-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-930T
TITLE: Renewable Energy: Increased Geothermal Development
Will Depend on Overcoming Many Challenges
DATE: 07/11/2006
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GAO-06-930T
* Background
* Current Geothermal Development Is Limited, and Estimated Pot
* Geothermal Development Faces Many Challenges
* Efforts by Federal, State, and Local Governments to Address
* Geothermal Royalty Disbursements Will Change Significantly,
* Conclusions
* Contact and Acknowledgments
* Order by Mail or Phone
Testimony
Before the Committee on Energy and Natural Resources, United States Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:30 p.m. EDT
Tuesday, July 11, 2006
RENEWABLE ENERGY
Increased Geothermal Development Will Depend on Overcoming Many Challenges
Statement of Jim Wells, Director Natural Resources and Environment
GAO-06-930T
Mr. Chairman and Members of the Committee:
We are pleased to participate in the Committee's hearing to discuss the
development of geothermal energy on federal lands and the role of
geothermal resources in the nation's portfolio of alternative energy
sources. We previously testified that fossil fuels, such as coal, oil, and
natural gas, provide about 86 percent of our nation's total energy
consumption, with the rest coming from other sources, including nuclear
energy and renewable resources, such as hydroelectric energy, wind, solar
energy, and geothermal resources.1 Our nations' long-standing reliance on
imported crude oil and natural gas and disruptions in their supply
highlight the need to develop renewable energy sources. Among these
sources is geothermal energy. Geothermal energy is a unique renewable
resource in that it can provide power that is independent of weather and
climate, thereby enabling a consistent and uninterrupted supply of heat
and electricity. Geothermal energy also creates fewer environmental
impacts than the production of natural gas and other conventional fossil
fuels. Because many areas that have the potential to produce additional
geothermal energy are located on federal lands, the federal government
plays a major role in the future development of geothermal energy.
Harnessing geothermal energy, however, is not easy. Developers of
geothermal energy face many challenges, including the high risk and
uncertainty of developing geothermal power plants, lack of sufficient
capacity to transmit electricity from these plants to consumers,
inadequate technology, and delays in leasing federal lands, which supply
about 50 percent of the geothermal resources used to generate electricity.
To address these and other challenges, the Congress included detailed
provisions in the Energy Policy Act of 2005.
My testimony today is based on a report we recently completed entitled
"Renewable Energy: Increased Geothermal Development Will Depend on
Overcoming Many Challenges." In this report, we addressed: (1) the current
extent of and potential for geothermal development; (2) challenges faced
by developers of geothermal resources; (3) federal, state, and local
government actions to address these challenges; and (4) how provisions of
the Energy Policy Act are likely to affect federal geothermal royalty
disbursements and collections. In addressing these issues, we reviewed key
studies on the extent and potential of geothermal development, interviewed
a variety of government and industry officials, reviewed substantial
supporting documentation and the Energy Policy Act, analyzed geothermal
royalty data, and toured geothermal electricity plants and other
facilities in California, Idaho, Nevada, and Oregon.
1See Meeting Energy Demand in the 21st Century: Many Challenges and Key
Questions, GAO-05-414T (Washington, D.C.: March 16, 2005).
In summary, we found the following:
o Although locally important, geothermal resources produce a very
small portion of our nation's total electricity and heating needs.
In 2004, geothermal resources generated about 0.3 percent of the
nation's total electricity and supplied heat and hot water
directly to about 2,300 district heating systems, fish farms,
greenhouses, food drying plants, spas, and resorts. The most
recent estimates of future electricity generation from geothermal
resources suggest that the current production of 2,500 megawatts
of electricity-enough to supply 2.5 million homes-could increase
to as much as 12,000 megawatts in 11 years. Although the future
potential of other geothermal applications is less known, about
400 undeveloped geothermal wells and hot springs could supply heat
and hot water directly to a variety of businesses and other
organizations.
o The developers of geothermal resources face significant
financial, technical, and logistical challenges. Geothermal
electric power plant developers face a capital intensive and risky
business environment in which obtaining financing and securing a
contract with a utility are difficult, where recouping the initial
investment takes many years, and where transmission expenses could
be costly due to remote locations or capacity constraints on the
electric grid. These developers must also use exploration and
drilling technologies that are inadequate for the unique
attributes of geothermal reservoirs. Developers of electric power
plants on federal lands face additional administrative and
regulatory challenges and a complicated royalty payment system.
