an example of an existing waste-to-energy plant that
has two boilers. A facility might burn 1,500 tons a day of
municipal solid waste and generate 40 megawatts of electricity.
If a company adds a third boiler, a facility would be capable
of disposing of 2,250 tons a day of waste and 60 megawatts of
energy. Construction of that 750-ton-a-day unit would cost
about $120 million price tag, or about $6,000 a kilowatt. A
greenfield plant of the same size could cost as much as $350
million.
The combined electricity and disposal fee revenues will, on
average, not be sufficient to cover the total cost of new
waste-to-energy units. Added to these costs, of course, is an
adequate return on investment that is required to justify the
investment. In part, due to economic considerations, no new
waste-to-energy facilities have been constructed in the past
decade. An adequate Production Tax Credit will, in many cases,
make up the shortfall and make projects feasible. We view the
PTC as a much-needed tool that will make development of this
form of clean, renewable electricity more economically viable.
We urge Congress to extend the section 45 PTC, as it is set
to expire at the end of the year. We would recommend changes to
the tax credit that would greatly enhance our ability to
develop new waste-to-energy capacity. The IWSA urges the
Committee to make the tax credit applicable to energy
generating new units built at existing facilities as well as
newly-sited facilities.
The IWSA also urges the Committee to extend the existing
section 45 Production Tax Credit to apply to new facilities and
units placed into service within 3 years of enactment and to
make the credit available for 7 years after the facility has
been placed into service. In addition, we recommend the
Committee provide a credit amount that provides a level
playingfield for all renewable technologies with respect to the
rate of return on investment.
We fully support the goals of Congress to provide the
incentives for the development of renewables in order to
diversify the Nation's energy supply. We also provide that the
PTC is one of the most effective tools to achieve this goal.
I want to thank you for the opportunity to appear today.
[The prepared statement of Mr. Norris follows:]
Statement of Michael Norris, Director of Business Development, American
Ref-Fuel Company, Montvale, New Jersey, on behalf of Integrated Waste
Services Association
Good afternoon, Mr. Chairman and members of the subcommittee. I
would like to thank you for providing me with the opportunity to
testify today. My name is Michael Norris, and I serve as Director of
Business Development for American Ref-Fuel Company. I am testifying
today on behalf of the Integrated Waste Services Association (IWSA),
the national trade association representing America's waste-to-energy
industry. IWSA and its members commend you for conducting this very
important hearing on Section 45 renewable energy production tax
credits, so that we may describe to you the importance of this tax
credit for both the public and private sector members of the waste-to-
energy industry.
The IWSA was pleased to have our ``trash combustion facilities''
included as a qualified facility for purposes of receiving the Section
45 production tax credit last year. Inclusion of waste-to-energy
continues more than twenty years of recognition as a source of
renewable energy under federal law. The Federal Power Act, the Public
Utility Regulatory Policies Act, the Federal Energy Regulatory
Commission's regulations, and the Biomass Research and Development Act
of 2000 all recognize waste-to-energy power as renewable energy, as do
fifteen states, the U.S. Department of Energy, and U.S. Environmental
Protection Agency (EPA).
A tax credit for new waste-to-energy facilities or new generating
units at existing facilities continues the federal government's policy
to encourage clean, renewable electricity, and promotes energy
diversity while helping cities meet the challenge of trash disposal.
Waste-to-energy facilities generate clean, renewable energy through
the combustion of municipal solid waste in specially designed power
plants equipped with the most modern pollution control equipment in the
power generation industry. Trash volume is reduced by 90%, thereby
conserving landfill capacity. The remaining residue consistently meets
strict EPA standards for reuse. America's 89 waste-to-energy plants
operate in 27 states and generate about 2,700 megawatts of electricity
while safely disposing of 95,000 tons of trash each day. Our industry
meets the power needs of nearly 2.3 million homes, and serves the trash
disposal needs of more than 36 million people. The 30 million tons of
trash combusted in our facilities each year has the energy value of 48
million barrels of crude oil worth more than $2 billion. The $10
billion waste-to-energy industry employs more than 6,000 American
workers with annual wages in excess of $400 million.
America's waste-to-energy facilities meet some of the most
stringent environmental standards in the world and employ the most
advanced emissions control equipment available. In a February, 2003
letter, EPA wrote that America's waste-to-energy plants produce
electricity ``with less environmental impact than almost any other
source of electricity''. In addition, a study published by multiple
authors, including an official from EPA, determined that waste-to-
energy technology annually avoids 33 million metric tons of carbon
dioxide--a greenhouse gas that would otherwise be released into the
atmosphere.
I would like to provide a brief description of the economics of a
typical waste-to-energy facility. A facility's revenues come from two
sources: 1) fees paid to dispose of the trash, and 2) fees paid to the
facility for generating energy. New facilities or new generating units
(boilers) built at existing facilities require significant capital
investment. A new ``unit'' is a new boiler built at an existing
facility, which is often times more economical and politically feasible
than constructing a new facility. Take for example an existing waste-
to-energy plant that has two boilers. Such a facility might burn 1,500
tons of municipal solid waste per day and generate 40 megawatts of
electricity. If a company added a third boiler, that facility would be
capable of disposing of 2,250 tons of waste per day and generate over
60 megawatts of energy. Construction of a 750 ton per day unit at an
existing facility might carry a $120 million price tag in capital.
In the case of the construction of a typical new ``greenfield''
facility, the capital cost of, a facility that converts 2,250 tons of
trash each day into 60 MW of electricity is approximately $350 million.
The operations and maintenance cost without capital recovery approaches
$28 million annually.
The combined electricity and disposal fee revenues will, on
average, not be sufficient to cover the total cost of a new waste-to-
energy unit. Added to these costs, of course, is an adequate return on
investment that is required to justify the investment. In part due to
these economic considerations, no new waste-to-energy facilities have
been constructed in the past decade. An adequate production tax credit
(PTC) will, in many cases, make up for the shortfall and make projects
feasible. We view the PTC as a much-needed tool that will make
development of this form of clean, renewable electricity more
economically viable.
We urge Congress to extend the Section 45 PTC, which is set to
expire at the end of the year. We would also recommend changes to the
tax credit that would greatly enhance our ability to develop new waste-
to-energy capacity. IWSA urges the Committee to make the tax credit
applicable to electricity generated at new units built at either
existing waste-to-energy facilities or newly sited facilities. Given
the complexity of siting and permitting new facilities, it is likely
that most new capacity in the industry will be added through the
construction of new units at existing facilities.
The IWSA also urges the Committee to extend the existing Section 45
production tax credit to apply to new facilities or units that are
placed in service within three years of enactment and to make the
credit available for seven years after the facility is placed in
service. In addition, we recommend that the Committee provide a credit
amount that provides a level playing field for all renewable
technologies with respect to the rate of return on investment.
We fully support the goal of Congress to provide incentives for the
development of renewable energy in order to diversify the nation's
energy supply. We also believe that the PTC is one of the most
effective tools to achieve this goal. The availability of the tax
credit plays a critical role in determining whether or not new waste-
to-energy capacity will be brought online and we urge you to construct
the credit in a manner that maximizes its success of promoting new
renewable capacity.
Thank you for the opportunity to appear before you today, and I
will be happy to answer any questions.
Chairman CAMP. Thank you very much, Mr. Norris. Now, we
will have Mr. Vince Signorotti, which is Vice President for
CalEnergy Operating Corporation.
STATEMENT OF VINCE SIGNOROTTI, VICE PRESIDENT, REAL ESTATE
ASSETS AND COMMUNITY RELATIONS, CALENERGY OPERATING
CORPORATION, BRAWLEY, CALIFORNIA
Mr. SIGNOROTTI. Thank you, Mr. Chairman and Members of the
Committee. My name is Vince Signorotti. I am a Vice President
for CalEnergy. With me today is Jonathan Weisgall with
MidAmerican Energy Holdings, our parent company.
CalEnergy generates 340 megawatts of clean, reliable,
renewable geothermal electricity from ten plants near the
Salton Sea in southern California, and the experts believe
there is another 2,000 megawatts of geothermal energy still in
the ground at this location.
Two weeks ago, the State granted us a license for a new
215-megawatt geothermal plant called Salton Sea 6. However,
despite this approval and despite a 30-year fixed-price
contract that we had signed for 95 percent of the output, these
2,000 megawatts will remain untapped in this reservoir if the
geothermal Production Tax Credit is not extended in a viable
manner.
As a developer, I am alarmed by what I am seeing in the
marketplace, especially the volatile and rising price for
natural gas. Increasing the production of electricity from
renewable resources is a sensible alternative to this concern.
Production wells at our facilities extra super-heated
fluids from deep underground reservoirs which is flashed into
steam and used to create electricity. The fluid is then
injected back into the reservoir, completing the closed-system
process. Geothermal plants produce what is called baseload
power, consistent energy production, 24 hours a day, 7 days a
week. Geothermal energy is an important indigenous renewable
resource.
However, the industry faces serious challenges, primarily
the high up-front capital cost of building a plant. For
example, our costs are more than four time per megawatt higher
than comparable natural gas-fired power plants.
The output from Salton Sea 6 will make it the largest
renewable energy project of any kind in the United States. It
took us 5 years and over $8 million in development costs to
reach this point and it will take an additional 28 months to
build, a total of more than 7 years from start to finish.
Construction costs will exceed $700 million, which would
represent the single largest capital investment in Imperial
County, the most economically disadvantaged area in California
and one of the poorest in the country.
The bottom line is this. We have a permit to build the
plant, so we could break ground tomorrow. We have a customer,
and we are prepared to move forward with financing and
construction. But 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
wishful thinking.
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 a PTC
viable. Given the construction time of most geothermal plants,
a one- or two-year eligibility period extension will do nothing
to 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 must deal with the 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 3 years or provide
transition rules enabling new geothermal projects with binding
contracts in place to qualify for a Production Tax Credit.
The second issue is the duration of the PTC. We believe
geothermals should receive the same ten-year term that is
provided for wind. These improvements will result in better
long-term planning and significant additional geothermal
development.
If Congress extends the PTC for geothermal energy in this
manner, we will build Salton Sea Unit 6. It is that simple. It
will greatly increase the odds of seeing Salton Sea Units 7, 8,
and 9, because non-polluting baseload geothermal power is an
attractive substitute for fossil fuel plants.
Providing the geothermal industry with a PTC does not get
us off the tax hook by any means. Geothermal plants pay more
than three times more taxes than gas-fired plants pay on a per
megawatt hour basis. 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. In fact, over the next 30 years,
even with the benefits of a PTC, Salton Sea 6 will still pay
more than $300 million in Federal, State, and local taxes.
If, as policy makers, you want to encourage more renewable
energy development, you can impose a mandate, like a Renewable
Portfolio Standard, or offer an incentive, like a PTC. As a
businessman, I like incentives and the PTC fits that bill
perfectly. First, it is output-based, so you get your reward
only after making your investment and operating your plant.
Second, you can take it to the bank. Third, a low-cost producer
gets the biggest reward.
In sum, then, geothermal energy provides reliable baseload
power. It is virtually emissions-free, contributes to fuel
diversity, is an indigenous, renewable fuel source, contributes
to energy security, provides price stability, as seen by our
30-year fixed-price contract with our customer, and creates
more jobs than a comparable fossil-fired plant.
As President Bush has said, a key goal of comprehensive
energy legislation must be to develop new sources of energy.
The single best way to encourage new development of geothermal
power is to extend the PTC together with a longer or modified
placed-in-service date. That will do more to increase domestic
production of geothermal energy than any previous government
action. It would represent a huge win for the environment and,
therefore, the country and all U.S. energy consumers.
Thank you again for this opportunity, and at the
appropriate time, I will be pleased to answer any questions.
[The prepared statement of Mr. Signorotti follows:]
Statement of Vince Signorotti, Vice President, CalEnergy Operating
Corporation, Brawley, California
Thank you, Mr. Chairman. My name is Vince Signorotti. I am a Vice
President of CalEnergy Operating Corporation. I have lived in Imperial
County, California for 17 years and have worked in the geothermal
industry for the past 24 years. CalEnergy is a subsidiary of
MidAmerican Energy Holdings Company, an international energy company
headquartered in Des Moines. With me today is Jonathan Weisgall, Vice
President of Legislative and Regulatory Affairs for MidAmerican Energy.
My company currently generates 340 megawatts of clean, reliable and
renewable geothermal electricity for California's energy consumers from
our plants adjacent to the Salton Sea in the extreme southern part of
the state. We believe there are six times this amount available, or
another 2,000 more proven megawatts of geothermal energy that can be
developed near the Salton Sea. In fact, just two weeks ago we received
approval from the state for a new 215-megawatt geothermal plant, called
Salton Sea Unit 6. However, despite this approval and despite a 30-year
fixed price contract we have signed for 95% of the output, this power
and the other 2,000-plus megawatts will remain untapped in this
reservoir if the geothermal production tax credit is not extended in a
viable manner.
As a developer, what I'm seeing in the marketplace is volatile and
rising natural gas prices and increasing concerns about climate change,
clean air, job growth, and increased dependence on foreign sources of
energy. Increasing the production of electricity from renewable energy
addresses all of these problems head-on. As the Speaker's Task Force
For Affordable Natural Gas concluded, ``A sound energy policy should
encourage the development of renewables.'' \1\ Other recent studies
show that reducing demand pressure on natural gas through increased use
of clean, domestically-produced renewable energy can help bring down
natural gas prices.\2\
---------------------------------------------------------------------------
\1\ Speaker's Task Force For Affordable Natural Gas ``Final Summary
of Finding,'' September 30, 3003, p. 6 (download at http://
energycommerce.house.gov/NaturalGasTaskForce/scripts/
file.pl?file=findings.htm).
\2\ See, e.g., Ryan Wiser et al., ``Easing the Natural Gas Crisis:
Reducing Natural Gas Prices through Increased Deployment of Renewable
Energy and Energy Efficiency,'' Lawrence Berkeley National Laboratory
(January 2005) (LBNL-56756) (download at http://eetd.lbl.gov/ea/ems/
reports/56756.pdf).
---------------------------------------------------------------------------
Geothermal power, as the word implies, is energy that comes from
heat in the earth. Production wells at our facilities extract the
geothermal brine from underground reservoirs. When that superheated
brine reaches the surface, it flashes into steam, which turns a turbine
to create electricity. These wells range in depth from 5,000 to 9,500
feet below the earth's surface. We then re-inject the brine back into
the reservoir. Geothermal plants thus produce what is called baseload
power: consistent energy production, 24 hours a day, seven days a week.
In addition, a well-managed geothermal reservoir is a sustainable
resource; there has been no measurable decrease in pressure in our
Salton Sea geothermal reservoir since we started production in the
early 1980s.
Geothermal energy is a significant power producer, supplying about
5% of California's electricity generation, 9% of northern Nevada's, and
25% of Hawaii's. However, the industry faces serious challenges,
primarily the high up-front capital costs of building a geothermal
plant. Our costs are more than four times per megawatt higher than
comparable natural gas-fired power plants.\3\ In addition, we typically
sign long-term (20- to 30-year) fixed-price contracts, while coal- and
natural gas-fired plants typically enter into shorter contracts--and
usually with fuel adjustment clauses to hedge against fuel price
volatility. Geothermal energy thus bears the dual financial burdens of
higher initial capital costs combined with greater price risks going
forward--a combination that makes it difficult to attract investment
dollars.
---------------------------------------------------------------------------
\3\ A 2003 California Energy Commission study concluded that the
capital costs of geothermal plants are four to six times higher per
megawatt than natural gas plants. Final Staff Report, ``Comparative
Cost of California Central Station Electricity Generation
Technologies,'' June 5, 2003 (download at http://www.energy.ca.gov/
reports/2003-06-06--100-03-001F.PDF).
---------------------------------------------------------------------------
The output from Salton Sea Unit 6 will make it the largest
renewable energy project of any kind in the United States. It took us
five years--and over $8 million in development costs--to obtain our
permit from the California Energy Commission, and it will take an
additional 28 months to build--a total of more than seven years from
start to finish. Construction costs will exceed $700 million, using 550
construction workers and leading to more than 60 high-paying, fulltime
positions. It will represent the single largest capital investment in
Imperial County, which is the most economically disadvantaged area in
the state and one of the poorest in the country.
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.
The second issue is the duration of the production tax credit. We
believe geothermal projects should receive the same term provided for
wind generation--ten years--as opposed to the current five years for
geothermal. A five-year duration would represent an improvement to the
existing investment tax credit, but re-aligning the duration of the
credit from five years to match the ten years afforded other renewables
such as wind will result in better long-term planning and significant
additional 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, baseload 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.
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.\4\ 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.\5\ 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.
---------------------------------------------------------------------------
\4\ ``Does the PTC Work?,'' by Brandon Owens (PR&C Renewable power
Service, July 2004), pp. 10-12.
\5\ 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).
---------------------------------------------------------------------------
Our industry does have another option--the energy investment tax
credit. However, for my company, the one-time investment credit
provides nowhere near the benefit that the recurring PTC does and
simply cannot make the project commercially viable.
If, as policy makers, you want to encourage more renewable energy
development, you can impose a mandate like a renewable portfolio
standard or offer an incentive like a tax credit. As a businessman, I
like an incentive, and the production tax credit fills that bill
perfectly. First, it is output-based, so you get your reward only after
making your investment and operating your plant. Second, you can take
it to the bank, and third, the low-cost producer gets the biggest
reward. State renewable portfolio standards are somewhat limited by the
cost of renewable power, but the PTC will literally energize these
standards by reducing costs and stimulating investment.
Lessons of the last few years--with record high prices for natural
gas, coal, and gasoline--teach us that the United States must diversify
and expand its domestic energy supply, and that means tapping our
nation's entire renewable energy resource base.
It is important that tax measures in the energy bill help to ensure
that future U.S. electricity supplies will be available from a diverse,
domestic, and environmentally friendly resource base located right here
in the United States.
Geothermal energy: (1) provides reliable baseload power; (2) is
virtually emissions-free; (3) contributes to fuel diversity; (4) is an
indigenous, renewable fuel source; (5) contributes to energy security;
(6) provides price stability, as seen by our 30-year fixed price
contract with our customer; and (7) creates more jobs than a comparable
fossil fuel-fired plant.
As President Bush has said in several recent speeches, a key goal
of comprehensive energy legislation must be to develop new sources of
energy. The single best way to encourage new development of geothermal
power is to extend the production tax credit, together with a longer or
modified placed-in-service date. Simply put, that action will do more
to increase the domestic production of all renewable energy than any
previous government action. It would represent a huge win for the
environment and therefore the country and all U.S. energy consumers.
Thank you. I would be pleased to answer any questions.
Chairman CAMP. Thank you very much, Mr. Signorotti. Now we
have Mr. Christopher O'Brien, who is Vice President of Sharp
Solar Systems.
