Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 02:30 PM

Mr. Paul Thomsen

Public Policy Administrator, Ormat Technologies

Statement of Paul A. Thomsen

Public Policy Administrator

Submitted to the U.S. Senate Energy Committee

July 11, 2006

 

Mr. Chairman, members of the committee, it is my honor to testify today on behalf of not only ORMAT Nevada, but also on behalf of the Geothermal Energy Association which has an attached statement that has been reviewed and approved by the Board of Directors and will be submitted into the record.

 

By way of introduction ORMAT Nevada is a subsidiary of ORMAT Technologies, which is a New York Stock Exchange registered company (symbol “ORA”). ORMAT is a technology based company which develops, owns, and operates geothermal and recovered energy facilities as well as manufacturers and supplies geothermal and renewable energy power plants to third parties.  ORMAT has supplied 800 MWs of geothermal power plants in 21 countries throughout the world. We own and operate geothermal power plants producing over 250 MW in the United States and more specifically in California, Hawaii, and Nevada, and is pleased to provide US Geothermal Company with technology to bring Idaho’s first geothermal power plant online.  To date ORMAT has arranged over $ 1.5 billion dollars in geothermal projects and corporate financing.

 

The Impact of the Epact:

 

From the industry prospective we feel it is too early to assess the impact of the EPACT on the geothermal Industry because: (i) only one operating 20 MW project, which happens to be the ORMAT Richard Burdette Project has qualified to date for the PTC; (ii) the new regulations to implement the Rishell Amendment to the steam act are still currently being drafted, and (iii) the DOE Geothermal Research Program funding for fiscal year 2007 has been zeroed out by the administrations current 2007 budget.

 

The Potential Impact of the Epact:

 

That being said the Industry truly believes that despite the fact that geothermal power currently provides approximately 50% of the KWhs of renewable energy produced in the United States, the PTC will enhance the ability of geothermal projects to compete with other fossil fuel technologies.  The PTC can effectively lower the price of geothermal energy by 1.9c/KWh making geothermal energy cost competitive with fossil fuels, enabling the development of the potential 5,600 MW capacity available in the Western United States over the next decade.

 

The John Rishell Amendment to the Geothermal Steam Act will simplify processes allowing the BLM and other federal and state agencies to work in the spirit of the legislation encouraging expanded geothermal production.

 

 

 

The significant increase in the funding authorized for DOE’s renewable research programs, including geothermal energy will facilitate collaboration between researchers and industry to harness the underutilized geothermal resource in the West.

 

As considerations for the future:

 

ORMAT believes that the Production Tax Credit should be extended more effectively for geothermal facilities.  This may be accomplished by qualifying geothermal facilities for the PTC before the operational placed in service date if: (i) the facility has a power purchase contract in place and (ii) has begun construction.  This is not without precedent.  For some other tax provisions with similar time-certain requirements, the law allows investments to qualify based upon having binding contracts in place that meet specified requirements.

 

ORMAT believes that the BLM and other state agencies need to move quickly on the pending lease applications and complete regulations that will implement the new law. BLM needs to hold new lease sales in every western state.  Let’s implement the new law and urge Congress to actively oversee the process to ensure that all agencies keep the spirit of the legislation – to boost production of geothermal energy.  Then and only after a thorough review of the results, should industry ask Congress to take action on any changes that may be needed. 

 

ORMAT feels that the full geothermal potential of the Western United States can be brought online in the near term with the assistance of DOE.  In the next decade ORMAT feels that the DOE research program can best benefit by focusing its funding in the following areas: (i) improve accuracy of exploration technology to reduce risk; (ii) improve drilling technology to reduce risk and cost; (iii) improve identification, and characterizations of geothermal resource areas; (iv) share in the cost of exploration and drilling in new areas; (v) continue investigations into future technologies such as Enhanced Geothermal Systems (EGS). 