Businesses and individuals trying to tap geothermal resources for
direct use face unique marketing, financing, and technical
challenges and, in some cases, must contend with remote locations,
restrictive state water rights, and high royalties.
o To address the many challenges of developing geothermal
resources, federal, state, and local governments have implemented
a number of incentives and initiatives, many of which show
promise. However, it is too early to assess their overall
effectiveness. To address the capital intensive and risky nature
of developing geothermal power plants, the Energy Policy Act
grants developers a federal tax credit. Some states also encourage
the production of electricity from renewable energy by granting
various tax credits or by passing laws or adopting policies
requiring that public utilities provide a minimum percentage of
their electricity from renewable energy. To address technological
challenges, the federal government and the state of California
awarded research and development grants through the Department of
Energy's Geothermal Technologies Program and the California Energy
Commission, respectively. The Energy Policy Act gives the Federal
Energy Regulatory Commission new authorities to address
transmission limitations and contains provisions designed to
improve the efficiency of federal geothermal leasing and to
simplify or reduce federal geothermal royalties.
o How federal royalties are shared will change significantly
since passage of the Act, and the total amount of royalties
collected could change significantly if electricity prices also
change. While the Act continues to provide that 50 percent of
federal geothermal royalties will be disbursed to the states in
which the federal leases are located, an additional 25 percent
will now be disbursed to the counties in which the leases are
located, leaving only 25 percent to the federal government. The
Act also directs for most leases that the Secretary of the
Interior seek to maintain the same level of royalty revenues as
before the Act, but our analysis suggests that this will be
difficult because of two factors. First, because lessees in
certain situations will have the option of choosing a different
formula for calculating royalties, changing electricity prices
could significantly affect the percentage of future royalty
revenues that they pay. Second, the Minerals Management Service
(MMS) does not routinely collect from royalty payors the gross
sales revenue figures for the electricity they sell so MMS cannot
determine if or how these future royalty revenues differ from what
lessees would have paid before the Act. We have made
recommendations to the Secretary of the Interior to instruct the
appropriate managers within MMS to collect from royalty payors the
gross sales revenue figures from electricity sales. MMS has agreed
to do so.
Geothermal energy is literally the heat of the earth. This heat is
abnormally high where hot and molten rocks exist at shallow depths
below the earth's surface. Water, brines, and steam circulating
within these hot rocks are collectively referred to as geothermal
resources. Geothermal resources often rise naturally to the
surface along fractures to form hot springs, geysers, and
fumaroles. For centuries, people have used naturally occurring hot
springs as places to bathe, swim, and relax. More recently, some
individuals have constructed buildings over these springs,
transforming them into elaborate spas and resorts, thereby
establishing the first direct use of geothermal resources for
business purposes. Businesses have also established other direct
uses of geothermal resources by drilling wells into the earth to
tap the hot water for heating buildings, drying food, raising
fish, and growing plants. Where the earth's temperature is not
high enough to supply businesses with geothermal resources for
direct use, people have made use of the ground's heat by
installing geothermal heat pumps. Geothermal heat pumps consist of
a heat exchanger and a loop of pipe extending into the ground to
draw on the relatively constant temperature there for heat in the
winter and air conditioning in the summer.
Geothermal resources can also generate electricity, and this is
their most economically valuable use today. Only the highest
temperature geothermal resources, generally above 200 degrees
Fahrenheit, are suitable for electricity generation. When
companies are satisfied that sufficient quantities of geothermal
resources are present below the surface at a specific location,
they will drill wells to bring the geothermal fluids and steam to
the surface. Upon reaching the surface, steam separates from the
fluids as their pressure drops, and the steam is used to spin the
blades of a turbine that generates electricity. The electricity is
then sold to utilities in a manner similar to sales of electricity
generated by hydroelectric, coal-fired, and gas-fired power
plants.
In the United States, geothermal resources are concentrated in
Alaska, Hawaii, and the western half of the country, primarily on
public lands managed by the Bureau of Land Management (BLM). The
Congress set forth procedures in the Geothermal Steam Act of 1970
for leasing these public lands, developing the geothermal
resources, and collecting federal royalties. Today, BLM leases
these lands and sets the royalty rate, and the Minerals Management
Service (MMS)-another agency within the Department of the Interior
(DOI)-collects the federal geothermal royalties and disburses to
the state governments its share of these royalties as required by
law. In 2005, MMS collected $12.3 million in geothermal royalties,
almost all of which was derived from the production of
electricity.
