Legislature(2009 - 2010)BUTROVICH 205
02/10/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB242 | |
| SB243 | |
| Presentation: Point Mackenzie Rail Extension | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 243 | TELECONFERENCED | |
| *+ | SB 242 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 242-GEOTHERMAL RESOURCE TAX CREDITS
CO-CHAIR MCGUIRE announced SB 242 to be up for consideration.
3:38:13 PM
MIKE PAWLOWSKI, aide for Senator McGuire, sponsor of SB 242,
explained that this measure is an income tax credit for
geothermal exploration and development. He said that geothermal
is a clean renewable source of power and can provide an
important base load supply of power. It has been used in other
countries and states successfully.
Section 1, he said, has the geothermal resource tax credit that
is located within the corporate income tax statutes under AS
43.20. This section has two tax credits: the first, on page 1,
lines 9-14, subsection (b), provides a resource exploration
credit in the amount of up to 50 percent of the qualified
exploration expenditures for exploration conducted on state land
and 25 percent for those not conducted on state land. According
to the Department of Revenue (DOR), the resource owned by the
state and not owned by the state should actually be adjusted to
reflect the land ownership when the bill moves forward. The
important limit on that credit starts on page 2, line 1 - that
it cannot exceed $20 million.
3:39:51 PM
MR. PAWLOWSKI said the second credit is on page 2, lines 8-12,
and is the resource development credit, which is 10 percent of
the qualified development expenditures. Both of the tax credits
are limited further by subsection (d) that says the tax credit
taken in either (b) or (c) can never amount to more than 50
percent of a person's tax liability. As a company develops and
brings the resource on line and is accruing revenue, these tax
credits can offset their tax liability - the key point being
that revenue would be coming into the state at that time. A
carry-forward of seven years is on page 2, lines 10-11, but it
should be more like 20 years.
3:41:24 PM
CO-CHAIR WIELECHOWSKI said he thought encouraging this sort of
development was a step in the right direction. He asked how "a
person" is defined in sections (a) and (b) and all throughout
the statute.
MR. PAWLOWSKI deferred that answer to Johanna Bales, Department
of Revenue (DOR).
3:41:40 PM
SENATOR STEVENS joined the committee.
3:42:03 PM
CO-CHAIR WIELECHOWSKI asked if this tax credit is available per
site or per company, per well or per unit.
MR. PAWLOWSKI again deferred to the DOR, but his understanding
was that the tax credit is based on actual expenditures rather
than the project multiple times.
CO-CHAIR WIELECHOWSKI asked if the credit is available when the
resource goes on line or as incurred even though it may not be
on line for several years.
MR. PAWLOWSKI replied that the tax credit accrues as the
expenditures are made, but without production there is no income
to claim the credit against. The credits are in the income tax
statutes, and that is why the carry-forward provisions are
necessary.
CO-CHAIR WIELECHOWSKI asked if the credit is transferable.
MR. PAWLOWSKI answered that the credit in the current version of
the bill is not transferable beyond a successive interest only.
So, you could sell the credit if you sell the facility along
with it. That language is on page 2, lines 16-19.
3:44:27 PM
CO-CHAIR WIELECHOWSKI asked why the credit is retroactive to
June 30, 2008 if the goal is to encourage future development.
MR. PAWLOWSKI explained that some companies are working on
geothermal projects in Alaska to the degree that actual
conducted expenditures would be creditable. The credit is to
apply to projects that are currently under development.
CO-CHAIR WIELECHOWSKI asked if these credits would be passed
through to consumers when the rates are set.
MR. PAWLOWSKI deferred that answer to the project sponsors in
terms of their understanding of whether or not they would be
rate regulated and to the Regulatory Commission of Alaska (RCA).
He added that the project sponsors would also talk about the
transferability issue and whether credits should be rebated or
transferred similar to oil and gas credits. It was not drafted
that way.
3:46:19 PM
CO-CHAIR MCGUIRE asked Ms. Bales how "person" is defined in
Title 43.
JOHANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR), answered that under the Alaska income tax title a
"person" is defined as an individual, a trust, an estate, a
partnership, or a corporation.
CO-CHAIR WIELECHOWSKI said he is trying to understand the
parameters with the $20 million cap. Could this credit be
applied to multiple persons or multiple sites, so an entity
could get multiple $20-million tax credits? Maybe that language
needs to be tightened up.
MS. BALES answered that the way the language is written, the
$20-million cap is per project. If an individual taxpayer had
several different projects, he could get a $20-million tax
credit for each project.
CO-CHAIR WIELECHOWSKI asked if someone is doing a well at Mt.
Spurr and they do multiple wells or wells that are several miles
apart, is "project" defined anywhere.
MS. BALES answered no; existing language doesn't have a
definition and neither do existing corporate income tax
statutes.