 

On behalf of ORMAT, and the Geothermal Energy Association, I want to applaud this committee for its interest in the secure domestic baseload energy supply that is geothermal energy.  We humbly realize that the decisions made by this committee impact our nations energy security. 

 


 

Statement of the Geothermal Energy Association

Submitted to the Senate Energy Committee

July 11, 2006

 

Mr. Chairman, Members of the Committee, the Geothermal Energy Association (GEA) appreciates the Committee’s interest in the development and use of geothermal and other renewable energy resources on the public lands.  Mr. Paul Thomsen of Ormat Technologies will be testifying today as a witness for both his company and the Association.  The GEA Board of Directors has reviewed this statement to be submitted for the record of the hearings along with his testimony.

 

The Energy Policy Act of 2005 has had a major, positive impact on geothermal energy.  In March of this year, GEA conducted a survey of industry activity.  The survey showed a substantial surge in developing geothermal power projects in the US.  Some 45 projects are under development.  These projects could nearly double US geothermal power output to a total capacity of roughly 5,000 MW.  The US had 2,828 MW of geothermal power capacity on-line in 2005.

 

The survey identified new power projects in Alaska, Arizona, California, Hawaii, Idaho, New Mexico, Nevada, Oregon and Utah.  These projects, when developed, would provide between 1778 MW and 2055 MW of new electric power for the grid.   This would be enough electricity to meet the needs of cities the size of Albuquerque, Las Vegas, Sacramento and Seattle combined.

 

Results of the survey provide dramatic evidence that new federal and state initiatives to promote geothermal energy are paying off.  The most significant catalyst behind this new industry activity has been passage of the Energy Policy Act by Congress (EPAct) in 2005.  EPAct made new geothermal plants eligible for the full federal production tax credit, previously available only to wind and closed-loop biomass projects.  It also authorized and directed increased funding for research by the Department of Energy (DOE), and gave the Bureau of Land Management (BLM) new legal guidance and secure funding to address its backlog of geothermal leases and permits.

 

If we can build and sustain the momentum that EPAct has given the industry, geothermal energy can become a major US energy source.  The untapped potential of this resource is enormous.  Today, geothermal energy provides nearly 3,000 MW of reliable electric power in the US but according to the US Geological Survey (USGS) this represents only a small fraction of US resource potential.  Representatives from the USGS 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 22,000 MW and an undiscovered, unidentified potential for geothermal production of an additional 72,000 to 127,000 MW from hydrothermal resources alone.

 

We want to thank Members of this Committee for helping us turn back some of the early challenges to this new momentum.  The FY 2007 Budget could have undermined several of EPAct’s initiatives, which would have been major setbacks to progress.  We were pleased to see Chairman Domenici state his support for directed funding for BLM’s geothermal program in his letter to the Budget Committee.   These funds are critically needed to ensure that the backlog of leases and permits is addressed.  Also, we were very pleased that the Senate Energy and Water Appropriations Subcommittee and the full Senate Appropriations Committee restored FY 2007 funding for DOE’s geothermal research program.

 

Building Upon The Energy Policy Act

 

The Energy Policy Act has helped launch a new era for the geothermal industry.   But, as this Committee knows, it’s only the beginning.  Consistent federal and state policies over a longer period of time will be needed to develop a new industry.  The roller-coaster of federal and state energy policies has undermined development of many clean technologies.  As the Preface to the report of the Western Governors’ Association’s (WGA) Clean and Diversified Energy Advisory Committee (CDEAC) states, “A strong, overarching theme…is the need for stable, long-term policies at both the federal and state levels….”

 

The Chairman and Members of the Senate Energy Committee know well that energy is too often an issue of the moment, or the latest crisis.  But to address US energy needs the nation needs sustained longer-term energy policies.  GEA has supported the work of this Committee to develop such policies, including the landmark Energy Policy Act of 2005.  We hope that the Committee will consider new energy legislation this session to build upon this success, and we make the following suggestions and observations to assist your efforts to expand the future contribution from our nation’s largely untapped geothermal resources.