STATEMENT OF CHRISTOPHER O'BRIEN, VICE PRESIDENT, STRATEGY AND
GOVERNMENT RELATIONS, SOLAR SYSTEMS DIVISION, SHARP ELECTRONICS
CORPORATION, KINGSTOWNE, VIRGINIA, AND CHAIRMAN OF THE BOARD OF
DIRECTORS, SOLAR ENERGY INDUSTRIES ASSOCIATION
Mr. O'BRIEN. Mr. Chairman, Members of the Subcommittee, I
thank you for the opportunity to testify today. My name is
Christopher O'Brien. I am Chairman of the Solar Energy
Industries Association, the national trade association of the
solar energy industry, representing over 100 companies who
manufacture and sell solar energy systems and representing all
major solar energy technologies--photovoltaics, solar thermal,
and concentrating solar power.
I am also Vice President for Strategy and government
Affairs for Sharp Corporation's Solar Systems Division. Sharp
is the world's largest manufacturer of solar photovoltaics, or
PV, with manufacturing plants located in Japan, in the U.K.,
and in Memphis, Tennessee. The Sharp Solar plant in Memphis was
inaugurated in 2003, with a capacity of manufacturing 20
megawatts per year of solar panels. The capacity was doubled to
40 megawatts per year in 2004, and will increase to 60
megawatts later this year.
I would like to make three points in my testimony this
afternoon. First, the section 45 Production Tax Credit as
structured has insignificant value to the solar industry.
Second, meaningful incentives are key to bringing down the cost
of solar energy and increasing deployment. Third, we would,
therefore, recommend that solar be removed from the list of
eligible technologies under Section 45 in exchange for an
expansion of the existing section 48 Investment Tax Credit.
Now, it may come as a surprise that the section 45 PTC does
not benefit all eligible renewables. However, as structured, it
simply is not beneficial to any sector of the solar energy
industry. Let me explain.
The section 45 credit, first of all, is available only to
projects that engage in the sale of power. Most solar PV and
solar thermal projects are distributed generation, installed on
rooftops of homes and businesses, and the energy generated by
these solar energy systems is used on-site. The definition of a
power sale used by the legislation, therefore, excludes
distributed solar energy systems from the credit.
Larger utility-scale solar plants are also unlikely to
claim the section 45 PTC because under current law, developers
must choose between the section 45 PTC and the existing Section
48 Investment Credit, and the latter is more significant in
value.
So, the most effective way to bring solar energy online in
the U.S. would be to increase the Section 48 solar ITC to
approximately 30 percent and make that credit available to all
solar applications, even if that credit were to come at the
expense of our being excluded from section 45 PTC.
Congress has used Investment Tax Credits for the last 40
years as a mechanism to support key emerging industries and to
realize public value. Solar provides excellent public value,
reducing peak demand, reducing pollution, and avoiding or
deferring transmission and distribution upgrades. Furthermore,
the U.S. has the best solar resources in the developed world.
An expansion of the section 48 Investment Credit would have
a strong positive effect on the U.S. solar energy market,
increasing the scale and competition among manufacturers,
accelerating the drop in the cost of solar energy to the point
where solar energy would more rapidly and broadly compete with
convention peaking and retail electric prices.
SEIA, or the Solar Energy Association, estimates that an
expansion of the ITC would over 10 years stimulate an estimated
50,000 new jobs, decrease solar costs by 50 percent, and save
consumers over $15 billion in electricity and natural gas
costs. In California alone, we estimate that these provisions
would create over 10,000 jobs and spur $8.5 billion in economic
investment. In other places, like Saginaw County, Michigan,
home to one of the largest producers of silicone for the solar
industry, Hemlock Semiconductor Corporation would expect to see
significant investment and capacity expansion.
In other nations, similar policy models have been used to
spur manufacturing scale-up, increased competition among
installers, and improved marketing. This international market
growth has cut the cost of solar energy sharply and
demonstrated the ability of the industry to move off of
incentives after that initial jump-start.
On the other side of Capitol Hill, Senator Lamar Alexander
has proposed in S. 727 a temporary 5-year expansion of the
Investment Tax Credit that would apply to both residential and
commercial sectors.
We have an opportunity to shift a tax policy that does not
work as effectively as intended for solar energy into one that
does. Expanding the section 48 ITC would give the solar
industry a credit of approximately the same proportional value
as that enjoyed by other renewables through the section 45 PTC.
This would help to accelerate the public benefits associated
with the increased use of solar energy and bring a booming
solar market back to the United States
Once again, I appreciate the opportunity to testify and the
willingness of this panel to explore new policy options. I look
forward to answering your questions.
[The prepared statement of Mr. O'Brien follows:]
Statement of Chris O'Brien, Vice President, Strategy & Government
Affairs, Sharp Electronics, Solar Systems Division, Kingstowne,
Virginia, and Chairman, Solar Energy Industries Association
Mr. Chairman, members of the committee, I thank you for this
opportunity to testify.
My name is Chris O'Brien. I am Vice President for Strategy and
Government Affairs at Sharp Electronics, Solar Systems Division. We are
the largest photovoltaics manufacturer in the world. Our Memphis
facility will soon be the largest solar manufacturing facility in the
United States. I also serve as Chairman of the Solar Energy Industries
Association, the national trade association of the solar energy
industry,--representing the photovoltaics (PV,) Concentrating Solar
Power (CSP,) and solar heating industries.
I would like to make three points this afternoon.
First, the current production tax credit has no value to
the solar industry.
Second, meaningful incentives are key to bringing down
solar costs.
And third, we would willingly be removed from the section
45 credit in favor of an expansion of the existing investment credit.
It may come as a surprise that the current credit does not benefit
all eligible renewables. However, the PTC as currently written is
simploy not relevant to any sector of the solar industry.
For different reasons, the credit is of no value to either
distributed retail, or central station wholesale, solar power.
As you know, this credit is available only to projects that engage
in the sale of power. Most solar PV projects are distributed
generation, installed on rooftops and run through the customer's meter.
The definition of a power sale used by the legislation therefore
excludes them from the credit.
Even if they could theoretically take the PTC, owners of most PV
systems would not realistically benefit. A typical home PV system is 2
kilowatts--one twenty-five-thousandth the size of a small wind farm.
With the PTC, that system would generate just $50 in annual credits.
The difficulty inherent in somehow having the IRS ``read your meter''
would remove any economic benefit.
Of course, photovoltaics are not the only solar electric
technology. For almost 20 years, approximately 400 megawatts of
concentrating solar (``CSP'') projects have been operating in the
Mojave Desert of California. These plants use fields of mirrors to
bring heat into a conventional steam power plant, feeding valuable peak
power into the grid. New projects are currently in the pipeline. And
although the developers of these new CSP plants could at least
theoretically claim the PTC, they will not. Under current law,
developers must choose between the PTC and the existing 10% commercial
solar investment credit. While the current PTC represents 30-40% of
power costs for wind, it is perhaps 6--10% of solar costs. Given the
realities of commercial finance, no project developer will trade 6 %
over 10 years for 10% up front.
We appreciate that the expansion of the PTC indicates a desire by
Congress to support clean, domestic solar power. Unfortunately, as
written, it simply will not work.
So, while our industry represents many different technologies, we
speak with one voice on this issue.
The most effective way to bring solar on-line in the United States
would be to increase the existing investment credit to 30%--and make
that credit available for all solar applications.
The reasoning would be that increasing market size allows the
industry to increase the scale of manufacturing, bring competition into
the marketplace, and decrease costs.
Historically, solar prices have come down 20% for each doubling of
installed capacity. A usable ITC would ``jumpstart'' the U.S. market by
bringing already-declining solar costs over the ``tipping point'' in
many areas, to the point where they broadly compete with conventional
peaking and retail electric prices.
Similar models have been used by other countries to expand the
solar industry, resulting in double-digit annual market growth. (Though
the U.S. lags, global PV industry is now 10 times the size it was in
1996.) In other nations, manufacturing scale-up, increased competition
among installers, and improved marketing have proven the ability of the
industry to move off of incentives after that initial ``jumpstart.''
Congress has used investment tax credits for the last 40 years as a
mechanism to stimulate economic growth in emerging industries, and
realize public value.
Solar provides excellent public value, and the United States has
the best solar resources in the developed world. From Maine to Nevada,
we could use solar power to meet some of our most pressing energy
concerns--from peak demand reduction, to environmental benefits, to the
avoidance of transmission and distribution upgrades. I would be happy
to provide the committee with a body of work that quantifies these
benefits.
In S. 727, Senator Alexander has proposed a temporary 5-year
expansion of the investment tax credit that would apply to both the
residential and commercial sectors.
This bill also proposes changes that would make the PTC usable for
some types of solar projects. However, I've asked my colleagues, and we
agree that if we seek to see significant near-term deployment and
really bring down solar costs, the most important policy change that
Congress could enact would be an expansion of ITC--even if that credit
were to come at the expense of our being excluded from the production
tax credit.
Over 10 years, these credits would stimulate an estimated 50,000
new jobs, decrease solar costs by 50%, and save consumers over $15
billion in electricity and natural gas. In California alone, we
estimate that these provisions would create over 10,000 jobs and spur
$8.5 billion dollars in economic investment. Expanding the ITC is the
most meaningful solar policy that Congress could enact in the energy
bill.
We have an opportunity to shift a tax policy that does not work
into one that does. Expanding the existing ITC, would give the solar
industry a credit of approximately the same value as that currently
enjoyed by other renewables through the PTC. This would begin to bring
the booming solar market back to the U.S.
Once again, I appreciate the opportunity to testify, and the
willingness of this panel to explore new policy options. I look forward
to answering your questions.
Chairman CAMP. Thank you very much. Thank you all very
much. That was excellent testimony. I just have a couple of
questions.
Mr. O'Brien, do you see the market share of solar in the
U.S. comparable with other countries, and if other countries
have a larger solar use than the U.S., what reasons do you
attribute that to?
Mr. O'BRIEN. Probably the most dramatic example of an
effective policy has been taking place over the last 10 years
in Japan. Japan put in place a policy targeting installation of
solar on residential rooftops. This is back in 1994 and they
set a goal of five gigawatts of installed solar capacity by
2010. At that time, the world market for solar was in the tens
of megawatts, so it was an outrageous goal. Nevertheless, they
committed to a long-term set of incentives. That, in turn, gave
businesses a framework that they could work with, a degree of
certainty to make the investments, to drive down the cost, and
to increase deployment.
What happened? Over the next 10 years, the installed cost
of solar systems in Japan dropped by 70 percent. The subsidy
level that the government provided decreased from approximately
$8 per watt installed to--it will be phased out to zero next
year. The total number of systems installed increased from
approximately 500 in 1994 to 70,000 per year this year. So, it
has overall been a great example of a short-term stimulus that
has very effectively increased the dissemination and the use of
solar energy in Japan.
Chairman CAMP. That is one of the concerns, that data shows
the cost of solar power is higher on a kilowatt hour basis than
other kinds of renewables, and I wondered, if sounds as if in
Japan it was economies of scale that brought that price down.
Are there any technologies on the horizon that you see that may
make solar power more economically comparable to other
renewables?
Mr. O'BRIEN. There are technologies emerging. There are
some new--I think you see over the last 20 or 25 years, you
have seen that the cost of the solar module, the solar panel
itself, has decreased by about 20 percent each time that the
global volume has doubled. It is about an 18 to 20 percent
learning curve. There are new breakthrough technologies that
are being worked on, including deposition of photovoltaics on
plastic substrates. There are concentrating photovoltaic
technologies. Concentrating thermal solar power is proving to
be economic. So, I think that there are a variety of solar
conversion technologies that are effective.
I think equally important, though, and what we have seen in
some of our larger markets is the productivity and the
efficiency between the factory gate and the rooftop. What we
have seen in places in larger markets is that some of the
largest solar companies in Japan now are home-building
companies. They have incorporated solar so that they have
standard model homes that are eco-homes or zero-energy homes
that you as a consumer can walk in, and instead of getting
granite countertops, you can get a solar system on your roof
and no energy bill. So, it is making much more efficient
solar--market channels has been a big part of the successful
outcome there.
Chairman CAMP. Okay. Thank you very much.
Mr. Ranger, I have a couple questions. I wondered, this
obligation, this current requirement to flare landfill gas, how
does that affect--how does that flare requirement factor into
the economics of using the gas to generate and sell
electricity, this preexisting requirement of flaring landfill
gas?
Mr. RANGER. Well, generally, Mr. Camp, the landfills are
flaring that gas, so those systems are already installed at the
bigger landfills. What has excited the industry about the
section 45 tax credit is it is something that can go into
putting in new capital to change that gas, take it away from
the flare and turn it into electricity. It is still a capital-
intensive industry past the flare, and that is where we need
the support of the tax credit.
So, one thing that is troubling to me, personally, is that
landfill gas gets penalized because there is an environmental
benefit that is attached to collecting the gas. We still have
the same capital requirements as any other renewable energy
provider and we still need some support to make that
investment. I would like to see all renewables be treated
equally and make more of these projects happen.
Chairman CAMP. All right. Thank you. Do you mean equal in
terms of the time period as well as the amount, credit amount?
Mr. RANGER. Correct.
Chairman CAMP. From the charts we have, the production from
wind and closed-loop biomass receive basically 1.9 cents per
kilowatt hour for the first 10 years and others are not, are
either equal or less than that. You think that has had an
effect on the ability to compete in that area?
Mr. RANGER. Well, the EPA estimates that there is another
500 landfills that are candidates for landfill gas electricity
projects. So, if we were at that level of support, you would
see almost all those projects come about. But what has happened
in the landfill gas industry is we keep getting ratcheted back.
We have looked at numbers at 1.3 cents a kilowatt hour, and
what finally came out was the 0.9. That is going to generate
some activity, but we are talking 20 projects, in my
estimation, that were going to come forward, not only because
of the deadline but also the magnitude of the tax credit.
Chairman CAMP. You said in your testimony that a medium-
size landfill would meet the electrical needs of 3,000 homes.
That is fairly significant.
Mr. RANGER. Yes, it is, and I think it is just a resource
that continues to go up a flare and this country can't afford
to watch that kind of energy evaporate, no matter what the
reasons it is going into a flare.
Chairman CAMP. All right. Thank you very much.
The gentleman from New York, Mr. McNulty, may inquire.
Mr. MCNULTY. Thank you, Mr. Chairman. I also thank all of
you for your testimony.
We have heard so many times today that we have had this
goal of reducing our dependency on foreign sources of energy. I
mentioned earlier that the President has made this a highlight
in his State of the Union Address for the last couple of years
and I was very enthusiastic about that. Then we get going
through the legislative session and I find myself asking the
question, where is the beef, because we talk about it a lot and
we don't do a lot about it.
So, in my limited time, I just wanted to kind of go down
the line and get a little bit more from you about what you
think the government ought to be doing. Now, I understand that
is a limited role, and it should be. But I really appreciate
Mr. O'Brien's testimony because he got into that. He talked
about other things that we ought to be doing in order to help
his industry.
Now, I know how all of you feel about the PTC and the ITC,
but in your opinion, what else should--I am looking for a sense
of urgency here. I am not talking about you, about us, about
getting the information so that we can move on something and
get some things done, the things that--the urgency that Mr.
Larson was talking about earlier.
In your opinion, what else should we be doing beyond the
PTC to help your industries grow and to reduce our dependency
on foreign sources of energy? Mr. Gosselin, we can start and
just go down the line. Just take about a minute.
Mr. GOSSELIN. Thank you. For wind industry, we clearly
believe a long-term extension is what is necessary for us to
get traction, remove the inefficiencies from the production of
the equipment, and drive down our costs to remove the
dependency from the PTC itself and add significant new wind
into the country's energy mix. It is as simple as that. Thank
you.
Mr. MCNULTY. Mr. Carlson?
Mr. CARLSON. Thank you, Mr. McNulty. Basically, you heard a
lot today about the cost of the various renewable technologies.
Some are closer to the fossil fuel-driven electricity market
than are others, and basically, the bridging of that gap really
requires two actions, in my opinion.
One isn't necessarily a Federal action, because many of the
States have moved forward with things like Renewable Portfolio
Standards, and that is basically a spreading phenomena that
creates a market segment for just renewables which allows them
to compete among themselves for that market segment. So, that
is one action that needs to continue and spread across the
country.
The other basically is this Production Tax Credit and the
levelizing of that so that all of these renewables have an
equal opportunity to grab some of that market share where it is
appropriate, because many of them, as you have heard today, are
also very driven by location. Where there is forest restoration
to be done, it may favor biomass. Where there is the large
resources that Mr. Norris talked about in terms of trash, that
may be the chosen technology. But we need to level the
playingfield for all of those so they have an equal opportunity
to compete.
Mr. MCNULTY. Thank you, Mr. Carlson.
Mr. Ranger?
Mr. RANGER. I appreciate your openness and willingness to
consider other ways to help our industry. From the landfill gas
perspective, I think this incentive is going to be sufficient
to see a lot of activity, but we just need more time. This was
the first time we were included in the PTCs and the one-year
time frame, as you have heard, is just insufficient. I think if
you gave us an extension of at least 3 years, we will see a lot
more of these, and if you would make the incentive the same as
all the other renewables, I think you are going to be surprised
at how many projects we could bring online in that time frame.
Thank you.
Mr. MCNULTY. Thank you.
Mr. Norris?
Mr. NORRIS. I think for the waste-to-energy industry, the
big issue that we have, or the two big issues are the capital
costs and the amount of time it takes to put one into
operation. If we were to build a new waste-to-energy facility,
by the time we got through developing, permitting, and
construction, we are seven or 8 years in and probably close to
$15 or $20 million, similar to what the geothermal is. With
that, it is hard to get incentivized to build one when we have
such a short period of time in order to put this into place.
We have asked for a three-year here, thinking that we could
add some small number of units at existing facilities because
we think they may take a little less time to permit and to put
into operation. But to make some wholesale big move as far as
generating electricity out of the waste that comes out of urban
areas that would normally go to landfills, to do that, we are
going to need a lot longer time and a tax credit either through
this way or the ITCs.
If we will remember back in the mid-1980s when the vast
majority of the waste-to-energy plants got built, there was an
Investment Tax Credit there that went through that drove the
vast market of that, and probably 40 percent of the plants, 40
to 50 percent of the plants that are operating today got put
into place because of that Investment Tax Credit. Since then,
in the last 10 years, we have not built a new waste-to-energy
facility anywhere in the United States.
Mr. MCNULTY. Thank you.
Mr. Signorotti?
Mr. SIGNOROTTI. Well, clearly, as I hope I have
illustrated, the single most important point that the
government can do to help us is to extend the in-service date
and to levelize the playingfield for geothermal. However, in my
opinion, since so much geothermal in the West is located on
public lands, and that does not apply to our project in
southern California, but a vast amount of geothermal energy
does exist on public domain lands, lands that are controlled by
the Bureau of Land Management, it would seem to me that to
accelerate leasing, to perhaps simplify some of the rules as
far as getting permits to drill and the various other
components that are involved in exploratory drilling and
development of geothermal resources on public lands would be a
tremendous benefit to the industry.