Geothermal resources currently account for about 0.3 percent of
the annual electricity produced in the United States, or 2,534
megawatts-enough electricity to supply 2.5 million homes. Even
though the percentage of electricity generated from geothermal
resources is small nationwide, it is locally important. For
example, geothermal resources provide about 25 percent of Hawaii's
electricity, 5 percent of California's electricity, and 9 percent
of northern Nevada's electricity. As of January 2006, 54
geothermal power plants were producing electricity, and companies
were constructing 6 additional geothermal power plants in
California, Nevada, and Idaho that collectively will produce
another 390 megawatts of electricity. Over half of the nation's
electricity generated from geothermal resources comes from
geothermal resources located on federal lands in The Geysers
Geothermal Field of northern California; in and near the Sierra
Nevada Mountains of eastern California; near the Salton Sea in the
southern California desert; in southwestern Utah; and scattered
throughout Nevada.
Industry and government estimates of the potential for electricity
generation from geothermal resources vary widely, due to
differences in the date by which forecasters believe the
electricity will be generated, the methodology used to make the
forecast, assumptions about electricity prices, and the emphasis
placed on different factors that can affect electricity
generation. Estimates published since 1999 by the Department of
Energy, the California Energy Commission, the Geothermal Energy
Association, the Western Governor's Association, and the Geo-Heat
Center at the Oregon Institute of Technology indicate that the
potential for electrical generation from known geothermal
resources over the next 9 to 11 years is from about 3,100 to
almost 12,000 megawatts. A more comprehensive and detailed study
of electricity generation from all geothermal resources in the
United States was published in 1978 by the U.S. Geological Survey
(USGS). This assessment estimated that known geothermal resources
could generate 23,000 megawatts if all of them were developed. The
USGS estimate is greater because it did not consider how much
electricity could be economically produced, given competing
commercial sources of electricity. In addition, the USGS estimated
that undiscovered resources could generate an additional 72,000 to
127,000 megawatts. In short, geothermal resources that could
generate electricity are potentially significant but largely
untapped.
In 2005, over 2,300 businesses and heating districts in 21 states
used geothermal resources directly for heat and hot water. Nearly
all of these are on private lands. About 85 percent of these users
are employing geothermal resources to heat homes, businesses, and
government buildings. While most users heat one or several
buildings, some users have formally organized heating districts
that pipe hot water from geothermal wells to a central facility
that then distributes it to heat many buildings. The next most
plentiful direct use application is for use by resorts and spas,
accounting for over 10 percent of sites. About 244 geothermally
heated resorts and spas offer relaxation and therapeutic
treatments to customers in 19 states. Two percent of geothermal
direct use applications consist of heated greenhouses in which
flowers, bedding plants, and trees are grown. Another two percent
of geothermal direct use applications are for aquaculture
operations that heat water for raising aquarium fishes for pet
shops; catfish, tilapia, freshwater shrimp and crayfish for human
consumption; and alligators for leather products and food. Other
direct use geothermal applications include dehydrating vegetables,
like onions and garlic, and melting snow on city streets and
sidewalks.
The potential for additional direct use of geothermal resources in
the United States is uncertain due to the geographically
widespread nature of low-temperature geothermal resources and the
many different types of applications. USGS preformed the first
national study of low-temperature geothermal sites in 1982, but
this study was not specific enough to identify individual sites
for development. In 2005, the Geo-Heat Center at the Oregon
Institute of Technology identified 404 wells and springs that
might be commercially developed for direct use applications-sites
that had the appropriate temperatures and are within 5 miles of
communities.
Geothermal heat pumps have become a major growth segment of the
geothermal industry. They make use of the earth's warmer
temperature in the winter to heat buildings and use the earth's
cooler temperature in the summer for air conditioning. The
Geothermal Heat Pump Consortium estimated that 1 million units
were in operation in all 50 states as of January 2006. Because
geothermal heat pumps are effective where ground temperatures are
between 40 and 70 degrees F, they can be installed in almost any
location in the United States and, therefore, constitute the most
widespread geothermal application and represent the greatest
potential for future development.
