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Executive Summary The United States (U.S.) geothermal industry has a 45-year history. Early developments were centered on a geothermal resource in northern California known as The Geysers. Today, most of the geothermal power currently produced in the U.S. is generated in California and Nevada. The majority of geothermal capacity came on line during the 1980s when stable market conditions created by the Public Utility Regulatory Policies Act (PURPA) in 1978 and tax incentives worked together to create a wave of geothermal development that lasted until the early 1990s. However, by the mid-1990s, the market for new geothermal power plants began to disappear because the high power prices paid under many PURPA contracts switched to a lower price based on an avoided cost calculation that reflected the low fossil fuel-prices of the early 1990s. State-level policies in California and Nevada also played a role in the reduction in demand for geothermal power. In particular, as part of an ongoing restructuring effort, utilities in California and Nevada began selling off electric generation capacity and did not have interest in bringing new capacity online.1 Today, market and non-market forces appear to be aligning once again to create an environment in which geothermal energy has the potential to play an important role in meeting the nation's energy needs. Electricity supply shortages in California have greatly increased demand for reliable power sources such as geothermal energy; record levels of natural gas demand, coupled with infrastructure constraints, have resulted in volatile natural gas prices; and new concerns over environmental quality have led some states to enact renewable portfolio standards as part of their restructuring efforts. In this context, in 2001, multiple bills were introduced in the U.S. Congress that were intended to encourage geothermal energy development. One potentially attractive incentive for the geothermal industry is the Production Tax Credit (PTC). The current PTC, which was enacted as part of the Energy Policy Act of 1992 (EPAct) (P.L. 102-486), provides an inflation-adjusted 1.5 cent per kilowatt-hour (kWh) federal tax credit for electricity produced from wind and closed-loop biomass resources. Proposed expansions would make the credit available to geothermal and solar energy projects. This report focuses on the project-level financial impacts of the proposed PTC expansion to geothermal power plants. The key findings of this report are: • For the two financing cases examined in this report, the PTC has the potential to be an effective incentive for helping geothermal power projects to become more economically competitive with fossil fuel plants. • In the Project Finance case, where 10-year non-recourse debt is used, for binary cycle projects, a 10-year 1.8 cent/kWh inflation-adjusted PTC has the potential to reduce the real levelized cost-of-electricity (LCOE) by 25% from 5.7 to 4.3 cents/kWh.2 For flashed-steam projects, a PTC has the potential to reduce the real LCOE by 30% from 4.6 to 3.2 cents/kWh. • In the Corporate Finance case, where 10-year corporate debt is used, for binary cycle projects, a 10-year 1.8 cent/kWh inflation-adjusted PTC has the potential to reduce the real LCOE by 44% from 5.0 to 2.8 cents/kWh. For flashed-steam projects, a PTC has the potential to reduce the real LCOE by 44% from 4.1 to 2.3 cents/kWh. • Tax appetite limitations and the Alternative Minimum Tax (AMT) can reduce the overall effectiveness of tax incentives such as the PTC, independent of the type of debt used in project financing. The effectiveness of the credit will be improved if the PTC legislation contains specific provisions that enable developers to configure around tax appetite limitations, and if the AMT level is reduced for geothermal developers who receive the credit. 1 See Appendix A for legislative background on the geothermal industry. 2 All values expressed in 2001 U.S. dollars unless otherwise noted. iiiPDF Image | An Economic Valuation of a Geothermal Production Tax Credit
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