3:48:14 PM
SENATOR FRENCH asked how expenditures on state lands and
expenditures on other lands are treated differently
philosophically.
MR. PAWLOWSKI said he was unclear on the different taxing
relationship between state-owned land and non-state owned land,
and that these provisions are part of an entire fiscal picture.
CO-CHAIR MCGUIRE said the bill is to incentivize development on
state lands.
SENATOR FRENCH said he didn't know what revenue the state gets
from geothermal energy when it comes out of the ground other
than cheap electricity, which he hoped the state would get lots
of. The state wouldn't grab a royalty on that electricity. He
was trying to understand how the consumer would be able to
differential between geothermal from the state versus from the
federal government. Maybe it should all be 50 percent.
MR. PAWLOWSKI responded that Ms. Chin who is developing the
Naknek geothermal project that is not on state land might be
able to answer that question later in the hearing. He said the
definition is on pages 2-3, the qualified development
expenditures, but the project language still needs work.
SENATOR STEDMAN said he had a similar concern to Senator
Wielechowski's about retroactive application and thought they
should tighten up "qualified exploration expenditure" language
on page 3, line 9, and that they should do some background work
to find out how many geothermal businesses Alaska has.
CO-CHAIR MCGUIRE replied that currently no geothermal companies
are operating in Alaska although Ormat has the lease on Mt.
Spurr. When they came to town they started looking at statutes
on the books that deal with geothermal and what kinds of things
would make a difference in incentivizing geothermal energy in
Alaska. These two bills came out of those discussions. She said
the next one deals with royalty.
3:52:57 PM
SENATOR WAGONER asked how this would affect the Chena Hot
Springs business.
CO-CHAIR MCGUIRE responded that the Hot Springs doesn't operate
in a commercial environment.
SENATOR WAGONER said the owner is developing it to supply power
and lay a line over the mountain to the base, and that is a
commercial application.
CO-CHAIR MCGUIRE said if he was creating a commercial entity, he
would qualify for this credit. The retroactivity would be a
policy decision.
CO-CHAIR WIELECHOWSKI asked if a geothermal company joins in a
joint venture with another company that has money, could they
take the credit if no energy is produced.
MS. BALES answered yes.
3:56:13 PM
CO-CHAIR MCGUIRE said these bills were not put in for any one
entity, but rather the inspiration came from her trip to Iceland
to see how geothermal energy had transformed that nation that
now has a rate of 6 cents/kWh.
3:56:42 PM
PAUL THOMSEN, Director, Policy and Business Development, Ormat
Technologies, supported SB 242. He introduced Raum Orenstein who
is the project developer for the Mt. Spurr project and director
of business development with Ormat Technologies. He thanked
Senator McGuire and legislative staff for drafting these bills
that remove significant barriers to geothermal development. He
said he would focus on SB 242 at this time and give them a
little bit of background on Ormat Technologies. He elaborated
that Ormat is publicly traded on the New York Stock Exchange. It
started as a company in 1965 designing and manufacturing
equipment.
What sets them apart from other developers is that they are
vertically integrated. They design and manufacture equipment and
delineate the resource and operate the geothermal power plants.
Ormat did its first contract installing remote power units in
1975 with the TransAlaska Pipeline. In that time, he said, Ormat
has been responsible for over 1000 mgW of geothermal development
in over 71 countries around the world. They are interested in
coming back to Alaska and developing this resource to supply
energy to the Railbelt; they are particularly interested in Mt.
Spurr and Mt. Makushin.
He said that Ormat was honored in the recent AGA grant process
when the Division of Geological and Geophysical Survey (DGGS)
sited it as one of the most highly experienced companies in the
world and that the proposed approach is the best to move forward
toward potential development at Mt. Spurr.
MR. THOMSEN said that they strongly support SB 242, which
recognizes that geothermal exploration is similar to oil and gas
exploration in that they both involve high cost/risk drilling.
He added that many Alaskan resources are green fields that
require blind drilling which increases the cost and the risk.
3:59:28 PM
Alaska has introduced tax credits for oil and gas exploration
and this bill similarly incentivizes geothermal exploration in
the same way, he explained. If passed, their financial analysis
indicates that this credit, if the carry forward is increased to
20 years or made refundable, will lower the total cost of
geothermal development by more than 10 percent and, therefore,
lower the total cost of power to the ratepayer by 5 to 10
percent.
CO-CHAIR WIELECHOWSKI said this is a really exciting project. A
particularly good thing about geothermal is that it is a solid
base line of energy 24/7; it doesn't matter if the sun is out or
if the wind is blowing. He asked if they have timelines for this
project coming online, how they envision this credit passing
through to the consumer, and if he could talk publicly about
what he expects those rates to be.
MR. THOMSEN answered that typically developing a green field
geothermal project from defining the resource to bringing the
power on line takes 4 - 5 years, but in Alaska they are looking
to extend that a little bit by having it online by 2016.