The development of geothermal resources for electricity production
faces major challenges, including high risk and financial
uncertainty, insufficient transmission capacity, and inadequate
technology. Geothermal groups reported that most attempts to
develop geothermal resources for electricity generation are
unsuccessful, that costs to develop geothermal power plants can
surpass $100 million, and that it can take 3 to 5 years for plants
to first produce and sell electricity. Although some geothermal
resources are easy to find because they produce tell-tale signs
such as hot springs, most resources are buried deep within the
earth-at depths sometimes exceeding 10,000 feet-and finding them
often requires an in-depth knowledge of the area's geology,
geophysical surveys, remote sensing techniques, and at least one
test well. The risks and high initial costs associated with
exploring for and developing geothermal resources limit financing.
Moreover, few lenders will finance a geothermal project until a
contract has been signed by a utility or energy marketer to
purchase the anticipated electricity. Geothermal industry
officials describe the process of securing a contract to sell
electricity as complicated and costly. In addition, lack of
available transmission creates a significant impediment to
developing geothermal resources for electricity production. In the
West where most geothermal resources are located, many geothermal
resources are far from existing transmission lines, making the
construction of additional lines economically prohibitive,
according to federal, state, and industry officials. Finally,
inadequate technology adds to the high costs and risky nature of
geothermal development. For example, geothermal resources are hot
and corrosive and often located in very hard and fractured rocks
that wear out and corrode drilling equipment and production
casing.
Developing geothermal resources for direct use also faces a
variety of business challenges, including obtaining capital,
overcoming specific challenges unique to their industry, securing
a competitive advantage, distant locations, and obtaining water
rights. While the amount of capital to start a direct-use business
that relies on geothermal resources is small compared to the
amount of capital necessary to build a geothermal power plant,
this capital can be substantial relative to the financial assets
of the small business owner or individual, and commercial banks
are often reluctant to loan them money. Challenges that are unique
to certain industries include avoiding diseases in fish farms;
combating corrosive waters used in space heating; and controlling
temperature, humidity, and light according to the specifications
of the various plant species grown in greenhouses. Even when
overcoming these unique challenges, successful operators of direct
use businesses may need to secure a competitive advantage, and
some developers have done so by entering specialty niches, such as
selling alligator meat to restaurants and constructing an "ice
museum" in Alaska where guests can spend the night with interior
furnishings sculptured from ice. Furthermore, developing direct
uses of geothermal resources is also constrained because
geothermal waters cannot be economically transported over long
distances without a significant loss of heat. Even when these
resources need not be moved, obtaining the necessary state water
rights to geothermal resources can be problematic. In areas of
high groundwater use, the western states generally regulate
geothermal water according to some form of the doctrine of prior
appropriations, under which specific amounts of water may have
already been appropriated to prior users, and additional water may
not be available.
Developing geothermal power plants on federal lands faces
additional challenges. Power plant developers state that the
process for approving leases and issuing permits to drill wells
and construct power plants has become excessively bureaucratic.
BLM and Forest Service officials often have to amend or rewrite
resource or forest management plans, which can add up to 3 years
to the approval process. Delays in finalizing the resource and
forest management plans and in conducting other environmental
reviews have resulted in backlogs of lease applications in
California and Nevada, particularly when the public has raised
more environmental issues. Geothermal applications, permits, and
environmental reviews are also delayed by a lack of staff and
budgetary resources at the BLM state and field offices that
conduct the necessary work and when BLM must coordinate with the
Forest Service, which manages land in some project areas. In
addition, developers of geothermal resources for both power plants
and direct uses faced a challenging federal royalty system prior
to the Energy Policy Act. While developers of geothermal power
plants generally did not consider the federal royalty system to be
a major obstacle in constructing a geothermal power plant, some
described paying royalties as burdensome and reported expending
considerable time and expense on royalty audits. On the other
hand, some developers of geothermal resources for direct use
stated that the federal royalty system was a major obstacle and no
longer economically feasible.
