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Appendix A: Legislative Background Geothermal energy is a power source that produces electricity with minimal environmental impacts. Since geothermal power production entails no combustion, its atmospheric emissions are limited. Geothermal electricity is also attractive because at some sites it is economically competitive, reliable, and commercially proven. For these reasons, U.S. federal and state governments have historically taken an interest in increasing the supply of geothermal electricity. Federal government involvement began with the passage of the Geothermal Steam Act of 1970 (P.L. 91-581). This law was intended to make geothermal resources more widely accessible by authorizing the U.S. Department of Interior to lease geothermal resources on federal lands.12 After the 1973 Arab oil embargo and ensuing energy crisis, the U.S. government took an even stronger interest in promoting the production of geothermal energy. Congress passed the Geothermal Energy Research, Development and Demonstration Act of 1974 (P.L. 93-410), which established a geothermal research and development (R&D) program and a loan guarantee program that ultimately issued five loan guarantees totaling $136 million (Williams 1982). The program sought to help make private capital available to the geothermal industry. In the 1970s, the U.S. geothermal industry was unable to attract sufficient capital for project development because commercial bankers were unwilling to take risks on an industry about which they knew little. By sharing some of the risk of early geothermal development, the goal of the loan guarantee program was to provide a capital impetus to the industry.13 The Public Utility Regulatory Policies Act of 1978 (PURPA) (P.L. 95-617) set the stage for a geothermal power project boom beginning in the early 1980s. Prior to PURPA, there was little incentive for electric utilities to purchase electricity generated by geothermal power plants. Under the provisions of PURPA, however, utilities were required to buy power from qualifying power plants at rates that were equivalent to the cost that the utility would otherwise have to spend to generate or procure power. When PURPA was passed, the so-called “avoided” cost of power – which is calculated by forecasting future energy prices – was high because oil prices were at historic highs and expected to continue to increase. As a result, utilities entered into long-term agreements to purchase electricity from geothermal power plants at (what later turned out to be) above market rates. By creating a stable and secure market, PURPA insulated geothermal developers from market risk and made geothermal projects attractive for both debt lenders and equity investors. The Energy Tax Act of 1978 (ETA) (P.L. 95-618) made geothermal power projects even more attractive by allowing for depletion of geothermal deposits by instituting a percentage depletion allowance rate of 10 percent for 1978 through 1979, and 15 percent thereafter (CCH 1997). ETA also created a 10% Energy Investment Tax Credit (ITC) for geothermal and other renewable energy technologies. The ITC was increased to 15% from 1980 through 1986. The ITC, in addition to an existing general 10% investment tax credit, allowed some geothermal developers to receive income tax credits of up to 25% of the cost of geothermal technology through the mid-1980s. The Economic Recovery Tax Act of 1981 (ERTA) (P.L. 97-340) improved the attractiveness of geothermal projects even further by allowing for five-year accelerated depreciation of geothermal equipment. In 1986, the Tax Reform Act (P.L. 99-514) repealed the general 10% investment tax credit, but extended the 10% geothermal EITC through 1991. In 1992, the 10% ITC was permanently extended by EPAct. 12 Some believe that this act contained overly strict requirements for assessing the environmental impacts of proposed geothermal projects. As a result, the majority of lease applicants never obtained leases (Gorschboth 1980). The Energy Security Act (H.R. 2436), which was introduced in the U.S. House of Representatives on July 10, 2001, is intended to provide relief from the requirements of the Geothermal Steam Act. The success of the PTC will depend in part on the passage of legislation such as H.R 2436 which facilitates the federal leasing process. 13 Observers vary in their assessment of the act. Some believe that the program was unduly complex (Williams 1982). However, others point to the federal loan guarantee used by ORMAT in 1980 to launch the first commercial-scale binary plant in the U.S. as proof of the Act's success. The Renewable Energy Loan Guarantee Act (H.R. 2774), which was introduced in the U.S. House of Representatives on August 2, 2001, is intended to revive the loan guarantee program for geothermal and other renewable energy resources. 11PDF Image | An Economic Valuation of a Geothermal Production Tax Credit
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