 

Tax Incentives and State Renewable Initiatives

 

Because of the high initial cost and risk of developing new geothermal power projects, geothermal, one of the largest renewable energy resources in the western US, has not been developed to its full potential. The CEC recently estimated that the initial capital cost of a typical geothermal facility was roughly $2700 per kilowatt, which is 4-6 times greater than the capital cost of a comparable-output combined cycle natural gas power plant as shown in the following table. (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.)

Table 1: Capital Costs of Natural Gas and Geothermal Facilities

(CEC estimates)

 

Capital Costs

Installed Costs

In-service Cost

Combined Cycle Natural Gas

542

592

616

Geothermal Flash

2128

2410

2558

Geothermal Binary

3210

3618

3839

 

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

 

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.

 

The Energy Policy Act amended the Section 45 PTC to include new geothermal facilities on the same basis as new wind facilities.  The PTC gives the developer the incentive needed to choose an investment in geothermal energy.  However, given the longer construction lead-time for geothermal plants, 2-3 years, the short period the law allows for new plants to be placed in service undercuts its effectiveness.  The short timeframe also means that some of the largest new geothermal facilities may not go forward because they face unacceptable risks trying to meet the rigid deadline. 

 

Ideally, the placed in service deadline for the Section 45 PTC should be extended an additional 3 to 5 years and geothermal facilities should be given greater flexibility in meeting the placed in service requirement.  If geothermal facilities that secure binding contracts and are under construction by the placed in service deadline could be certain to qualify for the credit, substantial additional geothermal generation would be developed in the next few years.  Otherwise, many developers may balk at taking an all-or-nothing gamble on future extensions of the credit.

 

We also urge Congress to consider extending to geothermal energy the favorable tax treatment provided for oil and gas exploration in EPAct.  The cost and risk of exploration for new geothermal resources is as high or higher than those in the oil and gas industry, and the ability to attract capital to finance geothermal exploration is far more difficult.  We understand that the DOE has also completed a study examining the potential for a targeted loan guarantee program to address exploration risk, and would urge the Committee to examine this report when it is released.

 

Further, we should point out that state initiatives to use more renewable resources, particularly Renewable Portfolio Standards (RPS), are critical complements to these federal incentives.  These state efforts ensure that renewable power developers will be able to sell their power after undertaking the considerable expense and risk to build a power plant.  Power purchase contracts that meet developer, consumer and utility needs for clean, reliable and affordable power are vital.  Today, the combination of state initiatives and federal incentives makes this possible.  We also know that this Committee has considered and supported adopting a national RPS, which GEA has also supported.  However, we caution the Committee that the states are still learning how to make these standards work effectively, and that the lessons they learn should be examined as the Committee considers any future federal initiative.  It has been our position that any federal effort should build upon these state initiatives and be careful not to undermine them, and we appreciate the effort the Energy Committee has taken to address this issue in the past.

 

 


 

BLM Leasing and Permitting

 

The Energy Policy Act included an extensive re-write of the Geothermal Steam Act of 1970.  In its provisions, DOI is directed to place a priority on clearing up its large pending lease backlog.  For new leasing, regular lease sales must be held at least every two years in states with geothermal resources, and all leases will be subject to competitive bidding.  BLM and Forest Service (FS) are directed to adopt a 5-year leasing plan for National Forests with geothermal potential.  The royalty provisions of the law are completely rewritten.  For new leases royalties will be determined on a "gross proceeds" basis.  Royalties for existing leases are reduced for expanded production in the next four years (following enactment). County governments will receive 25% of the royalty income, and the federal share of the royalties is dedicated to BLM’s geothermal program for the next five years to provide the resources needed to address the lease and permit backlog and implement amendments to the law.

 

GEA supports many of the changes made by the Energy Policy Act to the Geothermal Steam Act.  We are, however, concerned about the long lead-time involved in putting the new program in place, and are aware that in the intervening time there have been concerns and fears expressed about how the new leasing system might work.  GEA believes that the new leasing law should be put into place as quickly as possible, and once it is operating Congress should plan an oversight hearing to determine whether there are changes needed in the law or the implementing regulations.