The Energy Policy Act of 2005 includes a variety of provisions
designed to help address the challenges of developing geothermal
resources, including the high risk and financial uncertainty of
developing renewable energy projects and the lack of sufficient
transmission capacity. Provisions within the Act address high risk
and financial uncertainty by providing tax credits and other
incentives. For example, starting on January 1, 2005, the Act
extends for 10 years a tax credit on the production of electricity
from geothermal resources for already existing plants and for any
new plants producing by December 31, 2007. The Act also provides a
financial incentive for tax-exempt entities, such as
municipalities and rural electric cooperatives, by allowing the
issuance of clean renewable energy bonds for the construction of
certain renewable energy projects, including geothermal
electricity plants. Investors can purchase the bonds, which pay
back the original principal and also provide a federal tax credit
instead of an interest payment. Another provision in the Act may
decrease the high risk of geothermal exploration by directing the
Secretary of the Interior to update USGS's 1978 Assessment of
Geothermal Resources, which is in need of revision because
significant advancements in technology have occurred since its
publication. The Act addresses transmission challenges by
providing the Federal Energy Regulatory Commission (FERC) with new
authorities in permitting transmission facilities and in
developing incentive-based rates for electricity transmission in
interstate commerce. FERC can now approve new transmission lines
in certain instances when a state fails to issue a permit within 1
year of a company's filing of an application, and companies that
acquire FERC permits for transmission facilities can acquire
rights of way through eminent domain proceedings. In November
2005, FERC initiated the rulemaking process for establishing these
rates.
State governments are also addressing the financial uncertainty of
developing renewable energy projects by creating additional
markets for their electricity through Renewable Portfolio
Standards (RPS). An RPS is a state policy directed at electricity
retailers, including utilities, that either mandates or encourages
them to provide a specific amount of electricity from renewable
energy sources, which may include geothermal resources. To date,
22 states plus the District of Columbia have RPSs, and three other
states have set RPS targets, although not all states have
significant geothermal resources. Additional state programs also
provide tax credits and other financial incentives for renewable
energy development, including electricity generation from
geothermal resources. These incentives include property tax
incentives, sales tax incentives, and business tax credits.
To address technological challenges, the state of California and
the Department of Energy provide financial assistance and grants
to the geothermal industry. California's Geothermal Resources
Development Account competitively awards grants to promote
research, development, demonstration, and commercialization of
geothermal resources. California's Public Interest Energy Research
Program also funds awards for renewable resource projects,
including geothermal projects. On the federal side, the Department
of Energy's Geothermal Technologies Program competitively awards
cost-sharing grants to industry for research and development. In
the past, program funds have been used to pioneer new drill bits,
demonstrate the large scale use of low-temperature geothermal
resources to generate electricity, produce new seismic
interpretation methods, commercialize geothermal heat pumps,
develop slimhole (reduced diameter) drilling for exploration, and
produce a strategy for reinjection at The Geysers Geothermal
Field. The program's budget was $23 million in fiscal year 2006.
However, the President's budget contains no funding for fiscal
year 2007, and the House's proposal for fiscal year 2007 is to
appropriate a substantially reduced amount of $5 million. In
contrast to these funding decisions, the Senate Energy and Water
Appropriations Subcommittee just recently approved a budget of
$22.5 million for geothermal research and development. While the
future impacts of reduced or eliminated funding for geothermal
technology is uncertain, industry representatives believe that
this funding is necessary to address the near-term need to expand
domestic energy production and the long-term need to find the
breakthroughs in technology that could revolutionize geothermal
power production.
The Energy Policy Act also contains provisions aimed at addressing
the challenges of developing geothermal resources on federal
lands. Specific provisions are aimed at streamlining or
simplifying the federal leasing system, combining prospective
federal lands into a single lease, and improving coordination
between DOI and the Department of Agriculture. The Act also
requires the Secretary of the Interior and the Secretary of
Agriculture to enter into a memorandum of understanding that
establishes an administrative procedure for processing geothermal
lease applications and that establishes a 5-year program for
leasing of Forest Service lands and reducing its backlog of lease
applications, as well as establishing a joint data retrieval
system for tracking lease and permit applications. Finally, the
Act also contains provisions that simplify and/or reduce federal
geothermal royalties on resources that generate electricity and on
resources put to direct use. MMS is in the early stages of
implementing these provisions, and hence it is too early to assess
their overall effectiveness.