Mr. MCNULTY. Thank you.
Mr. O'Brien, I think you have answered some of my question,
but if you wanted to add anything else----
Mr. O'BRIEN. If you would, I think the most important point
would be the longevity of the incentive program that was put in
place, that for businesses like Sharp would provide a timeframe
of certainty to justify investments in everything from new
product development, project development, and manufacturing
capacity expansion.
There are two documents that I would like to enter into the
record. These pertain to the PV industry. One is a PV roadmap
that outlines a set of policies that would support that. The
second is a job study associated with that that shows the
related jobs development.
[The information was not received at the time of printing.]
Mr. O'BRIEN. I would say in addition to the Investment Tax
Credit that I described, probably for distributed technologies
like photovoltaics and solar thermal, the most important thing
is really the, in addition to the tax credit, is the ability to
easily interconnect to the electric grid and to get the full
benefit of the energy that is used on-site. So, those would be
some standardized interconnections, or interconnection
standards and what is called net metering, or the ability to
capture the value of the energy that is generated on site are
the two things.
Mr. MCNULTY. I thank you all and I thank the Chairman for
letting me go over a little bit.
Chairman CAMP. All right. Thank you.
The gentleman from Florida, Mr. Foley, may inquire.
Mr. FOLEY. Thanks, Mr. Chairman.
One of our biggest challenges, obviously, is getting the
people that proclaim they want to save the environment to allow
us to try to by implementing new technologies. When we talk
about methane gas, oh, no, I don't want a landfill. We talk
about wind energy, Walter Cronkite, no, I don't want them off
of Nantucket. No matter where you are located, they don't want
a nuclear facility. Well, I don't want those solar panels on
the roof in this development. We can't mar the nice-looking
Mexican tile by having that ugly solar panel. So, it seems like
everybody has an objection, yet they are all in unison
screaming, we have got to do more to lessen our dependency on
oil.
Now, you all suggested equalizing the credit. I assume you
would like to go to the 1.9, not reduce accordingly, is that
correct? Okay. I am just making sure we are all on the same
wavelength, singing from the same hymnal, because I do think it
is important.
Now, I must have missed something, but the gentleman from
Energy led me to believe that very, very little of our energy
production in the United States is by crude oil, am I correct
in that statement, and is that a correct statement? It is
mostly natural gas?
Mr. O'BRIEN. He was speaking about the electricity
generation.
Mr. FOLEY. So, we are out of diesel fuel generation, we are
out of light crude. I know the City of Lakeworth still has some
old generators. So, everybody in the Nation has converted, is
that true? Does anybody know? I am just curious.
Mr. CARLSON. Yes. Let me answer that, if I could, Mr.
Foley. He said only about three percent of our electric
generation is from oil, and that is correct. The largest single
source is coal, which represents slightly over half of the
total. Then nuclear and natural gas making up perhaps 40
percent, between those two. Then the hydro and renewables
basically making up the rest, the last 10 percent or so.
Mr. FOLEY. Then maybe I should have framed the question
``fossil fuels,'' those that are brought up from the ground.
So, then I would have had a higher number?
Mr. CARLSON. Yes. Fossil fuels would represent somewhere, I
believe, between 70 and 75 percent of the total.
Mr. FOLEY. Okay. I failed to ask the question. They always
teach you, make sure you know the question.
Well, I am encouraged at least that we are having the
debate, and I think each one of the members here presents real
options and real opportunity. We have seen in Florida
particularly solid waste facilities. Where we used to bury, now
we are finding recycling. Where we used to use the methane, now
we are trying to find ways to plumb it in and create the burn
rate that will make it cost effective. When we used to throw
everything into landfills, vegetative resources, now through
biomass credits, we are seeing people really clean up the
environment. So, if people give us a chance to do every one of
these options listed, I sense ten or so years from now, we will
be in a better place.
People in this country are impatient. I mean, I remember
when I had a cell phone in the 1980s. Nobody thought, oh, what
are you doing with that thing, that big lug? It was this big. I
could have used it for an attack weapon. Now they are this
small. But people assume, oh, nobody will ever need a cell
phone.
I think in this particular quarter, we have to think way
outside the box. I, myself, would be even interested in being
more aggressive with tax credits for all of your industries
because I think it is the pathway from reliance, whatever it
is, fuel, coal, in order to minimize the degradation of the
ozone and other things that you are able to provide for us.
So, I applaud each and every one of your industries. I
think we should try to make them equitable. I think that
creates a competition between the sectors. So, I appreciate
your input, and particularly those from Palm Beach County. We
are very, very encouraged by some of the things we are seeing.
On the interstate, we see phone systems now that are using
photovoltaics in order to power those. No longer do you have to
connect with electric wires. So, we are seeing a lot of new
technology that I think is spurring the use now and the
abilities in downtowns--new downtowns are going with
photovoltaic lighting systems.
Again, I guess the other reason we all want to support you
equitably, and one of you mentioned it, we are all in different
locations. Florida has an abundance of sunshine, as does
Arizona. In fact, Arizona has quite a bit this last couple
days. But that sunshine can help do things that in other
climates may not be as practical.
We certainly know we generate a lot of waste around here,
and I am not talking about the government, I am talking about
the confines of Washington, D.C., because there are a lot of
people that have to have their product go to the landfill,
which again would help us in the treatment of the methane and
other things.
Thank you for your presentations.
Chairman CAMP. Thank you very much.
The gentleman from California, Mr. Thompson, may inquire.
Mr. THOMPSON. Thank you, Mr. Chairman.
To my colleague from Florida's early remarks, I think that
he would be interested, knowing his interest in a specific
product that comes out of my district, I saw two wineries this
weekend, both of which were heavily dependent, and one of which
was totally dependent on solar energy. They had their panels,
one on the rooftop, the other one covering the septic system,
an area that couldn't be used for anything else. That
particular one at Frog's Leap was generating all the power that
they needed to run their whole winery. So, I think some of that
NIMBY stuff is going by the wayside and some folks are being
very creative and very helpful at the same time.
Mr. FOLEY. Would the gentleman please bring some of the
finished product so we could test it?
Mr. THOMPSON. I have never let you down in that regard, Mr.
Foley.
[Laughter.]
Mr. THOMPSON. I just want to say that I think Congress has
been way behind the curve in regard to providing a strategic
energy plan that the voters that we all represent want. I think
that those of you on the panel today represent the industries
that can help get us ahead of that curve. So, thank you for
being here.
I understand and appreciate the value that all your
industries bring to this discussion, so I don't want to sound
like I am excluding anyone, but I do have nearly half the
geothermal producers, or 17 of them are located in my district,
so if you would bear with me, I just want to focus a little bit
on the geothermal issue.
Mr. Signorotti, you had talked about the facility that you
are planning to build down in Southern California. I know that
from what is happening in Lake County in my district in
California, that the geothermal industry has done more than
provide a cleaner environment. They have also provided an
incredible boost to local government revenues, to local
revenues in regard to job creation, and it has been a real plus
to the entire community.
I don't know if your industry quantifies that somehow, but
do you see the same coming to the area in southern California
where you are proposing your new facility?
Mr. SIGNOROTTI. Absolutely. In Imperial County, where we
have our ten plants and 340 megawatts, we employ about 220
full-time employees. We are the largest taxpayer in the county
and have been for many years. This new project, we estimate
will generate an additional $3 million in new property taxes
annually. We estimate that there will be 550 construction jobs
created over a 24- to 28-month period and over 60 new full-time
jobs. Again, this is in a very economically disadvantaged part
of California.
Mr. THOMPSON. If this is like Lake County, these are good
jobs. They have benefits. They pay well.
Mr. SIGNOROTTI. These are jobs that people stand in line
for in our area, and I just wanted to follow up on your NIMBY
comment. When we permitted this plant through the California
Energy Commission, Commissioner Purnell commented at the
conclusion of one of the public hearings that he had never been
to a public hearing in his career as a Commissioner for the
California Energy Commission where there was not one comment in
opposition to this plant. I think that that speaks volumes
about the environment that we live within Imperial County.
Imperial County wants this, as does California.
Mr. THOMPSON. I know the industry folks in my district are
great neighbors, and you have the same response there.
I asked the last panel, or the last witness, about a couple
of specific issues, and I guess I would like to ask you about
those, too. It seems to me, and the last witness, at the end of
his testimony, he stated that studies show an increased use of
biomass, wind, and geothermal technologies in the wake of
higher natural gas prices or changes in environmental policies,
such as greenhouse gas caps and trade programs.
Given this, it would seem to me that we would want to
restructure the PTC in a way that would allow you maximum
leverage on getting investment dollars. I think the current
proposal is going down the wrong road. Any comments on that?
Mr. SIGNOROTTI. Well, clearly, with regard to Salton Sea 6,
the PTC is the key factor. This project is PTC dependent. With
the PTC, it will go forward. Without a PTC, it will not.
Mr. THOMPSON. So, the PTC should be extended to include all
of the industries that are providing us with these----
Mr. SIGNOROTTI. I certainly wouldn't speak against that,
but I am focusing in on our geothermal projects in the Imperial
County, but I certainly think that there is a lot of equity and
a lot to be said for that.
Mr. THOMPSON. Thank you. I yield back, Mr. Chairman.
Mr. SIGNOROTTI. Thank you.
Chairman CAMP. Thank you.
The gentleman from Indiana, Mr. Chocola, may inquire.
Mr. CHOCOLA. Thank you, Mr. Chairman, and thank you all for
being here today.
Mr. O'Brien, I just wish that solar energy had a more
viable future in Indiana. We don't get as much sunshine as I
would like.
But I guess the question I would ask all of you is how do
we, or when do we declare victory? When would you all come here
and say, you know, we don't need the tax credit anymore? Should
we think about this as kind of a venture capital, helping new
technology emerge, or should we think about this as a long-term
subsidy that supports good policy?
I will throw it open to all of you to try to give your
perspective on that. Mr. Gosselin, I will start with you.
Mr. GOSSELIN. Thank you. Again, from the wind industry
perspective, we have been enjoying the benefit of the PTC and
what it drives in technology for approximately the last 13
years. We have seen at least eight generations of new machine
technology come to bear and continually lower costs. It is just
in the last couple of years that we have seen higher costs come
into the capital base of a wind project, and we believe that by
having a long-term, stable PTC environment, that manufacturers
will come to the U.S., create a U.S. base, and use that long-
term PTC to drive out their inefficiencies that we currently
have with the on and off again nature of the PTC.
So, victory is removing ourselves from the dependence on
the PTC and being able to stand alone on our own capabilities
and merits in terms of economics associated with wind energy
production. We believe that happens within the timeframe of a
long-term PTC extension.
Mr. CHOCOLA. Just briefly, one of the things you mentioned
in your testimony was the rising cost of steel. I used to be in
the grain bin business and I am painfully aware of the steel
escalating cost. But doesn't really every industry have to deal
with that? It is not unique, is it, to the wind generation?
Mr. GOSSELIN. No, it is not unique, but wind energy has a
very large component of steel in it. The towers alone are
something on the order of 60 tons of steel. So, it has a very
large component relative to other technologies. While steel is
driving costs up, it is not as material as what has happened
with the dollar-Euro, and also as we see new technologies
introduced, again, seeking to drive down the production cost,
the cents per kilowatt hour that allows us to stand alone and
compete on our own.
Mr. THOMPSON. Mr. Carlson?
Mr. CARLSON. Thank you. I think we declare victory
basically when we are no longer dependent on foreign sources of
energy for any significant percentage of our total national
total. If you take our raw material, for example, biomass, it
cannot just be used to generate electricity. It can also be
used to make fossil fuels for automobiles. There is a synergy
between those two activities that goes beyond just having, for
instance, electric cars replace internal combustion engines,
where we can actually produce the fuel for the internal
combustion engine, and a substantial amount of that activity
does take place in Indiana in terms of the ethanol production.
So, I think that it is all part of a coordinated total
where the renewables must start to displace fossil fuels and
the same activity must take place in the transportation fuel
network to the point where we can push back our dependency on
foreign sources of oil. I can't predict when we would declare
victory, but I think we will know it when we get there and I
think bringing renewables up to a substantial fraction of our
Nation's electric supply, for instance, say 20 percent over the
next couple of decades is a reasonable goal, and the PTC and
levelizing the PTC is probably the key element in doing that.
Mr. THOMPSON. Is poultry waste used in open-loop biomass?
Mr. CARLSON. It can be. It is not to any large degree at
this point. Those systems are typically very small and are
based essentially on the farm where the waste is produced. But
it certainly in some cases can be a viable fuel for electric
generation, certainly.
Mr. THOMPSON. I see we are going to run out of time here
quickly, but if anybody has a quick comment----
Mr. RANGER. I would like to just comment on the question.
In the case of the landfill gas industry, we are not looking
for a perpetual subsidy. In fact, one of the reasons that I
shared with you the Riverview project story was that the
subsidy has worked in the landfill gas industry to get energy
projects built and that subsidy basically helped them pay off
the capital.
In the case of Riverview, Michigan, I declare that one a
victory every day I look at the bottom line. We still have a
project that is bringing in money into our company. It enables
us to reinvest in that facility. You still have to keep the
technology upgraded. We are putting in PLCs now, modernizing
that plant. But Congress was successful in creating that
project and the Congress should feel good about that and we
need some help for another 500 more.
Chairman CAMP. Why don't we move on quickly. The gentleman
from Connecticut, Mr. Larson, may inquire.
Mr. LARSON. Thank you again, Mr. Chairman, and I thank the
panelists. I have indeed enjoyed your comments this afternoon.
My question will be more in association with one a lot of
the Members have raised in terms of a question following along
the lines philosophically, I guess, of what Congressman McNulty
raised earlier and Representative Chocola. What is the most
important factor in attracting capital to your businesses?
Mr. GOSSELIN. Certainly from the wind industry, the return
of the capital and the understanding or the known part of the
business is the single most important part of attracting it.
Mr. LARSON. So, that is why, with respect to the tax
credit, if there is certainty, if there is across-the-board
distribution, so you set up a system of competition where solar
isn't excluded or is included more under section 48 or Section
45, then we are leveling the playingfield and we are providing
an opportunity for you to compete.
It seems again like we get into these vicious circles where
we never directly get at the problem because we are always
chasing our philosophical or economical tails, because it seems
to me, and coming from perhaps a Keynesian perspective, that
government has a responsibility in promoting sound public
policy to make sure you are able to compete because you are
fulfilling an objective. Whether that is energy sufficiency,
and I won't even say total weaning ourselves off of dependency,
but at least energy sufficiency so that we can compete on our
own, that these are the kinds of things that we ought to be
pursuing.
Should the market dictate where we go, or is the
combination of the market and government providing an
opportunity for otherwise industries that would be dwarfed
because of lack of capital coming to it, and therefore lack of
investors? Where should Congress strike this balance in your
minds? Anyone?
Mr. CARLSON. If I could, sir, let me take a crack at that.
I don't know that it is--that Congress needs to pick the
winners and the losers. I think the market should pick the
winners and the losers, and I think we have demonstrated as a
panel that in different locations, you will have different
winners.
Mr. LARSON. Correct. That was a good point you made.
Mr. CARLSON. Clearly, I think that what Congress should do
is levelize the playingfield and make sure that we have the
opportunities. We don't have----
Mr. LARSON. As Mr. Foley said, is 1.9 percent the right
figure? Does it need to be more? Does it need to be less?
Mr. CARLSON. I think the 1.9 cents is a good starting
point, and we have to have access to the contracts with the
utilities, which is what PURPA gave us back in the late 1970s,
is that they had to purchase power from independent suppliers
that could supply it at their what was called avoided cost, the
same cost that it would cost them to produce it. That was a
watershed for the country.
Now, there have been ways in which they have attempted to
back away from that, certain utilities, and that needs to be
reemphasized, that if you can buy it from an independent
supplier at your cost, you should do so. Then any difference
could be made up by this PTC that we are talking about.
Mr. LARSON. Anyone else? Mr. O'Brien?
Mr. O'BRIEN. I think the lesson learned in our industry was
that there are successful policy examples that we can look to
in other countries. Actually, two of the most successful
countries have more sunshine than Indiana does, Japan and
Germany.
But I think that the clear ingredients for our industry and
what has worked well has been a reasonable horizon for the
longevity of the incentive combined with a clear signal that
there is a sunset. So, I think sending the right signal to the
folks that are making investments in product development and
manufacturing capacity and in project development is important.
You effectively get what you pay for by the longevity of the
program. So, those technologies that are less mature, that
require more development, I think require perhaps a longer
timeframe to recoup those investments.
Mr. LARSON. Is there a grand plan to synergistically link
your industries together, and could such be conceived?
Mr. GOSSELIN. Not that I am aware of.
Mr. O'BRIEN. I think I would just answer that, I don't
think there is a silver bullet. I think that when you look at
the size of the gaps that need to be addressed, when you look
at where we are today in terms of a dependence on fossil energy
and you look at the--if you look going forward, there will be a
portfolio that includes all of these technologies. I think it
is important to recognize, and I think each of the technologies
has different attributes. Some are distributed, some are
central, some are large-scale, small-scale. But I think there
is going to be--I would expect if you flash forward 20 years,
you are going to see a portion of the portfolio with each of
these technologies.
Mr. LARSON. Thank you all very much. Thank you for your
indulgence, Mr. Chairman.
Chairman CAMP. Thank you, and again, I want to thank the
panel for your excellent testimony this afternoon. The hearing
of the Subcommittee on Select Revenue is now adjourned.
[Whereupon, at 4:09 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of the American Public Power Association
The American Public Power Association (APPA) is the national
service organization representing the interests of over 2,000
community-owned utilities located in every state but Hawaii.
Collectively, public power utilities deliver electricity to one of
every seven electric consumers (approximately 43 million people),
serving some of the nation's largest cities. However, the vast majority
of APPA's members serve communities with populations of 10,000 people
or less.
We appreciate this opportunity to offer our views on federal
financial incentives for production of electricity from renewable
energy sources. Appropriate incentives for renewable and clean coal
generation are essential to achieving a balanced energy bill. At the
same time, we believe an important element of the debate on renewable
energy sources and clean technologies is absent from this hearing--
comparable incentives for public power systems. Without comparable
incentives, nearly 3000 public power and rural cooperatives serving
approximately 25 percent of America's electric consumers will be
hampered from investing in renewable energy facilities.
Under current law, investor-owned utilities are eligible to receive
a production tax credit for generating electricity from renewable
energy sources. However, not-for-profit utilities are ineligible for
such incentives because they do not incur any federal tax liability.
The only incentive provided to consumer-owned electric utilities for
renewable energy production is the Renewable Energy Production
Incentive (RPEI) Program subject to the annual appropriation process
and has been grossly under-funded since its creation as part of the
Energy Policy Act (EPAct) of 1992 and is discussed further in this
section.