 

Earlier this year, U.S. Senators Harry Reid and John Ensign were joined by Senators Bingaman, Murkowski, Wyden, Craig, Crapo, Cantwell, Akaka, Feinstein, Murray, Allard, Inouye, and Salazar in a letter to the Interior Secretary nominee Dick Kempthorne, Acting Interior Secretary Lynn Scarlett, and Bureau of Land Management Director Kathleen Clark urging them to move forward expeditiously on geothermal energy leasing and permitting. 

 

On June 16th BLM Director Kathleen Clarke replied saying, in part:

 

We understand and share your concern about the need to provide access to Federal lands for the development of geothermal power. Currently there are 354 geothermal leases on BLM and U.S. Forest Service (FS) lands.  Of these, approximately 50 are producing geothermal resources, which contribute over 45 percent of the Nation’s geothermal power.  Over the past five years, the BLM has issued over 200 geothermal leases, compared to less than 10 issued in the previous five years.  Increased demand for alternative energy has resulted in a significant increase in the number of new applications filed, leaving the BLM with 130 pending applications and the FS with 64 pending applications.  As mandated by the Section 225 of the Energy Policy Act of 2005 (EPAct), the BLM and the FS have finalized a Memorandum of Understanding to work together to eliminate the inventory of pending lease applications over the next five years.

 

Many of these lease applications cannot be issued because the applicable BLM or FS land use plan did not analyze the potential impacts of geothermal energy production.  To resolve this problem, the BLM has prioritized areas that have the greatest geothermal potential and number of pending applications and directed resources to revise the land use plans to allow the issuance of geothermal leases.  In addition, the BLM and FS will prepare a programmatic environmental impact statement to amend or revise those land use plans that have the greatest potential for geothermal energy production.

 

The BLM and Minerals Management Service (MMS) are also drafting proposed regulations to address significant changes to the Federal geothermal program as mandated by the EPAct.  The EPAct does not authorize the BLM to issue new competitive leases in the absence of regulations.  The BLM and MMS have established an aggressive timetable that meets the legal requirements for rulemaking, with plans to publish proposed regulations by early July and final regulations by December 2006.  Although the EPAct did not place a deadline on the agencies, expeditious completion of these regulations is a priority.

 

The BLM Director’s response to the fourteen Senators indicates several causes of delay in developing geothermal resources on federal lands.  First, it appears that EPAct should have given the agencies deadlines, since that would ensure faster implementation.  Second, there is more demand for geothermal leases than the agencies can process with existing resources, which creates a backlog.  And, third, a fundamental cause for delays is the need to meet land use planning and National Environmental Policy Act (NEPA) requirements and the associated need for the agencies to have the resources to do so. 

 

Land use plan amendments and associated NEPA documents are posing serious and continuing obstacle and delays, particularly in California where these federal requirements are routinely interpreted broadly and add to already cumbersome state processes.  But, the problem is not just the planning and analysis, it is the double-bind that is created when agencies do not have the millions of dollars needed to conduct these studies and, as a result, no action gets taken.

 

Although California has extensive untapped geothermal resources, California’s BLM offices have not issued a geothermal lease in some 20 years.  People applying for geothermal leases in California have been more likely to die while waiting in line than receive a lease.  The impact this has had on whether companies want to even consider applying for a federal lease, or making nominations under the new law, is simply incalculable.

 

Further, the economic impact of delays can simply wipe away any incentives that Congress or the states might provide.  In a recent report, GEA examined what the cost of a 20 year delay could mean for a project.  If a rate of return of 17% is applied to a specific exploration cost of 150$/kW during 20 years, the resulting cost of exploration would be 3466 $/kW. This cost corresponds to the total capital costs for the most expensive projects currently under development. Figure 1 shows the evolution of exploration cost when long delays take place.