A royalty provision of the Energy Policy Act redistributes the
federal royalties collected from geothermal resources-cutting in
half the overall geothermal royalties previously retained by the
federal government. Established by the Geothermal Steam Act of
1970, as amended, the prior distribution provided that 50 percent
of geothermal royalties be retained by the federal government and
the other 50 percent be disbursed to the states in which the
federal leases are located.2 While the Energy Policy Act continues
to provide that 50 percent of federal geothermal royalties be
disbursed to the states in which the federal leases are located,
an additional 25 percent will now be disbursed to the counties in
which the leases are located, leaving only 25 percent to the
federal government. The Act also changes how the federal
government's share of geothermal royalties can be used. Prior to
passage of the Act, 40 percent of the federal government's share
was deposited into the reclamation fund created by the Reclamation
Act of 1902, and 10 percent was deposited into the general fund of
the Department of the Treasury. For the first 5 fiscal years after
passage of the Act, the federal government's share is now to be
deposited into a separate account within the Department of the
Treasury that the Secretary of the Interior can use without
further appropriation and fiscal year limitation to implement both
the Geothermal Steam Act and the Energy Policy Act.
While, for most leases, the Energy Policy Act directs that the
Secretary of the Interior seek to maintain the same level of
royalty revenues as before the Act, our analysis suggests that
this will be difficult because changing electricity prices could
significantly affect the percentage of future royalty revenues
collected. Electricity prices are not possible to predict with
certainty, and as discussed below, changing prices could
significantly impact royalty revenues because electricity sales
account for about 99 percent of total geothermal royalty revenues.
The Act contains provisions for each of three specific types of
leases that generate electricity: (1) leases that currently
produce electricity, (2) leases that were issued prior to passage
of the Act and will first produce electricity within 6 years
following the Act's passage, and (3) leases that have not yet been
issued.
For leases that currently produce electricity, future geothermal
royalty revenues will depend on electricity prices. The Act
specifies that the Secretary of the Interior is to seek to collect
the same level of royalties from these leases over the next 10
years as it had before the Act's passage but under a simpler
process. Prior to passage of the Act, lessees of most geothermal
electricity projects paid federal royalties according to a
provision within MMS's geothermal valuation regulations referred
to as the "netback process." To arrive at royalties due under this
process, lessees are to first subtract from the electricity's
gross sales revenue3 their expenses for generation and
transmission and then multiply that figure by the royalty rate
specified in the geothermal lease, which is from 10 to 15
percent.4 The Act simplifies the process by allowing lessees,
within a certain time period, the option to request a modification
to their royalty terms if they were producing electricity prior to
passage of the Act. This modification allows for royalties to be
computed as a smaller percentage of the gross rather than the net
sales revenues from the electricity so long as this percentage is
expected to yield total royalty payments equal to what would have
been received before passage of the Act. Royalty revenues from a
geothermal lease currently producing electricity will remain the
same if the lessee elects not to convert to the new provision of
the Act. On the other hand, if the lessee converts to the new
provision, royalty revenues should remain about the same only if
DOI negotiates with the lessee a future royalty percentage based
on past royalty history and if electricity prices remain
relatively constant. If royalties are based on historic
percentages of gross sales revenues and electricity prices
increase, however, royalty revenues will actually decrease
relative to what the federal government would have collected prior
to passage of the Act. The federal government will receive less
revenue under this situation because expenses for generation and
transmission do not increase when electricity prices increase, and
the higher royalty rate specified in the lease is not applied to
the increase in sales revenues.
For the second type of lease-leases that were issued before the
Act and that will first produce electricity within 6 years after
the Act's passage-royalty revenues are likely to drop somewhat
because lessees are likely to take advantage of an incentive
within the Act. The Act allows for a 50 percent decrease in
royalties for the first 4 years of production so long as the
lessee continues to use the netback process.5 Because of the
substantial reduction in royalties, it is likely that lessees
owning leases issued before passage of the Act will elect to pay
only 50 percent of the royalties due on new production for the 4-
year period allowed by the Act. This incentive also applies to
sales revenues from the expansion of a geothermal electricity
plant, so long as the expansion exceeds 10 percent of the plant's
original production capacity. Owners of geothermal electricity
plants currently paying royalties under the netback process may
elect to take the production incentive for new plant expansions if
they perceive that the royalty reduction is worth the additional
effort and expense in calculating payments under the netback
process and worth the possibility of being audited.