The lack of comparable incentives will exacerbate problems for
public power systems due to a growing trend of state mandates and
prospects of a federal requirement that utilities generate a certain
percent of their electricity from renewable energy sources. For-profit
utilities have federal incentives in place to offset the cost of
investing in renewable energy facilities to comply with government
mandates while not-for-profits must pass on the cost as rate increases
to their customers.
Financial incentives for public power to invest in renewable energy
projects will also contribute to the reduction of greenhouse gas
intensity. As part of APPA's voluntary commitment with the U.S.
Department of Energy for participation in a voluntary greenhouse gas
reporting and reduction program, comparable incentives for all sectors
of the electricity industry is specifically outlined in the proposal as
an important strategy to achieve this objective and recognizing the
role not-for-profit utilities play in the industry by serving 25
percent of the nation's electricity customers.
Comparable Tax Incentives for Municipal Electric Utilities
Current market conditions make the of production of electricity
from renewable energy sources three to 10 times higher than from
traditional fuel sources such as coal and natural gas. APPA's members
have a commitment to their customers and the communities they serve to
keep rates at the lowest possible level. This commitment makes it
difficult to participate in a national energy policy that promotes
diversification of sources of electricity generation to include greater
use of renewable energy.
Many APPA members are extremely interested in expanding generation
capacity to include renewable generation facilities. Because public
power systems are governed by local elected or appointed officials,
they are responsive to the needs and expectations of their respective
communities. Public power communities want clean energy even when this
results in higher rates. In fact, public power has an excellent record
of providing clean energy. However, the availability of comparable
incentives would provide a more reliable and non-regressive financial
mechanism to make it easier to invest in qualified projects to generate
from renewable energy sources.
Traverse City Light and Power (TCLP) Department in Traverse City,
Michigan, is one example of a community's commitment to renewable
energy. TCLP has a nameplate capacity of 1,000 Kilowatts (kW) from
hydroelectricity generation. Furthermore, the TCLP owns and generates
800,000 kWh/year of electricity from a nine-year old wind turbine to
serve its 10,256 customers. The decision to make this investment was
finalized after enough volunteers in the community agreed to pay a 1.5-
cent/KWh premium on their electricity rates to cover the cost of the
production from a renewable energy source. The decision to make the
investment has been a positive one for the community as it has
diversified its energy supply and contributed to cleaner air. In
addition, TCLP has recently begun discussions with the local school to
provide some electricity from the wind turbines to charge a hybrid
electric bus that the school hopes to put in to operation soon.
Several of the dams used by TCLP for hydropower generation are in
need of heavy capital investment. However, these improvements provide
little additional power supply. TCLP estimates the dams would need
approximately $4 million for upgrades and improvements. With little
return on their investment and discussions in the Michigan legislature
regarding a renewable portfolio standard, TCLP is considering
additional wind generation capacity, but its options are limited
because it will be difficult to garner enough volunteers to accept a
surcharge given the necessity to ask citizens for help for the first
wind project. Therefore, the viability of pursuing this new wind
project will depend highly on whether or not public power systems
receive a comparable tax incentive.
Renewable Energy Production Incentive Program
The only federal incentive currently available to public power
systems is the Renewable Energy Production Incentive (REPI) program
authorized under the Energy Policy Act of 1992. This program was
created to be a comparable counterpart to the renewable energy
production tax credits made available to investor-owned utilities under
this law. Under REPI, the U.S. Department of Energy (DOE) is authorized
to make direct payments to not-for-profit public power systems and
rural cooperatives at the rate of 1.5 cents per kWh (1.8 cents when
adjusted for inflation) from electricity generated by solar, wind,
geothermal, and biomass projects. Unfortunately, the REPI program is
subject to the annual appropriations process, and the program has been
woefully under-funded since its inception. According to DOE sources,
approximately $80 million would be required in Fiscal Year (FY) 2006 in
order to fully fund all past and current REPI applicants. Despite the
demonstrated need, however, DOE has only asked for $5 million for FY
2006, citing budgetary constraints.
Renewable Portfolio Standards
Complicating the issue is a recent trend by several states to enact
renewable portfolio standards (RPS) and the prospects of a federal RPS
mandate. According to the U.S. Energy Information Administration (EIA),
almost 20 states have enacted some form of an RPS, and there are
further discussions in other state legislatures to enact similar
mandates. For-profit utilities can have the ability to use the federal
tax incentives granted to them to offset the costs associated with the
state laws. Not-for-profit utilities required to comply with these RPS
mandates will not have comparable incentives to assist them in doing
so.
Without federal financial assistance, public power systems must
finance more expensive renewable energy facilities internally--through
higher rates for everyone or surcharges paid by those willing to pay
more for ``green'' power. For example, the Board of Water and Power
Commissions for the Los Angeles Department of Water and Power (LADWP)
recently adopted a policy in response to a state RPS and a resolution
passed by the City Council. The policy approved by the Board set the
goal of LADWP supplying 20 percent of its generation load by 2017 from
renewable energy resources and an interim goal of 10 percent by 2010.
In order to determine how LADWP will pay for this effort, a study will
be conducted to examine a renewable surcharge for its customers to pay
for meeting the RPS goals and possibly a calculation method and plan
for implementing the surcharge. Also included in the study will be an
assessment for a solar surcharge to support installation and generation
of electricity from photvoltaics. But without comparable incentives,
the LADWP is limited to what financial options can be used to meet the
City Council's resolution.
Greenhouse Gas Initiative
APPA has joined with partners in the electricity industry in
signing a Memorandum of Understanding (MOU) with DOE that commits us to
voluntarily reduce greenhouse gas intensity. This MOU was part of
President Bush's proposal for a voluntarily greenhouse gas emissions
reporting and reduction program. The goal of the program is to reduce
greenhouse gas intensity levels by 18 percent by 2012.
APPA worked diligently to ensure that the MOU recognizes the need
to provide investment incentives to public power systems in order to
utilize the latest clean technologies and renewable generation. The MOU
specifically spells out the need to promote policies that provide
``investment stimulus on an equitable basis to all segments of the
power sector in order to accelerate use of existing [greenhouse gas]-
reducing technologies, deploy advanced technologies and maintain
America's critical energy infrastructure (emphasis added).''
Taxable Tax Credit Bonds
In the 108th Congress, the Senate twice passed legislation that
included a proposal to offer comparable tax incentives to consumer-
owned utilities. The proposal, included as part of the Senate passed
comprehensive energy bill and the Foreign Sales Corporation/
Extraterritorial Income (FSC/ETI) Bill, would have established a
mechanism--known as tradable tax credits--whereby public power systems
and rural electric cooperatives could earn tax credits for production
of electricity from renewable sources and then sell the tax credits to
entities with federal tax liabilities. The proceeds from the sale of
the tax credits would be used to offset the higher cost of renewable
energy generation. However, concerns expressed by the White House and
Members of the House prevented the plan from making it into the final
version of either bill.
In response to recommendations made by the Bush Administration and
Members of Congress to develop an alternative to the tradable tax
credit, APPA has worked closely with the National Rural Electric
Cooperative Association (NRECA) and others to develop an alternative
approach to the production tax credit so that the not-for-profit
utilities that serve nearly 25 percent of the total population can
receive incentives to help them invest in renewable energy resources.
The proposal is similar to a tax policy already incorporated in the
U.S. Tax Code. While not exactly identical, the alternative to tradable
tax credits utilizes a financial investment previously recognized in
the tax code that is familiar to most. The proposal is referred to as
clean energy bonds and has been introduced in the Senate as S. 962.
Senate Finance Committee Chairman Grassley and Ranking Member Baucus
have recently introduced this bill to provide for the use of taxable
tax credits bonds for qualified renewable energy facilities. APPA
strongly supports S. 962.
The clean energy bond would allow municipal utilities and rural
electric cooperatives to issue interest-free debt through a taxable tax
credit bond to raise revenue for renewable energy generation projects
as defined under Section 45 of the U.S. Tax Code. In lieu of interest
on the investment, the bondholders would receive a tax credit from the
federal government that could then be put toward reducing their
personal income tax liability. The bond is taxable, so if the credit is
worth $100 and the bondholder is in the 35 percent tax bracket, the
bondholder would deduct $65 from his or her tax liability.
In addition to renewable energy generation facilities, proposals in
Congress are being considered to expand the clean energy bond to
include new clean coal generation technologies. Coal is the most
abundant natural resource for producing electricity in the United
States. Increased use of clean coal technologies will allow us to
increase our use of this readily available and reliable resource. At
this time, the technology for clean coal facilities is not cost
effective compared with traditional generation facilities. But
including this technology as an eligible project under the scope of the
clean energy bond will allow for greater market share across
theelectricity industry; thereby reducing the cost for utilities to
install and generate from clean coal technologies. Senator Bunning and
others have introduced legislation in the Senate incorporating the
clean energy bond as a financing method for clean coal technologies
Conclusion
Not-for-profit electricity utilities need comparable tax
incentives for renewable and other clean energy generation. The debate
amongst policymakers regarding greenhouse gas emissions, RPS and
reducing our dependency on foreign sources of energy make the call for
comparable incentives that are much more important to keep electricity
rates affordable. While some not-for-profit electric utilities have
taken steps to advance renewable energy projects, the burden of the
cost has fallen exclusively on their ratepayers. These communities,
both large and small, should be recognized for their desire to promote
clean technologies and renewable energy generation. However, the
ability to participate in ``green'' power generation should be made
available to all communities regardless of economics, population or
geography and without the need to implement a regressive tax.
The policy to reduce our nation's dependence on foreign sources of
energy by investing in renewable energy and clean energy will greatly
benefit the economy and health of all Americans. But such a decision
should not exclude utilities that serve 25 percent of Americans from
receiving incentives to help achieve this positive goal.
Again, APPA thanks both the Chairman and Ranking Member for their
leadership on this issue, and we encourage the House to work with the
Senate to enact comparable tax incentives for not-for-profit electric
utilities in the 109th Congress. We look forward to working with you on
this issue.
Solar Mission Technologies, Inc.
Missoula, Montana 59801
No date available
Honorable Committee Members:
Solar Mission Technologies, Inc is a privately owned, renewable
energy power station developer based in the U.S. Solar Mission's core
business is to develop Solar Tower power stations globally.
The first Solar Tower development is in advanced stages of project
feasibility in Australia by local developer, Enviro Mission Limited; a
publicly-traded Australian company. Solar Mission has maintained an
investment in the Australian project since 2001.
Australia was selected as the launching place for Solar Towers due
to the favorable political and market sector receptiveness for clean
green electricity from a fully dispatchable solar powered generating
plant.
The success of the Australian roll-out is cornerstone to
development of similar power stations in the United States.
U.S. federal tax credits for renewable energy generators form part
of the impetus and timing for Solar Mission's decision to commence
development in the U.S. as a priority over markets where political
incentives do not exist.
The market case for renewable energy development is also supported
by evidence that energy supply is set to lag behind demand based on GDP
growth figures plotted against the equivalent energy indicators,
whether BTU's (natural gas/oil) or MWH (electricity generally). This
worldwide trend supports investment and policy incentives for energy
infrastructure development, particularly renewable energy.
The imperative for energy development was driven home at the World
Energy Congress (WEC) Sydney, Australia, (September 2004) with the call
that recommended ``no energy source should be taken off of the table.''
See: http://www.worldenergy.org/wec-geis/wec_congress/default.asp
In addition the WEC concluded ``[a] larger share of global
infrastructure investment must be devoted to energy''.
Tax credits will help move the electricity market in the United
States toward those two goals.
Solar Mission's development strategy for the U.S. is influenced by
the current tax policy although the tax credit structure could go
further to standardize the term, quantity and value of tax credits for
all renewable fuel sources. Standardization will provide certainty in
planning and costing renewable energy projects and will foster
investment confidence in renewable energy development.
Solar Mission seeks the support of the Legislative Committee to
continue shaping legislation that aims to capture electricity
production from renewable sources.
Thank you for the opportunity to table the views of Solar Mission's
directors and management.
Sincerely,
Christopher Davey
Statement of Edison Electric Institute
The Edison Electric Institute (EEI) appreciates the opportunity to
submit this statement for the hearing record on tax credits for
electricity production from renewable sources. EEI is the trade
association for U.S. shareholder-owned electric companies, and serves
international affiliates and industry associates worldwide. Our U.S.
members serve almost 95 percent of the ultimate customers in the
shareholder-owned segment of the industry and nearly 70 percent of all
electric utility customers in the nation. They generate almost 70
percent of the electricity generated by U.S. electric companies.
Several of our members have made significant investments in renewable
technologies including wind, biomass co-firing, landfill gas and waste
to energy, and geothermal, and many others may do so in the future.
While last year's extension of the Production Tax Credit (PTC) for
five or ten years was a step in the right direction, the requirement
that the facilities be in-service by the December 31, 2005 severely
limited the PTC's effectiveness. To maximize the impact of the tax
credit, there must be a realistic opportunity to plan for equipment
purchases in a sustained business cycle, address transmission and
siting issues, and begin production over a longer time period. The
``boom and bust'' business cycles created by frequent twelve-month
extensions of the tax credit have not helped developers of renewable
energy technologies and have only increased costs for the consumer. The
PTC extension was authorized in the JOBS Bill last fall and did not
provide enough time for technologies with long lead times, or
technologies that face equipment shortages, transmission access issues,
and siting challenges. It is very difficult to have all these functions
prepared for implementation or construction within a twelve-month
period. Consequently, EEI recommends extending the in-service date
requirement until December 31, 2010 and continuing the ten-year
opportunity to claim PTCs. Alternatively, a binding contract rule for
the project output could be substituted for the in-service requirement.
EEI supports extending the PTC for renewable technologies because
it will increase fuel diversity. This diversity is necessary to assure
domestic energy security, provide affordable reliable power to
customers, moderate fuel price fluctuations and increase in generation
costs, and improve the quality of the environment. For many companies,
their strategic business goals include asset diversification among
technologies and fuels, and renewable energy is expected to play an
important role. Achieving these goals will require policies that
optimize the use of all fuels. The PTC assists in furthering national
electric industry goals of fuel diversity by making it easier for
immature, but promising technologies to compete more effectively in a
brutally price competitive market: generation. The electric industry
supports subsidy only until such time as these technologies achieve
sufficient production to reach marketplace success through economies of
scale.
As you can see from the attached charts, non-hydro renewable energy
is a small but growing segment of the U.S. electricity generation
portfolio. However, the increase in a given year has varied depending
on the availability of the PTC. Ensuring that no one fuel type
dominates the electricity production will increase electricity pricing
stability for all consumers. EEI supports the PTC to help develop
renewable technologies so that they can be an important part of the
electricity production mix, along with coal, hydro, natural gas and
nuclear generation. Additionally, renewable technologies have the
potential to impact natural gas demand in some locations. The renewable
energy industry needs the PTC because it is still a new industry that
has yet to achieve the economies of scale that mature industries have
achieved. In the few cases where per unit costs are nearing
conventional fuels, there are still outstanding issues that are being
resolved. Because many of the best renewable resources may not be near
the load centers, additional transmission is likely to be needed to
bring the output to the load. Also, addressing local concerns about
siting can be expensive, difficult, and time consuming. In most cases,
the costs of renewable technologies are still higher than conventional
fuels because they have not yet achieved the necessary economies of
scale.
A five-year in-service rule would give developers adequate time to
plan forward to place facilities in service and provide a dependable
source of revenue so that multi-year projects could be developed. This
is particularly important for geothermal and landfill gas projects,
which would allow electric utilities to plan and build required
transmission facilities. This is consistent with other Congressional
efforts to use the tax code to increase sources of energy. EEI is
confident that such a program would result in increased renewable
investment, thereby increasing the nation's fuel diversity.
Additionally, an extended PTC is also likely to stimulate the
development of new technologies and more efficient devices to convert
the raw fuel input into electricity, whether the technology is
geothermal, wind, biomass, or land-fill gas.
Generation from renewable sources of energy has increased significantly
since 1990
Note: Numbers exceed 100% due to rounding.
*Includes wind, solar, biomass, geothermal and other non-hydro
renewable energy sources
Source: Energy Information Administration, 2004 preliminary data
Statement of Carolyn Elefant, Ocean Renewable Energy Coalition,
Potomac, Maryland
Introduction
Ocean Renewable Energy Coalition is a trade association founded to
promote energy technologies from clean, renewable ocean resources. The
coalition is working with industry leaders, academic scholars, and
other interested NGO's to encourage ocean renewable technologies and
raise awareness of their vast potential to help secure an affordable,
reliable, environmentally friendly energy future.
We seek a legislative and regulatory regime in the United States
that fosters the development of ocean renewable technologies, their
commercial development, and potential for export.
The United States is falling behind in the race to capture the rich
energy potential of our oceans. While other countries have already
deployed viable, operating, power generating projects using the
emission-free power of ocean waves, currents, and tidal forces, the
U.S. is only beginning to acknowledge the importance these
technologies.
Ocean energy can play a significant role in our nation's renewable
energy portfolio. With the right support, the United States ocean
energy industry can be competitive internationally. With the right
encouragement, ocean renewable energy technologies can help us reduce
our reliance on foreign oil--fossil fuels, in general--and provide
clean energy alternatives to conventional power generating systems.
Why the Ocean Energy Industry Needs the Production Tax Credit
1) What is ocean energy?
Ocean energy refers to a range of technologies that utilize the
oceans to generate electricity. Many ocean technologies are also
adaptable to non-impoundment uses in other water bodies such as lakes
or rivers. These technologies are can be separated into three main
categories:
Wave Energy Converters: These systems extract the power of ocean
waves and convert it into electricity. Typically, these systems use
either a water column or some type of surface or just-below-surface
buoy to capture the wave power. In addition to oceans, some lakes may
offer sufficient wave activity to support wave energy converter
technology.
Tidal/Current: These systems capture the energy of ocean currents
below the wave surface and convert them into electricity. Typically,
these systems rely on underwater turbines, either horizontal or
vertical, which rotate in either the ocean curren or changing tide
(either one way or bi-directionally), almost like an underwater
windmill. These technologies can be sized or adapted for ocean or for
use in lakes or non-impounded river sites.
Ocean Thermal Energy Technology (OTEC) OTEC generates electricity
through the temperature differential in warmer surface water and colder
deep water. Of ocean technologies, OTEC has the most limited
applicability in the United States because it requires a 40 degree
temperature differential that is typically available in locations like
Hawaii and other more tropical climates.
2) Is ocean energy commercially viable now?
Yes, but thus far, on a small scale and not in the United States:
The LIMPET project, a 500 kw shore-based wave plant in
Scotland has been feeding power to the grid for 5 years at a cost of 7
cents a kilowatt/hr. Another 600 kw project similar to LIMPET on Island
of Pico in the Azores is operational.
The Pelamis, a Scottish wave energy converter has been
feeding power to the grid in Scotland since August 2004--and recently
announced plans to construct a 2.25 MW plant off the coast of Portugal.
