An Economic Valuation of a Geothermal Production Tax Credit

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An Economic Valuation of a Geothermal Production Tax Credit ( an-economic-valuation-geothermal-production-tax-credit )

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Increasing the share of equity in a project is an imperfect solution for developers because the industry is highly equity constrained. Geothermal developers typically seek to minimize equity and are unlikely to engage in a financing arrangement that involves more than 50% equity under any circumstances (Owens 2001a). A more realistic capital structure for small and medium sized-Independent Power Producers involves 20% equity and would yield a real LCOE of 7.4 cents/kWh (Point C in Figure 1). At 20% equity, because of the DSCR constraint, the net effect of the PTC is a substantial increase in the investor's IRR with no corresponding decrease in the project's real LCOE. However, if the PTC were transferable to lending institutions, or if it were applicable as prepayment on any loans, then debt-service requirements would not limit the effectiveness of the credit. If these provisions were included in any new PTC legislation, then the ability of the credit to make geothermal projects more economically competitive would be increased. Impact of Capital Structure on Geothermal Binary Cycle Power Costs under Project Finance with 10-Year Debt 9 8C 7 6 5 4 3 2 1 0 A Base Case PTC Case B 50% 60% 70% DSCR constraint in all cases. 0% 10% 20% 30% 40% 80% 90% 100% Capital Structure (% Equity) Figure 1: Impact of Capital Structure on Geothermal Binary Cycle Power Costs under Project Finance. 6 Real Levelized Cost of Electricity (2001 cents/kWh)

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