 


 

Figure 1: Financial impact of delay on exploration costs.

 

The following table and chart shows the evolution of the expected value of a $100 and $150 capital investment when a 17% rate of return is considered. This illustrates the financial impact delays may have on the project viability.

 

Delay (years)

0

1

2

3

4

5

6

7

8

9

10

Exploration Costs

100

117

137

160

187

219

257

300

351

411

481

150

176

205

240

281

329

385

450

527

616

721

 

 

Delay (years)

11

12

13

14

15

16

17

18

19

20

Exploration Costs

562

658

770

901

1054

1233

1443

1688

1975

2311

844

987

1155

1351

1581

1850

2164

2532

2962

3466

 

 

(From: Factors Affecting Costs of Geothermal Power Development, by Cédric Nathanaël Hance, Geothermal Energy Association, August, 2005. Available for download at http://www.geo-energy.org/publications/reports/Factors%20Affecting%20Cost%20of%20Geothermal%20Power%20Development%20-%20August%202005.pdf)

Reaching NEPA decisions in a timely manner is critical to the future development of geothermal energy.  Adding mandatory timelines for the completion of NEPA documents would be one of the most beneficial actions that Congress could take to address the inordinate delays created by agency implementation of NEPA.  While it is unfortunate that Congress may have to take this step, there does not appear to be any more reasonable approach than establishing statutory requirements for NEPA compliance. 

 

DOE Research and Development

 

EPAct included a significant increase in the funding authorized for DOE’s renewable research programs, including geothermal energy.  It also included specific direction and goals for their geothermal research efforts and created an “Intermountain West Geothermal Consortium” to facilitate collaboration between researchers and industry to harness the underutilized geothermal resource in the West.

 

There are substantial needs for improvements in geothermal technology, information, and efficiencies for which federal research is vital.  The range of near-term needs is broad.  Knowledge of the geothermal resource base is limited and largely outdated.  The technology available today to identify and characterize the resource is too unreliable to effectively mitigate the high risk of development.  Drilling is expensive and faces a range of difficulties in harsh geothermal environments.  While power cycles are improving, there is always room for additional efficiencies.  Where the resource does support commercial production, we need to be able to apply the techniques under development to engineer it to achieve power generation.

 

A recent workshop was conducted by the National Renewable Energy Laboratory (NREL) to examine the simple question: What is the total “potential” accessible geothermal resource in the U.S.?  That workshop went beyond the identified and undiscovered hydrothermal resources mentioned earlier to examine the potential from direct uses, co-production from oil and gas fields, geopressured resources, distributed generation, engineered geothermal systems, and geothermal heat pumps.  The workshop concluded that the energy potential from the full range of geothermal resources was in the millions of megawatts!

 

The Department of Energy should be working with industry, the university, and the laboratory research community to develop the tools needed to access this massive resource base.  But, we believe DOE needs some encouragement to re-examine the potential of geothermal energy and its role in meeting US energy needs.  We strongly urge this Committee to hold a separate hearing on research priorities for geothermal energy and invite witnesses from DOE, leading laboratories, industry, and university research centers to provide testimony to help structure an effective federal effort.

 

The Western Governors’ Clean Energy Initiative

 

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

 

The CDEAC Geothermal Task Force made the following specific recommendations, which we recommend to the Committee:

 

E. Geothermal Priority Recommendations

Market Development- The marketplace needs to support the continued development of geothermal resources.

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

            2. State laws and regulations should promote a continuing series of opportunities for power purchase agreements between developers and utilities. Whether generated through Renewable Portfolio Standards, Integrated Resource Planning, or other mechanisms, power purchase contracts are fundamental drivers of the market.

            3. Federal and state laws and regulations should provide incentives for utilities and others to enter into long-term contracts for renewable power. Accounting and regulatory standards should treat renewable power contracts as benefits instead of liabilities, and power purchase contracts should have the backing of the government to ensure their credit worthiness.