An Australian company, Energetech, is in the final stages
of anchoring a 500 kw wave energy device in Port Kembla, Australia
which will feed power into the Australian grid.
3) What is the status of U.S. wave, current and tidal projects?
A number of such projects in the United States have been proposed
and are on the cusp of deployment:
New Jersey based Ocean Power Technologies has operated a
test wave energy buoy off the coast of Hawaii for the U.S. Navy and
plans to interconnect to the grid by the end of the year.
Washington state based Aqua Energy has proposed a 1 MW
pilot project for the Makah Bay off the coast of Washington state. The
project is currently in the midst of what is now verging on a three
year permitting process at the Federal Energy Regulatory Commission.
(FERC)
New York based Verdant Power is undergoing licensing at
FERC and intends to deploy six units of a tidal/current project located
in the East River and supply power to customers on Roosevelt Island
imminently, once all regulatory clearances have been obtained.
Australian based Energetech has formed a subsidiary in
Rhode Island which has received funding from the Massachusetts Trust
Collaborative and has planned a 750 kw project for Port Judith Rhode
Island. Permitting has not yet commenced.
4) Are these projects discussed above the start of real
commercialization?
Yes--or at least that's what the Electric Power Research Institute
(EPRI), perhaps the nation's most prominent utility research
collaborative, concluded. An EPRI Report released in January 2005 found
that ``wave energy is an emerging energy source that may add a viable
generation option to the strategic portfolio.'' Among the benefits of
wave that the report identified are that it is environmentally benign,
has a low profile and is generally not visible and is more predictable
than solar and wind so it is more dispatchable to the grid. In light of
the success of its wave energy report, EPRI has now embarked on a
second stage of exploring the energy potential of tidal and current
ocean and coastal resources.
5) But is ocean energy economically viable?
The EPRI report found that presently, the cost of power from ocean
technologies ranges from 7 cents to 16 cents/kw in a low case scenario.
But these costs are expected to decline as the industry matures and as
economies of scale make ocean projects less costly. To compare, back in
1978 wind energy cost 25 cents/kwh to produce--but now costs between
4.5 and 6 cents/kwh. Wave is already less costly than wind. Moreover,
the EPRI report found that if wave had obtained the same government
subsidies as wind, it would be a far more advanced technology than at
present.
6) So how would a PTC help the ocean energy cause when ocean plants are
not yet producing power in the United States?
Several reasons. First, ocean projects are already operating
commercially, albeit on a small scale overseas and are on the cusp of
doing so in the United States. Second, in the absence of a PTC, ocean
is perceived by investors as a second class renewable, thus making it
impossible for ocean developers to attract necessary capital. Third,
the absence of a PTC also makes ocean a less desirable renewable
investment than other renewables like wind or solar that do receive the
credit.
Because currently, the government offers no funding or programs for
ocean energy, the industry, though nascent, has had no choice but to
seek out private investment. But the ocean, wave and tidal/current
energy industry cannot attract financing effectively if handicapped by
the absence of a PTC for new technologies with applicability to ocean,
lakes and other free flowing non-impounded bodies of water.
Statement of Glenn English, National Rural Electric Cooperative
Association, Arlington, Virginia
On behalf of the National Rural Electric Cooperative Association
(NRECA), I appreciate this opportunity to provide testimony for the
record on an issue of great importance to our members--incentives for
renewable generation. Electric cooperatives are an untapped market
force for deploying more renewable generation technologies. Developing
additional renewable generation in rural America would help to advance
these technologies and bring down their costs. But although electric
cooperatives are uniquely situated to develop additional renewable
resources, the cost of these resources is too high for their consumers.
Electric cooperatives need an incentive comparable to the Production
Tax Credit so they can bring the benefits of renewable generation to
their communities.
Background
Electric cooperatives are private, not-for-profit utilities, owned
by the consumers they serve. In most states, member-elected boards have
ultimate sign-off on rates, terms and conditions of daily business
transactions. Today, 930 electric cooperatives serve electric consumers
in 47 states. There are generally two types of electric cooperatives:
``distribution'' cooperatives that deliver electricity directly to the
consumer and ``generation and transmission'' (``G&T'') cooperatives
that generate and transmit electricity to distribution cooperatives.
Distribution cooperatives may also purchase power from the marketplace
and from investor-owned utilities and public power systems.
Electric cooperatives serve an average of 6.6 consumers per mile.
By way of comparison, investor-owned utilities serve an average of 34
customers per mile and municipal utilities serve an average of 44
customers per mile. Although cooperatives serve 12% of the nation's
electric consumers, they own and maintain 43% of the miles of
distribution lines (lines that move power from higher voltage
transmission substations into homes and businesses). Revenue per mile
for cooperatives averages only $8,558 while it is more than six times
higher for investor-owned utilities, at $58,981.
Electric Cooperatives Face Cost Impediments
Given the relatively low revenue per mile that electric
cooperatives receive from members, keeping electricity rates affordable
depends upon access to low-cost generation. The capital cost to install
new renewable generation capacity is three to ten times more expensive
than the cost to install conventional gas generation. Despite this
challenge, electric cooperatives are committed to offering renewable
generation to their consumers. In 2003, electric cooperatives purchased
more than 200 megawatt hours of energy from renewable resources
operated by developers that benefit from the Production Tax Credit
(PTC). Nearly 250 co-ops offer renewable energy options through ``green
power'' programs. Yet only twelve out of 930 electric cooperatives own
renewable generation. Electric cooperatives generate about 5% of the
electricity produced in the United States, but taking renewable
generation alone, electric cooperatives own less than 1%. Why? Because
renewable generation is driven by the PTC and the developers and
utilities that benefit from the PTC. There is no incentive that enables
electric cooperatives to affordably develop renewable generation for
their communities.
Electric Cooperatives Are Ideally Situated to Plan More Renewable
Generation
Renewable generation should be planned not for the purpose of
receiving a tax break, but to deliver electricity to consumers on a
long term, affordable basis. Electric cooperatives are ideally situated
in rural America to site, build and transmit renewable energy to their
consumers. I say transmit, because having a good spot for a new wind
project does not mean that the power can actually be delivered to the
grid. The transmission grid is a complex and often highly constrained
system. There are utilities that would like to sign contracts to take
delivery of power from wind farms but are prevented because
transmission constraints prevent delivery of that power. Electric
cooperatives have a tradition of integrated, long-term planning and
expertise on the nation's electricity grid that must be taken into
account as Congress seeks to foster more renewable generation.
Renewable generation must ultimately reach end consumers in order to
appropriately fulfill Congress' goals of more renewable energy
production at lower costs.
Beyond the planning that electric cooperatives can provide when
developing a new project, there is a potential for a significant
synergy given our rural geography. Electric cooperatives serve many
farm communities and have an opportunity through a partnership with
farmers to solve problems of animal waste runoff. A farmer can purchase
a methane digester, and the local electric cooperative can in turn
purchase the methane output and convert it to electricity. Electric
cooperatives are also located in many wind-rich areas, as well as in
proximity to landfill gas facilities. Electric cooperatives are
positioned to make renewable energy more affordable and economically
competitive with convention generation.
Electric Cooperatives Need Affordable Options for Complying With New
Policies
Given their mission of providing affordable electricity to rural
consumers, electric cooperatives rely and have historically relied upon
inexpensive generation from coal. But electric cooperatives are seeking
the means to provide more costly renewable generation to their
consumers on an affordable basis. Increasingly stringent clean air
standards addressing NOx, SO2 and Mercury are being set forth in new
federal and state regulations and possibly new legislation. Climate
change standards requiring carbon reductions, if enacted, will require
electric cooperatives and the entire utility industry to seek more
production from non-emitting generation sources. And, electric
cooperative consumers in some states are impacted by renewable
portfolio standard mandates.
Given the increasing costs that these policies are imposing, those
electric cooperatives with access to local renewable generation
resources should have the option that all others have to develop those
resources for their consumers on an affordable basis. And, electric
cooperative consumers should not face the uncertainty of being entirely
dependent upon purchases from third parties. Depending upon the market,
private developers may or may not pass through the savings they realize
through the PTC in power sales to cooperatives. Electric cooperatives
need an opportunity to develop local generation resources for the
benefit of the consumers within their service territories.
The Cooperative Business Model: Why Comparable Incentives are Needed
NRECA supports the extension of the PTC equitably to all renewable
resources, given that many electric cooperatives purchase from the
developers who rely on the PTC. But electric cooperatives also need
access to comparable incentives. Electric cooperatives provide power to
their consumer-owners ``at cost'' and thus are not-for-profit.
Therefore electric cooperatives do not generally pay federal income
tax. Revenues above cost of service are returned to customers, used to
reduce rates or reinvested in utility infrastructure rather than paid
to shareholders. Traditional tax incentives do not work for not-for-
profit utilities as they have no federally taxable income to offset.
And, while electric cooperatives have access to low-interest loans from
the Rural Utilities Service (RUS), the interest rate on those loans
does not nearly approach the approximately 30% cost reduction that the
Production Tax Credit, for example, achieves for the wind developers.
In order for Congress to fully realize the benefits of tax
incentives that are designed to make renewable energy economical, a tax
incentive tailored to the unique characteristics of not-for-profit
utilities is required. Electric cooperatives previously proposed a
``tradable tax credit'' incentive for electric cooperatives, but it was
rejected by the Committee due to tax policy concerns. Electric
cooperatives have therefore developed a new approach--a ``clean energy
bond.'' Clean energy bonds can provide electric cooperatives with an
incentive comparable to the production tax credits that are available
for the private sector. Clean energy bonds are based upon a ``tax
credit bond'' that currently exist in the tax code for school
construction under the ``qualified zone academy bond'' (QZAB) program.
In essence, a clean energy bond would provide cooperatives and public
power systems with interest-free loans for financing qualified energy
projects.
S. 962, the ``Clean Energy Bonds Act of 2005,'' was recently
introduced by Chairman Grassley and Senator Baucus, and a House
companion will soon be introduced. The bills provide the clean energy
bond for the renewable resources in Section 45 of the Code. I urge the
Committee to consider this legislation in a potential energy
conference.
Conclusion
Electric co-ops need incentives to afford renewable generation,
just as investor-owned utilities and private developers are able to
afford renewable generation through the PTC. The Clean Energy Bond
provides an incentive tailored to co-ops, acting as an interest-free
loan to finance qualified renewable energy projects. I appreciate the
Subcommittee's consideration of our business model, which is critical
to serving rural America; the significant renewable generation
opportunities that exist in the areas we serve; and our desire to
provide our consumer-owners with affordable green energy options.
Please let me know if I or anyone in our organization can be of
assistance to the Committee as it considers these important issues.
Statement of the Geothermal Energy Association
On behalf of the Geothermal Energy Association, we submit this
testimony to the Subcommittee on Select Revenue Measures for inclusion
in the record of its hearing on May 24, 2005 on tax credits for
electricity production from renewable energy sources.
Geothermal energy is a clean, renewable resource that provides
energy in the United States and around the world. Geothermal energy is
defined as heat from the earth. It is considered a renewable energy
resource because the heat emanating from the interior of the earth is
essentially limitless. The heat continuously flowing from the earth's
core is estimated to be equivalent to 42 million megawatts of
energy.\1\ The interior of the earth is expected to remain extremely
hot for many years to come, ensuring a permanent flow of energy.
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\1\ Energy and Geosciences Institute, University of Utah. Prepared
by the U.S. Geothermal Industry for the Renewable Energy Task Force
(1997), Briefing on Geothermal Energy. Washington, D.C.
---------------------------------------------------------------------------
The benefits of geothermal energy include minimal air emissions,
marginal land impact, reduced waste, and reduced environmental costs.
In addition, geothermal energy is one of the most reliable renewable
energy sources available. Electric power from geothermal sources is
very desirable because it is base load power, not peaking, and it
enjoys the highest capacity and availability factors of any power
generation system.
Today, geothermal energy provides nearly 3,000 MW of reliable
electric power in the U.S. But according to the USGS, this represents
only a small fraction of U.S. resource potential.\2\ Because of the
high initial cost and risk of developing new geothermal power projects,
geothermal, one of the largest energy resources in the western U.S.,
has not been developed to its full potential.
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\2\ The U.S. Geological Survey testified before the Subcommittee on
Energy and Mineral Resources of the House Resources Committee, U.S.
House of Representatives, on May 3, 2001 that their 1978 report still
represents the best available resource estimate. According to that
report, there is an identified geothermal potential of 22,000MW and an
undiscovered, unidentified potential for geothermal production of an
additional 72,000 to 127,000 MW. This does not include all resource
types considered to be part of the geothermal resource base.
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Geothermal projects take years to bring to fruition. Early
exploration is high risk, and verification of a geothermal resource on
a prospective site typically involves ten million dollars or more for
drilling and related geophysical studies and reports. The success rate
for ``green field'' exploration has been estimated to be between 20 and
50 percent in recent years, which is significantly higher than
historical success rates. Once a resource is verified, permitting and
construction can take 3-5 years or more, depending upon the resource
location and the number and variety of governmental authorities with
jurisdiction over the project. Despite all of these barriers, new
geothermal projects are coming on-line today for initial prices between
6.0 and 7.5 cents/kWhr
In 2003, the California Energy Commission estimated that the
average capital cost of a geothermal facility was roughly $2700 per
kilowatt, which is 4-6 times greater than the capital cost involved in
a comparable-output combined cycle natural gas power plant as shown in
the following table.\3\ (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 shown later in Figure 1.)
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\3\ California Energy Commission (2003). ``Comparative Cost of
California Central Station Electricity Generation Technologies.''
Table 1: Capital Costs of Natural Gas and Geothermal Facilities
(CEC estimates)
------------------------------------------------------------------------
In-
Capital Installed service
Costs Costs Cost
------------------------------------------------------------------------
Combined Cycle Natural Gas 542
---------------------------------------------------------- 592------ 616
------------------------------------------------------------------------
Geothermal Flash 2128 2410 2558
------------------------------------------------------------------------
Geothermal Binary 3210 3618 3839
------------------------------------------------------------------------
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 quite reasonable. 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.
An expanded Section 45 Production Tax Credit (PTC) that includes
geothermal energy helps overcome these barriers. An expanded PTC gives
geothermal energy the opportunity to develop to its full potential
alongside other renewables on an equitable basis, and spurs development
of one of the nation's largest under-developed energy resources. While
geothermal development in the U.S. flourished in the late 70s and 80s,
since roughly 1992 there has been very limited development of new
geothermal facilities. During this period, natural gas became a
plentiful and cheap energy source and states struggled with changing
their laws to allow more competition in the power industry. With cheap
and plentiful gas and substantial legal uncertainty, developers shied
away from making expensive and risky investments in geothermal power.
Congress' decision to expand the PTC to include geothermal energy
in 2004 appears to be changing these trends as interest in new projects
is evident in several western states. With continued support,
geothermal power can rebound from the stagnant 90s and provide needed,
reliable energy to meet our nation's needs. An expanding geothermal
power industry will mean improvements in technology, expansion of the
resource base, and as the infrastructure supporting geothermal
development is rebuilt reduced production costs.
Here are some reasons to support making geothermal energy eligible
for the full, ten-year Section 45 PTC:
It will spur new investment, adding hundreds of new
megawatts of highly reliable base load geothermal power to the grid.
Geothermal power provides some of the most reliable electric power
produced today, and produces electricity virtually emissions free.
New geothermal development will mean new jobs and an
immediate economic stimulus, and will bring substantial, long-term
economic benefits to many communities in the West.
It is justified. Geothermal power plants are capital
intensive, costing several times more than a comparable fossil fuel
plant, and involve greater risk due to the uncertainties of the
subsurface resource. Providing investors a production tax credit
incentive helps overcome these barriers and spurs new development.
Development of geothermal energy resources will add to
our nation's energy security. As former CIA Director Woolsey, National
Security Advisor McFarlane, and Chairman of the Joint Chiefs of Staff
Admiral Moorer said in their September 19th, 2001 letter to the Senate,
``disbursed, renewable and domestic supplies of fuels and electricity,
such as energy produced naturally from wind, solar, geothermal,
incremental hydro and agricultural biomass address the challenges [to
America's energy security].'' Their letter went on to urge immediate
action on renewable energy production tax credits.
It is equitable. Federal tax incentives for renewable
energy have favored wind energy more than other renewable technologies.
Extending the PTC on an equal basis to geothermal and other renewable
energy sources would allow the market to choose which technology to
pursue.
The net cost to the federal government should be
negligible. A recent study of the economic impact of extending the PTC
to geothermal energy conducted by the National Renewable Energy
Laboratory found, ``from the perspective of the U.S. Treasury, it is
likely that the net cost of the PTC would be insignificant or perhaps
even negative . . .'' (NREL/TP-620-31969, April 2002)
In many areas, rural economic development is nearly as important as
securing reliable energy at stable prices. The geothermal facilities
operating today provide high quality jobs in many rural counties, and
are often among the principal sources of income supporting local
schools and government services. New facilities spurred by extending
the PTC to geothermal energy would provide reliable electricity, income
and economic benefits for decades. As GEA stated in its October 3, 2001
testimony before the House Resources Committee, ``If the goal of the
DOE [Geothermal Energy] Strategic Plan could be reached, the cumulative
federal royalties from new power plants would reach over $7 billion by
2050, and estimated income tax revenues would exceed $52 billion in
nominal dollars.\4\ From just the state share in these royalties,
alone, that would mean an additional investment of $3.5 billion in
schools and local government facilities in the western states.''
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\4\ Princeton Energy Research Inc (December 15, 1998). Review of
Federal Geothermal Royalties and Taxes. Volume I, page 17.
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There is broad support outside of Congress, as well. Not just the
renewable power companies, but also the National Association of
Regulatory Utility Commissioners, the Edison Electric Institute, and
the Western Governors' Association have been among the groups calling
for the expansion and extension of Section 45 as a national priority.
For similar reasons, Congress should consider providing equivalent
incentives to public power entities and cooperatives that face similar
investment choices. These organizations provide power to 25% of the
nation's consumers. One approach that we believe deserves support is
embodied in The Clean Energy Bonds Act of 2005, recently introduced in
the Senate as S. 962.
Background on the PTC
A recent report from Platts Energy Resource provides some
interesting background and insight on the role of the PTC:
The U.S. government has a long history of supporting renewable
power technologies. This support has taken the form of publicly funded
research and development (R&D) activities, on the order of over $15
billion in the past 20 years, as well as direct market intervention
through the enactment of favorable regulatory policies, such as the
Public Utilities Regulatory Policies Act of 1978 (PURPA, P.L. 95-617)
and direct tax incentives like the investment and production tax
credits. Among these support mechanisms, the production tax credit
(PTC) is viewed as the most effective method for achieving increased
market expansion of renewable energy sources.