It is difficult to predict exactly how royalty revenue from the
third type of lease-leases that have not yet been issued-will
change, but it appears that revenue impacts are likely to be
minor, based on our review of historic royalty data. The Act
specifies that the Secretary of the Interior should seek to
collect the same level of royalty revenues over a 10-year period
as before passage of the Act. The Act also simplifies the
calculation of royalty payments by providing that, for future
leases, royalties on electricity produced from federal geothermal
resources should be not less than 1 percent and not greater than
2.5 percent of the sales revenue from the electricity generated in
the first 10 years of production. After 10 years, royalties should
be not less than 2 percent and not greater than 5 percent of the
sales revenue from the electricity. Our analysis of data for seven
geothermal projects showed that lessees were paying a wide range
of percentages after 10 years of production-from 0.2 to 6.3
percent. Three of the seven projects paid under the minimum 2
percent royalty rate prescribed in the Act, suggesting that some
projects in the future could pay more under the Act's new
provisions than they would otherwise have paid. On the other hand,
one project paid greater than the maximum 5 percent prescribed in
the Act, suggesting that it is possible for a plant to pay less in
the future than it would otherwise have paid. However, neither the
amount that the one plant would have overpaid nor the amounts that
the three plants would have underpaid are significant.
Even though provisions of the Energy Policy Act may decrease
royalties on direct use applications, the impact of these
provisions is likely to be small because total royalty collections
from direct use applications are minimal. In fiscal years 2000
through 2004, MMS reported collecting annually about $79,000 from
two direct use projects, or less than 1 percent of total
geothermal royalties. While a provision of the Act may encourage
the use of federal geothermal resources for direct use by lowering
the federal royalty rate, we believe based on challenges facing
developers that it is unlikely that this royalty incentive alone
will stimulate substantial new revenues to compensate for the loss
in revenue due to the lower royalty rate. We believe that in order
to substantially increase the development of federal direct use
applications, developers must overcome the relatively high capital
costs for investors, unique business challenges, and water rights
issues.
Finally, MMS does not routinely collect data from the sales of
electricity that are necessary to demonstrate that MMS is seeking
to maintain the same level of royalty collections from geothermal
resources, as directed by the Energy Policy Act. For most
geothermal leases, MMS will need to calculate the percentage of
gross sales revenues that lessees will pay in future royalties
from electricity sales and compare this to what lessees would have
paid prior to the Act. However, MMS does not routinely collect
these data. Accordingly, we are recommending that the Secretary of
the Interior instruct the appropriate managers within MMS to
collect from royalty payors the gross sales revenues from the
electricity they sell. MMS has agreed to do so.
The Energy Policy Act of 2005 addresses a wide variety of
challenges facing developers of geothermal resources. The Act
incorporates many of the lessons learned by state governments and
federal agencies in an attempt to provide financial incentives for
further development and make federal processes more efficient.
However, the Act was only recently adopted, and insufficient time
has passed to assess its effectiveness. Several of the Act's major
provisions will be left to the federal agencies within DOI for
implementation, and the drafting and public comment period for
regulations that implement these provisions will not occur
overnight. Agencies will also need to spend considerable time and
effort in working out the details for implementation and securing
the necessary budgets. Hence, the fate of a significant portion of
our nation's geothermal resources depends on the actions of these
federal agencies.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to respond to any questions that you or other Members of
the Committee may have at this time.
For further information about this testimony, please contact me,
Jim Wells, at 202-512-3841 or [email protected] . Contributors to
this testimony include Ron Belak, John Delicath, Dan Haas, Randy
Jones, Frank Rusco, Anne Stevens, and Barbara Timmerman.
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Background
Current Geothermal Development Is Limited, and Estimated Potential for
Additional Development Varies
Geothermal Development Faces Many Challenges
Efforts by Federal, State, and Local Governments to Address the Challenges of
Developing Geothermal Resources Show Promise
Geothermal Royalty Disbursements Will Change Significantly, and Changes in
Electricity Prices Could Alter Total Royalty Collections
230 U.S.C. S: 191 (a). The State of Alaska is an exception to this
provision, receiving 90 percent.
3The valuation regulations 30 C.F.R. S: 206.352 (c) (1) (ii) actually call
for using gross proceeds, not sales revenue, in this calculation. The
Energy Policy Act also refers to the term gross proceeds. Gross proceeds
are all financial compensation accruing to the lessee from the sales of
electricity. Since sales revenues are generally the largest component of
gross proceeds, we use the two terms synonymously in this report for
simplicity.
4Deductions are estimates that are to be recalculated at the beginning of
each year. Prior year's deductions are to be adjusted based on actual
costs during that year.
5Pub. L. No. 109-58 S: 224 (2005).
Conclusions
Contact and Acknowledgments
(360734)
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