 

Timely Permitting and Environmental Reviews- Geothermal projects should be prioritized to ensure that permitting, leasing, and environmental reviews are completed in a timely and efficient manner.

            1. Federal, state, and local agencies should coordinate resources and requirements. Agencies should be designated to take the lead on specific issues to avoid duplication, and once issues are resolved, they should not be revisited without cause.

            2. A critical path for new projects should be defined as part of this cooperative effort, and timeframes for key agency decisions along the pathway should be established.

 

Transmission Access and Adequacy- The Western Governors should lead the process to ensure that adequate transmission is available for the identified resources.

            1. There should be consistent Western state policies on inter-connection to the grid that facilitate new geothermal (and other renewable) power development.

            2. A fee to support the cost of new transmission could be set that would spread the cost across all states, parties and technologies on a capacity basis.

            3. Both inter- and intra-state transmission is needed to support the identified resources and should be fast-tracked for permitting and environmental reviews.

 

Federal Program Support- Continuing support from key federal programs is needed to achieve the 2015 goals. Federal programs should be coordinated with state agencies.

            1. As the National Research Council concluded (Renewable Power Pathways, 2002), given the enormous potential of the resource base, geothermal research by the U.S. Department of Energy should be increased, particularly into technologies that can reduce risk, reduce costs, or expand the accessible resource base.

            2. Better resource information is needed. The new USGS resource assessment and DOE’s cost-shared drilling and exploration technology efforts should be priorities.

3. The US Department of Energy’s GeoPowering the West initiative should continue to support state and local governments, Indian Tribes, and others seeking to utilize the West’s untapped geothermal resources.

 

(From the Executive Summary of the Geothermal Task Force Report, available at: http://www.westgov.org/wga/initiatives/cdeac/geothermal.htm)

 


 

Geothermal Energy’s Future Potential

 

While only a small fraction of the geothermal resource base is utilized today, it already provides significant energy for our nation.  The United States, as the world's largest producer of geothermal electricity, generates an average of 16 billion kilowatt hours of energy per year – more than wind and solar combined.  With continued federal and state support, much more geothermal generation is possible.  The U.S. Geological Survey (USGS), in its Circular 790, estimated a hydrothermal resource base of between 95,000 and 150,000 MW, combining both the identified and estimated undiscovered resources.  As the recent NREL workshop concluded, the full range of geothermal resources has even greater potential to serve our nation’s energy needs.

 

Within the next ten years, it is estimated that with continued federal and state support geothermal resources could be providing between 8 and 15 Gigawatts of electric power to help meet national energy needs.  With advances in technology, even more of the largely untapped domestic resource base could be developed.  Geothermal’s role among clean energy technologies is important to recognize.  It is one of the few technologies that can supply, clean, reliable, low emission fuel that is also a baseload resource providing power 24-hours a day, 365 days a year.  This power could also support our national hydrogen initiative and nation ethanol goals, both of which will require significant amounts of energy to produce alternative domestic transportation fuels.

 

In addition to significant electric power generation, direct uses of geothermal resources by businesses, farms, and communities have substantial potential for energy, economic, and environmental benefits.  While geothermal resources have been used in communities and homes for decades -- for example Boise, Idaho has been using geothermal resources for space heating for over 100 years -- the extensive potential for direct use has been largely ignored and underutilized.  Direct use resources span the entire country -- from New York to Hawaii – and their increased use would displace fossil fuels. 

 

The benefits of expanding new geothermal production will be substantial.  Geothermal power can be a major contributor to the power infrastructure and economic well-being of the United States.  Geothermal power is a reliable, 24/7 baseload energy source that typically operates 90 to 98 percent of the time.  Insulated from market price volatility, geothermal power supports energy price stability and boosts energy security because it is a domestic resource.  Geothermal power can help diversify the nation’s energy supply and is a clean, renewable energy source. 

 

We appreciate the interest of the Senate Energy Committee in geothermal energy and are prepared to work with the Committee and its staff to achieve the enormous potential of this renewable resource.

 

Thank you.