Before its expiration on December 31, 2003, the PTC provided an
inflation-adjusted tax credit of 1.8 cents (") for every kilowatt-hour
(kWh) of electricity produced from wind farms, ``closed-loop'' biomass
systems, or animal waste facilities during the first 10 years of
operation. Policy-makers and the renewable energy industry generally
believe that this credit, originally enacted as part of the Energy
Policy Act of 1992, was the primary driver behind the double-digit
growth of the U.S. wind power industry over the past five years. U.S.
wind power capacity grew by 31 percent between 1998 and 2003,
increasing from 1.6 to 6.3 gigawatts (GW).\5\
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\5\ Owens, Brandon (July 2004). ``Does the PTC Work?'' PR&C
Renewable Power Service.
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However, while the wind industry grew by double digits between 1998
and 2003, the geothermal industry grew by 2%, adding two new
facilities--49MW and 10MW power plants in California--that received
state production-based incentive payments similar to but slightly less
than the current 5-year geothermal PTC. These incentive payments were
enacted in association with the initial power industry deregulation
legislation and are no longer available. Two other projects that should
have been completed with incentive payments in the northern part of the
state were mired in a stranglehold of federal reviews given their
location on National Forest Service land. While these two projects are
still moving forward, the cost to the developer of delays caused by
federal land management agencies has been substantial.
Today, several states are moving ahead with laws that will promote
contracts for new renewable power development. The geothermal industry
is hopeful that these will lead to new power development, but the jury
is still out on their overall effectiveness.
State ``renewable portfolio standards'' (``RPS'') were recently
reviewed in a report by the National Geothermal Collaborative,
supported by the U.S. Department of Energy, entitled ``Evaluating State
Renewable Portfolio Standards: A Focus on Geothermal Energy,''
available at www.geocollaborative.org/publications. This report
concludes that state RPS laws have so far had mixed success and have
predominantly assisted wind energy development: ``. . . early
experience with the RPS in U.S. states has been mixed. Moreover,
geothermal energy has not yet been the primary beneficiary of many
state RPS policies.'' \6\
---------------------------------------------------------------------------
\6\ Wiser, Ryan, et al. (2003). Evaluating State Renewables
Portfolio Standards: A Focus on Geothermal Energy. National Geothermal
Collaborative (NGC). page 1.
---------------------------------------------------------------------------
In its examination of the existing state RPS programs, several
drawbacks were identified: ``. . . we also find that the RPS has some
potential disadvantages relative to other types of renewable energy
policies: (1) due to its complexity, the RPS can be difficult to design
and implement well, (2) an RPS may be less flexible in offering
targeted support to renewable energy than some of the other renewable
energy policies, (3) the exact cost impacts of an RPS cannot be known
with certainty in advance, (4) operating experience with the RPS
remains limited, (5) if an RPS does not lead to the availability of
long-term power purchase agreements, the ability to finance new
renewable projects will be limited and compliance costs may increase,
and (6) an RPS is not necessarily suited to supporting diversity among
renewable technologies, although an RPS can be designed to do so
through the use of resource tiers and credit multipliers.'' \7\
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\7\ Ibid, page 2.
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Policy Justifications for Adding Geothermal Energy to the PTC
While recent analysis by the California Energy Commission (CEC)
cited by the staff of the Joint Committee on Taxation in their report
for this hearing, JCX-36-05, shows that on a long-term basis,
investment in geothermal energy makes economic sense, the marketplace
is geared towards short-term decisions and minimum risk. As a result,
the CEC analysis misses the point.
What the PTC is doing is not so much levelizing cost as 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 an 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.
While the California Energy Commission's report presents an
interesting case for supporting geothermal energy and other renewables,
there are several points that need to be made about their analysis.
First, we do not agree that there is such a great disparity in the cost
of electricity between binary and flash plants as their study
concludes. Second, their capital cost estimates do not reflect recent
increases in world steel prices, which have more than doubled.
Geothermal facilities use significant amounts of steel, and this price
increase can result in a 10-20% or more increase in the cost of a
project. Similarly, the recent surge in world oil prices has led to a
rebound in the demand for drilling equipment and drilling supplies.
Geothermal developers are finding the cost of drilling has increased at
least 20-30% in the past year, and drilling is a significant part of
the cost of new facilities as shown in the Figure below. (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
it effectively a 5% credit, while an output-based credit like the PTC
makes no such distinction.)
Comparative Taxation Rates
It is generally observed that geothermal facilities pay significant
federal, state and local taxes. A study conducted for the Department of
Energy in 1998 by the Princeton Economic Research, for example, 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\
---------------------------------------------------------------------------
\8\ Entingh, Daniel J. (December 15, 1998). ``Review of Federal
Geothermal Royalties and Taxes.'' Princeton Economic Research, Inc.,
page 4.
---------------------------------------------------------------------------
More recent analysis supports this conclusion. Brandon Owens, who
is currently 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 (MWh) basis.'' \9\
---------------------------------------------------------------------------
\9\ Owens, Brandon (July 2004). ``Does the PTC Work?'' PR&C
Renewable Power Service, page 9.
---------------------------------------------------------------------------
That study, published by PR&C Renewable Power Service, presents the
following graphic of the relative tax value per Megawatt hour of
different technologies: \10\
---------------------------------------------------------------------------
\10\ Ibid, page 10. Figure and legend note are duplicated from the
original work.
---------------------------------------------------------------------------
Assessing Positive Geothermal Externalities
Another policy reason often given as a justification for support
for geothermal and other renewable technologies is compensation for
their values to the nation that are not reflected in the market price
of electricity--or their ``externalities.'' Domestic energy production
has obvious national security benefits, and electricity production has
new relevance to national security since EIA and others are projecting
significant and growing imports of natural gas. Obviously, reducing
natural gas imports will have national security benefits, as well as
benefits for our balance of trade. However, it is beyond GEA's
capability to estimate a dollar value for these attributes. While gas-
fired power plants must keep buying imported gas long into the future,
geothermal power plants do not buy fuel at all and have a captive
source of domestic energy.
A more measurable externality is the air emissions benefits of
geothermal power. One way to approximate positive geothermal
externalities is to examine the economic values received for these
attributes in existing emissions trading systems. In assessing
geothermal externalities through trading systems, we do not necessarily
advocate the inclusion of renewables in trading schemes over other
legislative policies nor speculate that the values here would be
received in any particular plan. There are a range of challenges to
analyzing such approaches that are beyond the scope of this statement.
We also recognize that if renewables were to be included in emissions
trading, prices would likely fluctuate, as markets would shift. In
response to these uncertainties, we have opted to use somewhat
conservative price per ton estimates, which we believe result in
conservative assessments. We have extrapolated average price per ton
values from the existing trading systems (NOx and
SO2 systems in the U.S., CO2 systems in Europe)
that currently exclude renewables.
Here are the results. Using the mid range value of the reported
price per ton estimate of each emission (NOx,
SO2, and CO2), we obtained a rough sense of the
positive externalities created by geothermal power production for each
emission. Valuing NOx at $2250 per ton, and estimating that geothermal
power production prevents emissions of 32 thousand tons of
NOx per year, U.S. geothermal power production generates a
value of $72 million a year ($2250 x 32,000). Valuing SO2 at
$150 per ton, and estimating that geothermal power production prevents
emissions of 78 thousand tons of SO2 per year, U.S.
geothermal power production generates a value of $11.7 million a year.
Valuing CO2 at $10 per ton, and estimating that geothermal power
production prevents emissions of 16 million tons of CO2 per
year, U.S. geothermal power production generates a value of $160
million a year. The total equals $243.7 million in equivalent air
emissions value.
While this calculation is very rough, it does give an approximation
of the externality value provided by geothermal power production.
Assuming average annual geothermal power production of 15 billion kWhrs
in the U.S., this equivalent air emissions total represents roughly 1.6
cents/kWhr in value that is not marketable and not recognized in the
market price of geothermal power.
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 stimulated
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.''
Conclusion
Congress' decision to expand the Production Tax Credit to include
geothermal technology was an appropriate policy choice. To make this
effective, we urge Congress to extend the credit three to five years.
If any shorter period is enacted, we urge Congress to allow geothermal
projects to qualify for the credit based upon binding contracts, not
just the ``in-service'' date of the power plant. Further, we urge
Congress to provide geothermal projects the same ten-year credit period
as wind sources.
These 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.
Statement of the Independent Wind Power Association
The Mission of the Independent Wind Power Association (IWPA) is to
enable small to mid-size wind energy companies to grow in order to meet
the United State's future energy production needs. The IWPA seeks to
define issues and support legislation that allows significant expansion
of the opportunities and capital investment pool available for these
companies.
In considering whether to extend the Production Tax Credit
(``PTC''), Congress should seize the opportunity to encourage more
competition among participants in this emerging segment of the power
industry. The PTC is a positive incentive that has stimulated the
development of clean energy projects throughout the United States, yet
the structure of the PTC can and should be perfected and improved to
increase market efficiency.
More competition can be achieved by allowing the PTC to be more
equitably utilized by independent, smaller developers including
ranchers, farmers, small businessmen and start-up renewable energy
project entrepreneurs--in addition to the nation's largest power
generators which under the current law benefit first from renewable
PTCs.
Such an amendment to Section 45 can be easily accomplished without
incurring a negative fiscal impact to the Treasury. Furthermore, by
encouraging more robust competition among renewable power facility
operators, the Congress can quickly and substantially diversify the
country's supply base thus increasing the number of taxable entities
and hastening the marketability and cost-competitiveness of renewable
electric power.
The practical imbalance of the current PTC is a function of price
and income. Though the price gap is narrowing, electricity generated
from renewable sources is currently more costly than electricity
generated from conventional power plants. Congress clearly intended for
the PTC to stimulate the development of renewable projects in the face
of this price differential.
As we have seen in recent months, global energy prices have become
increasingly volatile. Many economists predict crude prices could spike
as high as $100 per barrel in the coming years. The negative impact of
such a spike would be a significant blow to electric consumers and our
economy as a whole. It is important that Congress act now to promote
more electric generation in this country from sources other than fossil
fuels to avoid the negative impacts resulting from price volatility and
potential supply/capacity shortages. Wind power is one the cleanest and
most abundant sources of energy making it an important part of any
solution addressing America's energy needs.
To take full advantage of the PTC, a taxpayer must first have
sufficient offsetting taxable income. While large power producers enjoy
multiple revenue streams generated from diversified business segments,
ranchers, farmers, small businessmen and start-up renewable energy
project developers tend to be focused on a single renewable power
source and subsequently lack this offsetting income. As a result, these
smaller entrepreneurs are typically forced to sell their projects,
often in complex and costly transactions, to large financial
institutions whose chief interest in renewable energy is acquiring the
PTC to offset unrelated income.
As a solution, the IWPA proposes a more fair and equitable
structure of the PTC designed to allow competitive wind developers, who
commonly lack substantial taxable income, to retain ownership of their
projects by building the value of the PTC into the power purchase
agreement with their energy buyer. IWPA's proposal allows the
purchasers of renewable energy, who likewise have a direct interest in
expanding the development of renewable energy, to acquire all or a
portion of the PTC in connection with a long-term power purchase
agreement. This proposal confines the benefit of the PTC exclusively to
those investors taking the risks associated with bringing these clean
sources of electricity to the market.
The IWPA recommends the Congress consider legislation that would
allow the PTC, in a one-time election, to be utilized by a qualified
renewable-energy purchaser through a long-term power purchase
agreement. The experience of the current PTC indicates this proposed
modification will make the PTC more practical for the small businesses
taking financial risks in developing clean energy. The proposal
effectively allows the current PTC benefit to reside with the utilities
(which it was originally intended to benefit) seeking to purchase clean
energy and thus benefits the consumers who will see long-term benefits
in price, security and reliability from the production of clean,
domestic energy.
The proposal simply creates more efficient use of the PTC without
altering the definition of the current PTC. Furthermore, the IWPA
believes the amendment will not increase the government's cost of the
credit. The proposal will significantly improve the availability of
private capital for new wind-power projects thus lower financing costs.
Finally, the uncertainty associated with successive short-term
extensions of the PTC in recent years has added to rising costs. The
drive to complete construction within the one-year extension time
frames has created strains on turbine supplies and construction
contracting as project developers rush each year to develop projects
before the PTC expires.
A multi-year extension combined with the ability to join the PTC
into a power purchase agreement as proposed herein will provide the
industry better tax predictability and improved market stability. This
more attractive incentive will create favorable private financing and
is a significant step towards achieving Congress' initial goals in
establishing the PTC to promote renewable energy development.
Statement of David Koenig, American Forest and Paper Association
The American Forest & Paper Association (AF&PA) is the national
trade association for the forest products industry. We represent more
than 200 companies and related associations that engage in or represent
the manufacturers of pulp, paper, paperboard and wood products.
America's forest and paper industry ranges from the state-of-the-art
paper mills to small, family owned sawmills and some 10 million
individual woodlot owners. The U.S. forest products industry is vital
to the nation's economy. We employ approximately 1.3 million people and
rank among the top ten manufacturing employers in 42 states with an
estimated payroll of $50 billion. Sales of the paper and forest
products industry top $230 billion annually in the U.S. and export
markets. We are the world's largest producer of forest products.
Today, the U.S. forest products industry is facing serious domestic
and international challenges. Since 1997, 101 pulp and paper mills have
closed in the U.S., resulting in a loss of 70,000 jobs, or 32% of our
workforce. An additional 67,000 jobs have been lost in the wood
products industry since 1997. New capacity growth is now taking place
in other countries, where forestry, labor, and environmental practices
may not be as responsible as those in the U.S.
Energy is the third largest operating cost for the forest products
industry. In the pulp, paper and paperboard sector of the industry,
energy makes up 10-15 percent of the total operating costs. Since 1972,
our industry has reduced its average total energy usage by 17 percent
through increased efficiencies in the manufacturing and production
process. In addition, we have reduced our fossil fuel and purchased
energy consumption by 38 percent, and increased our energy self-
sufficiency by 46 percent.
The American Jobs Creation Act (H.R. 4520) included a provision to
expand the Section 45 tax credit to include open-loop biomass. For
purposes of the credit, open-loop biomass is defined as any solid, non-
hazardous, cellulosic waste material which is segregated from other
waste materials and which is derived from forest-related resources,
solid wood waste materials, or agricultural sources. Eligible forest-
related resources are mill and harvesting residues, pre-commercial
thinnings, slash, and brush. The 2005 credit for electricity produced
from open-loop biomass facilities is 0.9 cents per kilowatt hour
compared with 1.9 cents per kilowatt hour of electricity generated from
closed-loop biomass facilities. To qualify for the credit for both open
and closed-loop biomass, the facility must be placed in service prior
to January 1, 2006.
The forest products industry is the largest user of biomass for
energy production, which is used largely to fuel our wood and paper
manufacturing facilities. In addition to biomass like bark, sawdust,
and other residues from the wood harvesting and product manufacturing
processes, the industry uses biomass in the form of ``spent pulping
liquors.'' Spent pulping liquors are created as a residual during the
pulping process, and the wood residuals (mostly lignin) are burned in a
process that separates and recovers the chemicals for reuse and
captures the heat value from the lignin to create steam and
electricity. In total, the forest products industry currently uses
biomass to generate 60% of its power needs. With continued research
and development of new technologies, and expanded tax incentives, the
potential exists to greatly increase our industry's capacity for energy
production.
Regarding Section 45, the placed in service date for facilities
that produce electricity from open-loop biomass needs to be extended
from January 1, 2006 to January 1, 2010. Such projects take several
years to complete and the industry needs the certainty of knowing that
the current tax credit will be available in the future to take the risk
of making the investment. At the very minimum, Congress should extend
the placed in service date to January 1, 2008 as the Administration
proposed in its FY 2006 budget.
Also, clarification is necessary to the Section 45 definition of
open-loop biomass to ensure inclusion of the lignin content from spent
pulping liquors used to produce electricity at new or expanded
facilities. Wood is composed primarily of cellulose (wood fibers) held
together by lignin. Wood bark is composed of hemicelluloses. Pulping
chemicals are used to dissolve the wood used for making paper. The
cellulose fibers become paper products, the pulping chemicals are
recycled from recovery boilers for reuse in the pulping process, and
the wood residues (mostly lignin) are used to generate heat for making
steam and electricity.
Finally, the current inflation adjusted tax credit of 0.9 cents per
kilowatt hour needs to be increased to 1.5 cents per kilowatt hour to
make the additional electricity produced competitive with other
traditional forms of electric generation. The increased tax credit
would provide a critical incentive for new investments in energy
production facilities connected to current paper mill infrastructure,
thus helping to improve the competitive position of the forest products
industry.
We appreciate the subcommittee's interest in our thoughts on the
need to extend and modify the Open-Loop Biomass component of the
Section 45 tax credit.
Statement of Richard Kolodziej, American Biogas Alliance
The American Biogas Alliance (Alliance) is an organization of
companies and individuals dedicated to increasing the production of
methane from renewable sources in the United States.
COMMENT SUMMARY
Currently, the federal government provides tax credits for the
production of electricity from waste or renewable sources for new
projects. Landfill operators may receive 0.9 cents tax credit per
kilowatt-hour for electricity produced from landfill gas at facilities
placed in service during 2005. This is the equivalent of $2.64 per
million btus of electricity (delivered energy). For electricity
produced from animal and crop waste and municipal sewage, the tax
credit is 1.8 cents per kilowatt-hour or $5.28 per million btus. For
ethanol produced from crops or biomass, the credit is 52 cents per
ethanol gallon or $6.87 per million BTUs.
While the Alliance applauds Congress for providing these incentives
and for encouraging the production of electricity from renewable
sources, we believe that Congress can replicate the success of these
incentives for electricity production by also providing an incentive
for producing methane from these same renewable sources. Rather than
having the federal government pick winners among the energy forms, the
Alliance urges Congress to treat companies that own and operate
facilities that produce methane (biogas) from landfills, animal and
crop waste and municipal sewage the same as those companies that own
and operate facilities that produce electricity from these sources.
Specifically, Congress is urged to provide companies that produce
methane from landfills, animal and crop waste and municipal sewage the
same tax credit per million btus of methane produced (and either used
by that organization or sold to a third party) as they would receive if
they produce a million btus of electricity from these sources.
BACKGROUND
Almost a quarter of America's primary energy consumption is natural
gas, and natural gas is primarily composed of methane. Over 70 percent
of new single-family homes have natural gas service and, for the past
decade, more than 90 percent of new power plants have been natural gas
fueled. The reasons for this growth are the inherent environmental,
economic and form-value attributes of the fuel itself. Unfortunately,
the popularity of natural gas is driving demand to levels that will
exceed domestic and North American supply. As a result, the price for
natural gas has increased significantly over the past few years, and
there is renewed interest in building new liquefied natural gas (LNG)
receiving terminals in the U.S. to capitalize on the growing world-wide
trade in LNG. While LNG imports have benefits (especially if the gas
were imported from non-OPEC countries), it would be even more
beneficial if the U.S. took advantage of its undeveloped domestic
methane sources. One of the most valuable is the production biogas from
waste products.