On the question of impact to the ratepayers, their financial
model indicates that this credit reduces Ormat's CAPEX. With
geothermal projects there are two issues - the cost to develop
the project and the price they can get for selling the
electricity. So within this local market they are looking at a
fixed price and as an independent power producer, they look for
a contract with an investor-owned utility that is competitive
enough that they can get the price approved through the RCA.
Prices in 2009 dollars are about 12-14 cents/kWh. That gets
negotiated with an off-taker of that electricity- like GRETC or
a utility. Allowing them to lower the price translates into
ratepayers getting the benefit from that through lower utility
bills.
CO-CHAIR WIELECHOWSKI asked if that price includes the cost of
transmission lines into the main grid.
MR. THOMSEN replied no.
CO-CHAIR WIELECHOWSKI asked how the energy from this project
would get tied into the main grid.
MR. THOMSEN said they were looking for solutions to that. If
they had to bear building the additional transmission to reach
this project and the road, that would increase the price they
would need to get for their electricity to make this project
viable.
CO-CHAIR WIELECHOWSKI asked how many mgW they would produce.
MR. THOMSEN answered that they believe the resource could
achieve 100 mgW, but they have learned to develop these projects
pragmatically. So, the initial phase would be 50 mgW, and then
making sure the heat and water can sustain a full 100 mgW
development before making that capital expenditure.
CO-CHAIR WIELECHOWSKI asked if they plan to add more water to
create more steam.
MR. THOMSEN answered no. He explained that Ormat has a unique
closed loop system. There are two types of geothermal
development today: one is called "flash" and one is called
"binary." The first power plant using flash technology was built
in 1905 in Italy. This is basically where a well is drilled, the
water comes up out of pressure, and turns to steam that turns a
steam turbine. That process needs Mother Nature to work in your
favor because that steam needs to be recondensed into rain so it
can recharge the ground water table.
The Ormat system is closed loop: it brings up the hot water
under pressure in a closed environment and heats a secondary
working fluid. That working fluid vaporizes and when it expands
it builds pressure and turns a turbo expander. The hot brine is
then 100 percent reinjected back into the reservoir to be
reheated and reused. He said this is what makes their geothermal
development so unique - that it has a symbiotic relationship
with the reservoir. That reservoir needs to be maintained and if
they start to see a cooling effect, they know the power plant
will produce less electricity and become less economic; and they
will start losing money.
CO-CHAIR MCGUIRE asked him to describe their two projects in
Hawaii and Reno.
MR. THOMSEN responded that their facility in Reno, Nevada,
produces approximately 100 mgW of electricity; it is inside the
city limits and produces enough geothermal power to supply the
entire residential load of the city of Reno. The project was
built over a 20-year period with incremental projects coming on
line utilizing one reservoir. He said the prices have varied
greatly over that 20-year period. The initial power purchase
contracts were in the 6-8 cent range and today they are closer
to 10 cents.
He emphasized that as they look to bring the amounts per project
on rapidly, and added that the value in doing so becomes
exponentially more important in looking at a fixed-price 20-year
contract. They typically enter into fixed price contracts; so
the earlier the project gets on the line, the lower the rate
they have to negotiate, but that is what they have to live with
for the life of the project. So, these projects that came on
line at 6 cents in Reno in 1985 really show their value 20 years
later. They hope the same effect happens at Mt. Spurr. The Reno
resource is a unique geological resource that they have drilled
very deep and found very moderate-temperature water; so more
water and volume has to be used to sustain the reservoir.
4:07:22 PM
Contrary to that, their 30 mgW project on the Big Island of
Hawaii is from a volcanic resource, and it supplies
approximately 35 percent of the Big Island's energy needs. They
have implemented safety protocols and standards for dealing with
live molten lava and are able to produce a product there that is
very reasonably priced. Mt. Spurr would be a similar project,
however the price would be more in Alaska because geothermal
energy would be offsetting imported bunker fuel. On the Big
Island of Hawaii it would be closer to $.10 to $.12.
SENATOR HUGGINS asked for a "quick thumbnail sketch" of the two
states that have federal incentives.
MR. THOMSEN replied that today the federal government offers a
production tax credit, a $.02-tax rebate on the project once it
starts producing energy. But since that credit needs to be
reauthorized every few years, it is also unreliable. So, it is
very hard to count on that credit for their project that will
take five years before it will produce electricity. That tax
credit currently exists and today under the Stimulus Act they
can actually forego that production tax credit and receive a 30-
percent investment tax credit for projects coming on-line before
2013. So, their concern is not knowing what federal incentives
will be when this project is ready to be brought online in 2016.