Biogas is a product of the decomposition of organic
materials, such as animal or crop wastes. Biogas composition is
typically about 60 percent methane and 30 percent carbon dioxide, with
the remaining 10 percent dominated by nitrogen and water vapor. This
gas is produced at landfills, sewage waste treatment plants, feedlots,
and any other place where there is decaying organic material. The
biogas resulting from these activities can be released to the
atmosphere, collected and flared, or collected and used as a fuel. It
also can be collected and concentrated to match the composition of
natural gas, and used to supplement America's natural gas supplies.
Unfortunately, atmospheric release and flaring are the most common
methods of dealing with biogas today. A 1998 U.S. Department of Energy
study \1\ estimated that, worldwide, between 25 and 37 quadrillion btus
of methane each year is released into the atmosphere (beyond the
methane currently captured) due to natural decomposition of organic
material. This is equivalent to between 25 and 38 percent of all of the
energy used in the U.S. each year. Much of the naturally occurring
renewable methane is produced in small quantities from disparate
sources (e.g., swamp gas), and, therefore, is difficult and expensive
to capture. Fortunately, much of the biogas generated from human
activity is produced in larger quantities in discrete locations, where
it can be captured. In the U.S., the DOE study referenced above
estimated that the potential biogas production from farm waste,
landfills and municipal sewage alone is approximately 3.5 quadrillion
btus of methane. Of that amount, the study estimated that it would be
feasible to capture and use over a third of this methane (or about 1.25
quadrillion btus). This is equivalent to:
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\1\ ``Biogas For Transportation Use: A 1998 Perspective,'' July 9,
1998, QSS Group Inc.
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6 percent of all the natural gas used in the U.S., or
175 percent of all the LNG currently being imported into
the U.S., or
The output of four new one billion cubic-foot-per-day LNG
terminals
Landfills: Landfills generate a substantial amount of methane
through the anaerobic (oxygen-free) degradation process that occurs
naturally within the landfills themselves. The methane can be a safety
hazard if not ``drained'' properly. In November, the Bush
Administration co-signed a ``Methane-to-Markets'' agreement with 12
other countries, in part, to help developing countries implement
landfill gas collection programs. Currently, the federal government
offers incentives for new projects to convert landfill gas to
electricity. As a result, according to the U.S. EPA, there are 380 such
landfill gas electrification projects in place today. Unfortunately,
not all landfills are located in areas where the economics of
electricity production are sufficient to make landfill gas collection
and processing financially feasible (e.g., inadequate electricity
prices or access to the electricity grid), and, therefore, many U.S.
landfills do not capture their methane. They simply ``flare'' the gas
or allow the gas to vent into the atmosphere. The U.S. EPA estimates
that there are 600-700 additional landfill gas-to-energy projects that
could be constructed nationwide. An alternative to electrification is
to clean and concentrate the gas into pipeline-quality methane, and (1)
inject the gas into the local natural gas distribution system, (2) use
the gas to fuel trash trucks and other local vehicles at (or very near)
the landfill site or (3) transport the gas by truck to a location where
the gas can be used to displace petroleum or other, more polluting
fuels.
Animal Waste: The processing of waste from domesticated animal
operations (such as dairies, and pork and poultry production) is an
expensive process that presents significant environmental challenges.
With the proper financial encouragement, farmers and other operators of
these animal facilities could install anaerobic digester systems to
convert the waste to usable methane--with valuable, sanitary fertilizer
as a byproduct. As with landfill gas, there currently is a federal
incentive to convert animal waste to electricity, but no federal
incentives to convert animal waste to methane. Companies that must cope
with large quantities of animal waste can become significant producers
of methane through the use of anaerobic digesters. For example,
Smithfield Bioenergy today is producing biogas with a substantial
methane component at a Smithfield Foods hog farm in Utah. That
Smithfield facility shows that hog farms and similar operations can be
a viable source of methane that can reduce our dependence on imports if
the process can be made economically viable.
Sewage: The amount of human sewage that must be processed continues
to grow with the population. The economic costs are large, and the
environmental costs are significant. As with animal waste, sewage can
be converted to methane via anaerobic digesters. In Malmo, Sweden, for
example, the city runs part of its fleet of transit buses on methane
produced at its local sewage treatment plant. As with landfill gas and
animal waste, there currently is a federal incentive to convert
municipal sewage to electricity, but no federal incentives to convert
municipal sewage to methane.
Biomass: While not a major source of fugitive methane, recoverable
biomass--including crop waste, plants (such as switch grass) grown
especially for energy production and other organic matter--also can be
used as a feedstock for the production of methane. Here, too, Congress
has provided financial incentives for the conversion of biomass into
some forms of energy. For example, federal tax credits are available to
those who blend of ethanol with gasoline and to producers of biodiesel
from virgin plant oils (e.g., soy beans) that is used to displace
diesel fuel in vehicles.
While producing and capturing methane from these sources is
generally not economic given existing prices for competing fuels and
the fact that many of the technologies for producing and capturing
methane from these sources are new and just developing, with adequate
federal incentives, projects to capture and use methane from these
sources could become quite economically attractive. Currently,
commercial technologies exist for the production of biogas from all
these sources. However, since the demand for these technologies is
limited, there is little mass production and economies of scale. Early
projects stimulated by federal incentives would help demonstrate the
technology, help reduce the cost of similar future commercial projects
and increase competition for this equipment.
RECOMMENDATION
The Alliance urges Congress to treat companies that own and operate
new facilities that produce methane from landfill gas, animal and crop
waste and municipal sewage the same as those companies that own and
operate new facilities that produce electricity from these sources.
Specifically, Congress is urged to provide companies that produce
methane from landfill gas, animal and crop waste and municipal sewage
the same tax credit per million btus of methane produced (and either
used by that organization or sold to a third party) as they would have
receive if they produce a million btus of electricity from these
sources.
History has shown that such incentives for the production of
natural gas can be very effective. In 1979, Congress approved an
incentive for the production of methane from coals seams and coalmines.
For the first decade, investment and production grew slowly. Since
then, however, the production of methane from these sources has
mushroomed, so that, last year, nine percent of the natural gas used in
the U.S. was produced from coal seams and coalmines.
It is difficult to estimate prospectively the cost of the proposed
biogas incentive. However, the Alliance would urge Congress to consider
two points. First, from discussions with a number of project owners/
operators, it is believed that many of the renewables-to-electricity
projects that would be constructed in the future (assuming that the
existing Section 45 incentives for electricity production are extended)
would instead become renewables-to-methane projects if methane
production were provided the same incentive as electricity production.
To the extent that producers choose the methane course, this expansion
of Section 45 would offset itself. In other words, for those projects,
the additional cost to the Treasury would be zero. Second, it is
expected that it would take significant time to identify appropriate
sites, negotiate contracts, and then build and install the methane
producing technologies. The cost of those new facilities would run into
the millions, a reality that ensures that new entrants into this method
of methane production would be limited in number in the initial years,
hopefully, increasing as the credit is shown to make methane production
economically viable. The slow growth of coal seam methane production
over the first decade of the incentive illustrates this point. As a
result, the additional cost in the first several years of extending the
incentive to methane production should be comparatively modest at first
and climb only gradually in future years.
Increasing the production of biogas from animal and crop waste,
landfills and municipal sewage would help address several public policy
problems simultaneously. It would increase the supply of domestically
produced, non-fossil fuel energy while reducing the amount of
greenhouse gas now emitted into the atmosphere. It would lead to the
development and deployment of new technologies, and create jobs here at
home as the industry grows. It would help dairy, hog and poultry
farmers and their surrounding communities to successfully address the
significant environmental challenges to waste disposal while providing
them a valuable supplementary revenue source. And, for municipalities,
it also would provide a valuable supplemental revenue source while
reducing the amount of sewage that currently needs to be processed.
The noted scientist and inventor R. Buckminster Fuller observed:
``Pollution is nothing but the resources we are not harvesting. We
allow them to disperse because we've been ignorant of their value.''
Encouraging the harvesting of methane from these renewable sources
would be a win-win-win for America.
US Geothermal, Inc.
Boise, Idaho 83706
May 24, 2005
Dear Members of the Subcommittee:
My name is Daniel Kunz and I am President of US Geothermal, Inc. My
colleague's name is Douglas Glaspey who is the Chief Operating Officer
of our company. We have lived in Boise, Idaho for over 25 years and
have worked in the natural resource development and energy industries.
US Geothermal, Inc. was formed nearly 4 years ago to develop the Raft
River geothermal site in southeastern Idaho.
US Geothermal, Inc. is developing the Raft River geothermal
resource to initially produce 10 megawatts of clean, reliable and
renewable geothermal electricity under a 20-year contract with Idaho
Power Company. The power will be delivered to Idaho Power's energy
consumers from our site in the southeastern part of the state, half way
between the capital city of Boise and Salt Lake City, Utah on
Interstate highway I-84. We believe there are 10 to 20 times this
amount of energy available at Raft River, or another 100 to 200
megawatts of geothermal energy, that can be developed. In fact, two
months ago we signed two new 10 megawatt, 20-year power sales
agreements with Idaho Power Company. This means that we now have 30
megawatts under contract. However, despite having these 20-year fixed
price contracts it is probable that the other 100 to 200-plus megawatts
will remain untapped in this reservoir if the geothermal production tax
credit (PTC) is not extended in a viable manner. Idaho has additional
geothermal sites that we will seek to develop if the PTC is extended in
a viable manner.
Geothermal power plants produce what is called base load power:
consistent energy production, 24 hours a day, seven days a week. In
addition, a well-managed geothermal reservoir is a sustainable resource
as evidenced by many geothermal power projects in California and
Nevada. Geothermal plants enjoy the highest capacity and availability
factors of any power plant or project. Once the capital costs have been
paid for, these plants are very low cost to operate and have very
little ``down time'' because there is no combustion that requires
significant maintenance in other plants like coal, nuclear and gas. Our
problem is primarily the high up-front capital costs of developing a
resource and building a geothermal plant. Our costs are more than four
times per megawatt higher than comparable natural gas-fired power
plants. In addition, we typically sign long-term (20- to 30-year)
fixed-price contracts, while coal- and natural gas-fired plants
typically enter into shorter contracts--and usually with fuel
adjustment clauses to hedge against fuel price volatility. Geothermal
energy thus bears the dual financial burdens of higher initial capital
costs combined with greater price risks going forward--a combination
that makes it difficult to attract investment dollars. The benefits of
the power source often go unnoticed and unaccounted for. For example,
geothermal power has a high capacity factor that allows the customers
to rely on this source over very long periods of time. These plants
have no market fuel costs and are not subject to market related price
adjustments. The fuel source is secure, located in the United States:
no worry about the foreign energy sources.
We need a stable production tax credit program with a term of 3 to
5 years so that the capital allocation people can plan and rely on the
credit in order to invest in geothermal power development.
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. We
believe 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. Five years would
be better. We propose that you extend the Section 45 placed-in-service
date for at least three to five years.
The second issue is the duration of the production tax credit. We
believe geothermal projects should receive the same term provided for
wind generation--ten years--as opposed to the current five years for
geothermal. Making the duration of the credit match the ten years
afforded other renewables such as wind will result in better long-term
planning and significant additional geothermal development. If Congress
extends the production tax credit for geothermal energy in this manner
then the development program at Raft River can proceed toward building
the ultimate capacity that we believe is between 100 and 200 Megawatts.
While we are the ``little guys'' in geothermal development, we have
a great opportunity to grow and develop new geothermal sites in Idaho
and elsewhere in the west, adding good paying jobs to mainly rural
areas, providing tax revenues to those same rural areas, providing a
``flywheel'' effect from our jobs and tax payments that helps local
businesses and suppliers, and developing new technological advances in
this clean form of power development. For example, we have been awarded
a grant from the U.S. Department of Energy to be applied to the use of
a potentially higher efficiency power cycle using ammonia absorption.
This is an additional risk that may be difficult to finance without the
PTC. However, if successful, the ammonia absorption power cycle could
open doors for geothermal electric power development at resource sites
that today may not be economically viable.
We appreciate the opportunity to ``be heard''. We are thankful for
the hard work that the committee does in support of energy development
and independence. We respectfully request that you support the
extension and improvements in the PTC as outline herein.
Sincerely,
Daniel Kunz
President
Douglas Glaspey
Chief Operating Officer
Public Service of New Hampshire
Manchester, New Hampshire 03101
May 26, 2005
Dear Chairman Camp:
On behalf of Public Service of New Hampshire (PSNH), a subsidiary
of Northeast Utilities (NU), I am pleased to submit comments to the
Subcommittee on Select Revenue Measures of the House Ways and Means
Committee concerning renewable energy production tax credits.
PSNH, the largest electric utility in the State of New Hampshire,
operates three fossil electric generating facilities and nine hydro-
electric generating plants in the state. Both PSNH and New Hampshire
understands and has prioritized the value of fuel diversity; and
continues to look for ways to meet today's and tomorrow's energy
challenges, while being environmentally responsible.
PSNH has first hand knowledge of the benefits and challenges of
embarking on a renewable biomass project. The Northern Wood Power
Project (NWPP), located in Portsmouth, is our renewable energy
initiative in which we will be replacing an existing coal-fired boiler
with a state-of-the-art boiler designed to burn biomass. Biomass, or
clean wood, is a resource abundant in the New England region. Because
of its innovative approach, this project has enjoyed broad support, but
has not been without its challenges. Biomass projects are often smaller
in scale and therefore borderline in their financial viability. Federal
support, by way of the renewable production tax credit, can be the
critical piece which allows these important projects to move forward.
Supporting the application of the renewable energy production tax
credit for open loop biomass expands the fuel diversity of America's
energy supply and lowers dependence on foreign oil and gas supply.
Encouraging the use of biomass as a fuel to generate electricity
expands the fuel diversity while providing low-emissions generation
options.
Biomass as a renewable, using biomass as a fuel, is uniquely
important in supporting sustainable forest management practices and
selective forest clearing--an important wildfire prevention treatment.
Biomass power also generates jobs in rural economies and injects
sizable revenue into the regional economy. When completed, PSNH's NWPP
is estimated to add approximately $20 million annually into the New
Hampshire economy.
For these reasons, PSNH urges the Subcommittee to treat biomass no
differently than other forms of renewable energy. Extending the time
frame for the ``placed in-service date for qualifying facilities''
provision under the renewable energy production tax credits for units
placed in service through 2006 would encourage the environmentally
cleanest use of biomass for electricity generation. The newer, state-
of-the-art boiler design we plan to use at the NWPP is a great benefit
to the environment since air emissions are significantly reduced.
Extending the in-service date would provide an important boost in
encouraging industry to participate in the renewables program since it
takes many years to plan, site and develop these projects.
PSNH appreciates the opportunity to offer comments on the Renewable
Production Tax Credits hearing of the Subcommittee on Select Revenue
Measures. Please contact Mr. Todd W. Lavin, Executive Director of
Governmental Affairs for Northeast Utilities at (202) 508-0901 should
you require further information on this topic.
Sincerely,
Gary A. Long
President and Chief Operating Officer
Statement of Market Street Energy Company, Saint Paul, Minnesota
Mr. Chairman and Members of the Subcommittee, Market Street Energy
Company appreciates this opportunity to submit a statement for the
record for the Subcommittee's hearing on Federal tax credits for
electricity production from renewable resources.
Market Street Energy Company
Market Street Energy Company is an experienced leader in energy
conservation and the conception, design, operation and management of
renewable energy systems. The company is a for-profit affiliate of
District Energy St. Paul, a non-profit heating utility, and District
Cooling St. Paul, a non-profit cooling utility, in St. Paul, Minnesota.
Market Street Energy's mission is to deliver quality, cost-effective
energy projects and services that benefit communities, investors,
clients and the environment. The company is committed to expanding the
presence of renewable energy systems that achieve outstanding energy
efficiencies and improve the environment throughout the United States.
Deep water air conditioning
Deep water air conditioning offsets the demand for electricity by
using a renewable energy source to provide reliable, environmentally
friendly, low-cost air conditioning. Cool water from a deep lake or
ocean is pumped through a pipeline to a cooling system on the shore.
The intake pipe is placed at a depth where the water temperature is 39-
46 F. A cooling station transfers the water's chill to water
circulating in a closed loop pipeline system (district cooling system)
that provides air conditioning service to consumers. The water is
returned at a depth where the water in the lake or sea has a similar
temperature as the returned water.
Recent deep water projects include a system using cold water from
Cayuga Lake to cool campus buildings at Cornell University, another
using water from LakeOntario to cool buildings in downtown Toronto, and
another using water from the Baltic Sea to cool buildings in downtown
Stockholm. We are currently developing projects in Hawaii.
The benefits
Deep water air conditioning offers many advantages over
conventional methods to provide air conditioning.
Uses a renewable, energy source--cold, deep water.
Significantly reduces electrical usage--each ton of deep water air
conditioning saves about 0.7 kW of electric capacity.
Reduces reliance on fossil fuels.
Reduces emissions from power plants--r educed use of fossil fuels
provides for significant reductions in greenhouse gas emissions as well
as CO, NOx, SO2 and particulate emissions.
Eliminates need for chillers and cooling towers--eliminating the
use of cooling towers reduces potable water consumption, toxic chemical
use, and the production of sewage.
Eliminates use of ozone-depleting and greenhouse gas refrigerants.
Current law
While the Internal Revenue Code (sec. 45) provides a tax credit for
the domestic production of electricity from renewable resources, there
are no tax incentives for the use of renewable resource technology that
replaces the consumption of electricity, even though the environmental
advantages are the same. Sec. 48 provides an investment tax credit for
any property that uses solar energy or geothermal deposits for heating
or cooling, but does not apply to the use of deep water. Private
activity bonds (sec. 141) can be issued to finance local district
heating or cooling projects, including deep water air conditioning
projects, subject to the volume cap in sec. 146.
Need for change
The Congress has recognized the importance of tax incentives in
developing and accelerating the use of similar renewable energy
technologies. Deep water air conditioning projects provide the same
benefits as technology that qualifies for the sec. 45 credit for
electricity production from renewable resources and technology that
qualifies for the sec. 48 energy investment credit. The startup cost
for these projects is considerable. A lake source cooling project to
cool the central campus of Cornell University had a $60 million price
tag. A proposal to cool a significant portion of downtown Honolulu will
cost about $120 million.
Proposed change
In order to encourage the substantial up-front investment required
for deep water air conditioning projects, Congress should:
Extend the sec. 45 credit for production from renewable
resources to deep water air conditioning projects,
Extend the sec. 48 energy investment credit to deep water
projects, or
Allow the issuance of private activity bonds for such projects
outside the volume cap.
Statement of Richard A. Meyer, Ocean Energy Council, Inc., Royal Palm
Beach, Florida
Mr. Chairman and members of the Subcommittee, I welcome the
opportunity to add my Submission for the Record regarding including
OCEAN ENERGY as a significant renewable energy source worthy of
becoming eligible for the Section 45 production tax credit (PTC).
The Ocean Energy Council has over 80 members including
representatives of federal, state and local government, private
industry, research facilities, the offshore (oil) industry, power
generating firms, and others. There has been an abundance of testimony
by various witnesses to your Committee on the importance of adding to
and extending PTCs to encourage expansion of development of renewable
sources of energy.
Ocean energy encompasses various technologies including harnessing
the energy in the oceans from wave, thermal differences (OTEC),
offshore wind, tidal, current, biomass and salinity gradients. Each has
its champions, and all have been demonstrated not only in research
laboratories worldwide, but in recent years with demonstration
facilities in the ocean.
The keynote speaker at the April, 2005 EnergyOcean2005 Conference,
held in Washington, was Spencer Abrahim, Secretary of Energy in
President Bush's Cabinet until he left the administration in February.
He referenced the powerful and positive report on ocean energy that the
Edison Power Research Institute / EPRI, an independent energy research
organization, had just released in February, saying it would be a great
asset towards influencing Congress, the offshore industry, power
producers and investors.
He said: ``The ocean energy industry has matured over the past few
decades, and the technologies are becoming commercially viable at a
time when our nation seeks greater energy independence. The time is
right.''
I want to make 3 points regarding ocean energy:
1. Ocean Emergy outranks nuclear, oil, coal, and natural gas in net
energy analysis.
Ocean Energy outranks these energy sources economically. When
producing electrical power, an associated amount of energy is expended.
The costs of finding, extracting, processing, transporting, and
delivering energy too often goes unconsidered. Ocean energy is not the
most economical: hydroelectric and geothermal rank higher. But these
energy sources are found in only a limiting small number of locations.
Ocean energy is widely available.
Three major studies of net energy analysis have been done, by the
University of Massachusetts, Stanford University and the Oregon Office
of Energy Research.
2. Ocean Energy has far wider potential for adding to the energy
picture than other renewables including wind, biomass,
geothermal and direct solar.
Renewable ocean energy has vast potential because the sun's heat
warms the entire planet, but unlike land surfaces where it is
dissipated, this heat is
stored in the oceans, where it is waiting to be utilized. The
oceans cover over 70% of the earth's surface. The oceans are,
indisputably, the earth's largest solar collector. And while all this
energy takes up residence in the world's oceans, it is constantly
renewed and replenished. Throughout most of the world, it is available
24/7--unlike most other solar and renewable technologies. It is truly
``The 24/7 Energy''.
3. The U.S. is far behind Europe, China, Japan and Austrailia in
developing renewable energy.
Offshore wind farms have been operating for several years in
Denmark, Sweden, and the U.K. Two wave energy facilities have been
connected to local grids off Scotland and England. France and Canada
have had tidal generating installations providing power for decades.
Portugal, just last month, contracted for a wavefarm off its shores.
Australia has initiated two wave generating plants, and China has just
authorized an offshore wind farm. OTEC plants are planned for the
Mariana island of Saipan and in Tamil province in India.
I will be happy to provide further references regarding any of the
above statements upon request at 561.795.0320 or
[email protected].
We ask that you include ocean energy in the renewable sources of
electrical energy production eligible for Production Tax Credits. Thank
you.
Statement of Honorable Earl Pomeroy, a Representative in Congress from
the State of North Dakota
I first want to commend the Chairman and Ranking Member for holding
this hearing on the important subject of providing incentives to the
renewable energy industry in our country. I would like to bring the
subcommittee's attention to two significant issues with regard to the
production tax credit.
1) Extend the production tax credit for wind energy development for
a minimum of five years. There are currently some 6,700 MW of installed
wind generation in this country. That number is expected to climb to
nearly 9,000 MW by the end of the year. Without an extension of this
tax credit, growth in the wind energy industry would virtually grind to
a halt.
In North Dakota, about 60MW of wind energy has been installed that
is owned and operated by FPL Energy. FPL is the owner and operator of
these facilities. The incentive provided to FPL through the production
tax credit (PTC) allows the company to sell wind generated electricity
in our market at a competitive price. That price has been attractive
enough for FPL to secure purchased power agreements from Basin Electric
Power Cooperative, Bismarck, (for 40 MW) and Otter Tail Power
Company,Fergus Falls,Minn. (for about 20 MW). Without this production
tax credit, the price of wind generation would not be competitive in a
state like ours where generation costs are extremely low compared to
national averages.
Another reason the PTC needs to be extended is to encourage
suppliers to gear up for this market. Already, utilities in my state
that are interested in developing more wind energy tell me that
equipment costs for wind generation have risen 20 to 25% in the past
year. That's because not enough companies are gearing up to supply
equipment to the industry. Congress needs to provide certainty to this
market and the manufacturers who supply equipment to it. The stop and
start nature of the production tax credit must end; we must provide
long term certainty for a robust market to develop.
2) Provide a comparable incentive for nonprofit and municipal
utilities: The PTC is essentially not available to about 25% of the
electricity market supplied by nonprofit cooperatives and municipal
electric utilities. That's because these entities are generally not
subject to federal income tax. I encourage this committee to support a
comparable incentive for nonprofit and municipal utilities that wish to
own and operate wind generation facilities. I support a proposal for
Clean Energy Bonds, which could provide electric cooperatives and
municipal utilities with an incentive comparable to the production tax
credit. Clean Energy Bonds are based upon a ``tax credit bond'' that
currently exists in the tax code for school construction under the
qualified zone academy bond (QZAB) program. This program would allow
the U.S. Treasury to provide the holder of such bonds a tax credit to
be applied against federal income tax liability in lieu of interest
payments from the issuer of the bond. Essentially, a clean energy bond
would provide cooperatives and public power systems with interest-free
loans for financing qualified renewable energy projects.
Technology Transfer Partners
Chicago, Illinois
No Date Available
Honorable Committee Members:
I offer the following observations upon use of tax credits to help
promote electricity from renewable resources. These comments are based
upon 25 years experience worldwide literally in all facets of the
energy industry. First if one looks at economic development trends
worldwide, and then plots GDP growth against any rational energy
equivalent factor in BTU's (natgas/oil) or in MWH (electricity
generally), what becomes apparent is that worldwide, energy supply will
potentially begin to lag energy demand over the next decade.
For that reason as the World Energy Congress concluded in Sydney,
Australia in September 2004 that ``no energy source should be taken off
of the table.''
With that thought in mind Congress has developed and attempts to
encourage alternative energy supply development under the rubric of
``renewable energy''. In light of the World Energy Congress conclusion
above, ``renewable energy'' really has no absolute definition or
application, but ultimately functions as a flexible working definition
to include any alternative source of energy whose use may be stimulated
by reasonable incentives.
One category of energy supply readily available but often
overlooked is waste heat or waste energy off of existing electrical or
industrial applications. Congress may want to stimulate both industry
and creative minds to capture and employ this currently available-but
untapped--energy source. There are technologies already developed that
may be employed for this task; traditional cogeneration, the new
expansion gas motor technology, and other rankine cycle technologies.
I would encourage this legislative Committee to give serious
consideration to shaping its legislation in part to capture this
readily available energy supply. Specifically I suggest that tax credit
coverage be broadened to include particular types of equipment that
capture waste heat or energy. Alternatively the Committee may consider
creating an entirely new fiscal measure to further encourage productive
use of waste heat/waste energy. Thank you for your time.
Sincerely,
David Rosenberg
Verdant Power
Arlington, Virginia 22207
June 6, 2005
Thank you for allowing us to comment on this critical issue of
paramount importance to the emerging ocean renewable energy industry.
As you know the Production Tax Credit (PTC) has been and continues to
be a tremendous impetus to the successful development and maturation of
the wind industry. One of the values of the credit is that it
recognizes actual electricity production, not mere promises. All of the
business and market risks of the technology development and
implementation remain the obligation of the private sector.
We as a country need to extend the same principles to the emerging
ocean energy industry in order to provide needed critical support to
the development and growth of a domestic industry. Currently much of
the governmental support for research and development of this
technology is based in the European Union, which provides significant
financial, technical, and regulatory assistance to its budding marine
energy industry. Great strides are being accomplished as a result, with
a danger that the irrevocable dominance of this industry will
permanently reside outside of the United States.
The domestic industry is real. Our own company has been actively
developing a 200kW showcase demonstration project in the East River in
New York City, to be followed by a build out of a larger field of up to
5-10 MW. This facility would place New York City as one of the largest
urban renewable energy producers in the world. This particular effort
has been followed by the filing by other developers of preliminary
permits with the Federal Energy Regulatory Commission for more than a
dozen similar ocean energy projects.
In conclusion, we appreciate the advantages that the PTC has
provided the wind industry and its development. It has helped put the
wind industry on a path toward self sustainability. Might the same be
done for an emerging industry--ocean energy? The PTC would go a long
way toward accelerating the development of a new industry, which the
United States could dominate.
Sincerely yours,
Ronald F. Smith
Chairman
Statement of Mark R. Stover
Hydropower is one of the nation's most valuable energy resources.
It is low-cost, clean, domestic, renewable and emits no air pollution.
Hydropower also provides vast recreational opportunities, improves
electric grid reliability and significantly reduces the amount of
carbon emissions from the United States.
In fact, NHA estimates that U.S. hydropower generation avoids 130
million metric tons of carbon each year. Put another way, the carbon
emissions avoided by U.S. hydropower generation is equivalent to
removing approximately 40 percent of the vehicles from U.S. roadways.
Truly a unique electricity source, hydropower provides numerous
benefits every day to millions of Americans.
Despite its many benefits, data from both the Energy Information
Administration and the Department of Energy confirms that the nation's
hydropower resources are greatly underutilized. Hydropower has
significant growth potential. Considering the nation's growing need for
clean and domestic energy, the time has come for Congress to ensure
that this potential is developed.
Less than three percent of the nation's 75,000 dams produce
electricity. The Department of Energy estimates that as much as 21,000
megawatts of hydropower capacity sits unused at existing hydropower
facilities and non-hydropower dams--this is capacity that could be
developed without building new dams or impoundments. This is enough
power for eight cities the size of Seattle or for the entire state of
Virginia. It is enough yearly power for 7.8 million homes.\1\
Developing this unused capacity would also result in the avoidance of
42 million metric tons of carbon emissions each year.
---------------------------------------------------------------------------
\1\ Using a 45% capacity factor and an EIA figure stating that the
average U.S. home consumes 10,524 KwH of electricity per year.
---------------------------------------------------------------------------
Of the 21,000 MW identified by DOE, 4,300 MW of new hydropower
generation could be achieved by simply further developing our nation's
existing hydropower infrastructure through efficiency improvements and
capacity additions. This is known as incremental hydropower. There is
enough incremental hydropower to meet the electricity needs of the
states of New Hampshire and Vermont. Put another way, it is enough
yearly power for 1.6 million homes.
In addition to the conventional hydropower technologies mentioned
above, DOE estimates that a wealth of potential exists for micro, low-
head, kinetic and low-power hydropower development. In fact, DOE
believes that the hydropower industry could double its present
contribution to the nation's electricity supply if these emerging,
cutting-edge, non-conventional technologies are fully deployed.
Unfortunately, almost none of the nation's potential hydropower
capacity is being developed. Bringing new hydro generation on-line is
capital intensive, and the costs are increasing. In addition,
hydropower faces costly regulatory hurdles of new development not faced
by other resources. While the costs clearly vary from project to
project, new hydro generation--depending on the type of upgrade--runs
from $650 to more than $2,500 per kilowatt (Kw), sometimes much more.
Hydropower's development costs are very similar to the development
costs of the resources that are presently included in the Section 45
production tax credit (PTC). In short, hydropower faces similar
obstacles in today's energy markets as other renewable energy sources
and deserves similar policies designed to encourage the development of
renewable energy, such as the Section 45 PTC.
In its December 2004 Report, the bipartisan National Commission on
Energy Policy recommended that Congress expand the renewable energy
production tax credit to include ``new hydropower generation.'' During
the 107th and 108th Congresses, members in both the Senate and the
House, on both sides of the aisle, introduced 15 bills that recognized
the hurdles to new hydropower development by providing incentives--none
of which were adopted. The Energy Policy Act of 2005, which was
recently adopted by the House, authorizes appropriated payment
incentives, but the Section 45 PTC is without question the best
mechanism to ensure that new hydropower generation will come on-line in
the near future.
Incentives work. One need only look at the recent growth of the
wind energy industry, as well as some of the other renewable energy
industries. Or, look at the last time there was any significant growth
in the hydropower industry--the 1980s when Congress last provided
incentives for hydropower development. Those incentives resulted in
approximately 10,000 MW of clean energy being placed on the electricity
grid. Since then, development has been stagnant at best. It's time for
Congress to provide hydropower incentives again.
Without incentives, the wealth of valuable hydropower potential
will continue to sit unused at a time when it is most needed. NHA urges
Congress to include a strong role for hydropower in its renewable
energy tax incentive package. Specifically, the National Hydropower
Association calls on Congress to amend the Section 45 PTC to include as
``qualified energy resources:''
1. incremental hydropower;
2. qualified hydroelectric facility; and
3. kinetic hydropower.
As stated above, ``incremental hydropower'' is additional electric
generation achieved from increased efficiency or additions of capacity
at an existing hydropower facility. A ``qualified hydroelectric
facility'' is a FERC-licensed minor diversion structure less than 20
feet in height or an existing non-hydro dam to which turbines or other
generating devices are added to produce energy. ``Kinetic hydropower''
is any technology that uses water to generate electricity but does not
require the use of a dam or impoundment.
Hydropower enjoys strong public support. It's time for policies in
Congress to better reflect this support. A 2002 poll showed that 93
percent of America's registered voters believe that hydropower should
play ``an important role'' in our energy future.\2\ Of those voters, 75
percent support incentives from the federal government to develop more
renewable power in the United States and favor incentives for new
hydropower capacity at existing hydropower projects. Put another way,
they support increasing the efficiency and generating capacity of
existing hydro projects (incremental hydropower).
---------------------------------------------------------------------------
\2\ Public Opinion Surveys with Registered Voters, January 2002;
Bisconti Research, Inc. (BRi). Error of +/--3 percent.
---------------------------------------------------------------------------
Of the registered voters who support incentives from the federal
government to develop more renewable power in the United States, 74
percent favor incentives for new hydropower capacity at existing non-
hydro dams (qualified hydropower). Put another way, they support
retrofitting non-hydro dams with power generating equipment.
Hydropower, to quote FERC Chairman Pat Wood, III, has long been ``a
backbone of the nation's energy infrastructure.'' Considering the
nation's growing interest in fully developing its clean, domestic
energy supplies, the public's support for hydro, as well as the growing
bipartisan support for maximizing the power output of the nation's
existing hydropower and dam infrastructure, it's time for Congress to
bolster the nation's hydropower resources. The best way to do that is
to include a strong role for hydropower in the Section 45 PTC. In
addition to clean energy, development of new hydropower will lead to
jobs, investment in the economy, fees to the government for the use of
federal non-hydro dams, general hydropower fees and a new source of tax
revenue once the tax credit expires.
This year marks the 125th anniversary of hydropower usage in the
United States. Including hydropower in the Section 45 PTC is the right
way to celebrate this milestone. Hydropower has long played an
important role in the nation's energy portfolio and energy strategy,
but it stands ready to play an even greater role in the future with the
proper incentives from Congress. With proper incentives, such as the
Section 45 production tax credit, Congress can ensure that the nation's
hydropower resources and its many power, environmental and societal
benefits are fully deployed and available to future generations of
Americans.
Statement of Pat Wolff, American Farm Bureau Federation
The American Farm Bureau Federation stands in strong support of the
multi-year extension of tax credits for renewable fuels. We thank the
committee for the opportunity for Farm Bureau to provide its comments
for the record of the May 24 hearing on tax credits for electicity
production from renewable sources.
The Renewable Electricity Production Tax Credit (REPTC) is a small
but important piece of a renewable energy strategy for the United
States. The tax credit provides incentives for the development and
expansion of a reliable source of ``home grown'' fuel that will help to
ensure adequate supplies, stabilize energy costs and reduce dependence
on traditional energy resources. Wind power capacity in the United
States has quadrupled since 1990 and currently provides enough energy
to support the electrical needs of 1.5-1.9 million households. Biomass
conversion is already one of the most widely used renewable
technologies, accounting for 12 percent of renewable energy supplies.
The tax credit also promises to provide a steady source of income
to our nation's farmers and ranchers. As one of the largest holders of
private land, the agricultural sector is the most logical provider of
the resources needed for the continued growth of the wind power
industry. Producers stand to benefit from lease payments provided by
wind energy developers using land for placement of wind turbines.
Income realized from wind energy projects is usually very stable,
increasing revenue security for farmers. In addition, many leasing/
royalty contracts contain a provision for a minimum payment per
turbine, providing reassurance during low-wind periods. Farmers and
ranchers can harvest the air around them while they grow crops and
graze livestock. Wind turbines have a small ``footprint'' and provide
little obstruction, with the largest models utilizing only one-quarter
acre, including access roads. Furthermore, the turbines can be placed
on CRP land with USDA's approval.
Information collected from the Department of Energy (DOE), the
Government Accounting Office (GAO) and the USDA outlines the current
and potential benefits to the agricultural industry. While there are
several types, a typical leasing agreement provides $2,000 per year for
a 750-kilowatt wind turbine, roughly two to three percent of a wind
project's gross revenue. A 250-acre farm could increase annual income
up to $14,000 per year, given the common turbine spacing requirements.
With DOE's goal of producing five percent of the nation's electricity
through wind energy by 2020, farmers and rural landowners could see
$1.2 billion in additional income from wind energy over the next 15
years.
Extension of the tax credit for electricity produced from biomass
fuels will boost demand for the crop residues and the bioenergy crops
needed to fuel biomass conversion. An extension of the credit could be
expected to generate demand for as much as 40 million acres of land for
bioenergy crops. Bioenergy crops could become the fourth most important
crop market from an acreage standpoint after wheat, corn and soybeans.
USDA and DOE's assessment of the potential pay-off from expanded
production of biomass indicates that an expanding conversion industry
would generate higher commodity prices. USDA's feasibility studies
suggest crop prices would be up to 14 percent higher with bioenergy
crops using 40 million acres of production. This would boost farm
incomes $3 billion to $6 billion due to higher receipts for existing
crops and receipts from bioenergy crops. As a result of improved crop
prices, there would be a reduction in farm program costs of $2 to $3
billion with lower commodity payments due to higher prices and
conservation costs reduced by allowing CRP contract holders to grow
bioenergy crops on reserve acreage in return for a lower rental
payment.
The REPTC is set to expire at the end of this year. A long-term
extension of the credit will speed up adoption of renewable
technologies and support development of the market infrastructure
necessary to make these technologies more competitive. Furthermore, a
multi-year extension of the REPTC will ensure the stability of the tax
credit, attracting the capital necessary to realize the benefits of
long-term planning.
Farm Bureau urges Congress to act quickly to pass a multiple-year
extension of the Renewable Electricity Production Tax Credit.