He said Ormat operates projects in the states of Nevada,
California, Hawaii, and have built projects in Idaho and
Wyoming. Many of those states have also tried to incentivize
geothermal development either through property or sales tax
abatements or other such incentives. While they don't like the
impact to local governments that some of those incentives
create, they still think that looking at the corporate income
tax as a way to jump start these projects is "a great solution
to that."
SENATOR HUGGINS said this is exciting because it is the future.
He wanted to hear about some of their international experiences.
4:10:34 PM
MR. THOMSEN answered that they are equally as excited to trail-
blaze a project in Alaska and hope what they learn in developing
this project will lower the cost for future geothermal projects
in Alaska. Ormat recently developed a geothermal facility at
Lake Naivasha in Kenya, Africa, where they weren't able to
receive financing because people were concerned about developing
a project in a third world country. Ormat financed this 48 mgW
project on its own balance sheet; they then refinanced it
afterwards. They also improved upon the local community by
teaching local people how to operate and conduct maintenance to
the facility and by creating a school center for the children of
those employees. Today it is a model for developing geothermal
projects in third-world countries and has been cited in multiple
projects moving forward.
4:12:32 PM
MR. THOMSEN, referring to Co-chair Wielechowski's previous
question, said that Ormat's original concern was that their
leases for Mt. Spurr date back to 2008 and they would lose their
original $3.5 million investment by taking placed in service
today. They won't start getting the tax credit until this
project generates revenue and the majority of that exploration
cost is yet to come; so, they are open to modifying that date to
current.
4:13:28 PM
CO-CHAIR MCGUIRE asked him the value of the incentives to their
decision to continue moving forward.
MR. THOMSEN replied that these incentives are "absolutely
imperative" to moving this project forward. If they can't get
the price in line with what the local utilities are willing to
pay, it's a non-starter. Reducing these barriers would allow
them to release the funds quicker, thus allowing this project to
be actualized by 2016.
CO-CHAIR WIELECHOWSKI said, "I love clean energy, green energy;
I also like affordable, low-cost energy." He asked for
assurances that these tax credits will pass through to consumers
in the form of lower rates. He asked if he envisioned the RCA
regulating his end of the project or if he planned on going to
Chugach first and having them go to the RCA - and having no RCA
oversight over their project.
MR. THOMSEN replied that they envision the second getting a
contract with a utility and that contract is then approved or
not by the RCA. They want that contract to be transparent and to
be a good thing for Alaskans. He said the exciting thing about
working for a geothermal company is that it offers a base load
supply of electricity 24/7 and they think that their price,
while it might seem a little high compared to natural gas or
coal in the Lower 48, offers something that none of those can -
a fixed price over 20 years. That kind of a price hedge over 20
years will pay dividends in the future for the ratepayers of
Alaska - especially talking about current debates on cap and
trade, renewable portfolio standards, and so forth.
CO-CHAIR WIELECHOWSKI said the concern he has seen is that they
have a similar process in place for natural gas in Cook Inlet
and they have no idea how much it costs for producers to extract
it and sell it to Chugach Electric, ML&P or another
organization. It's something the RCA complains about a lot and
he wonders what direction they are headed in.
CO-CHAIR MCGUIRE thanked them for their presentation and for
believing in Alaska.
4:17:14 PM
SUZANNE LAMSON, Projects Manager, Naknek Electric Association,
said she was speaking for Donna Vukich, its general manager. She
thanked the committee for all of its work on energy-related
issues, especially regarding geothermal. She said they are
working on a green field development in Southwest Alaska and
they supported SB 242 and SB 243. Removing the barriers to
geothermal development through this kind of incentive is
"imperative" to develop geothermal energy in Alaska.
4:18:55 PM
MARILYN LELAND, Executive Director, Alaska Power Association,
strongly supported SB 242 and SB 243. She said Alaska has the
misfortune of having some of the most expensive energy costs and
the biggest problem supplying energy to its citizens. But, at
the same time it also has the fortune of having the best
resources in the country for generating electricity with
hydropower, wind and geothermal. Currently, one member, Naknek
Electric Association, is drilling for geothermal; several other
members including Inside Passage Electric Coop, Nome Joint
Utilities, and TDX Power are considering the possibilities.
However, the front-end costs are enormous and the systems of
pursuing of them are generally small; and without incentives
some geothermal projects just won't get done because the
companies won't be able to take the risk involved with that
cost, which would be a huge loss for Alaska.
MS. LELAND emphasized that geothermal is not a theoretical idea;
it is a real possibility and the time is here to carry it
forward.
CO-CHAIR MCGUIRE thanked everyone for their testimony and work;
and closed public testimony setting SB 242 aside.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Briefing on Southcentral Rail Extension.ppt |
SRES 2/10/2010 3:30:00 PM |
|
| Briefing on Rail Extension Econ. Benefits to Central AK.pptx |
SRES 2/10/2010 3:30:00 PM |