Legislature(2009 - 2010)BUTROVICH 205
03/11/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Finish Overview of Agia Regulatins | |
| SB242 | |
| SB243 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 242 | TELECONFERENCED | |
| += | SB 243 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 242-GEOTHERMAL RESOURCE TAX CREDITS
4:21:54 PM
CO-CHAIR MCGUIRE called the meeting back to order at 4:21 and
announced SB 242 to be up for consideration.
SENATOR FRENCH moved to adopt CSSB 242(RES) 26-LS1347\E. There
were no objections and it was so ordered.
MIKE PAWLOWSKI, staff to Senator Wielechowski, explained that
the committee substitute (CS) version E for SB 242 makes a
substantial departure from the original version by changing the
development and exploration tax credits in the following ways:
· Page 1, lines 9-14, subsection (b) is an exploration
credit. Since geothermal is a resource you have to drill
for, they felt it was appropriate to develop an exploration
credit. The original bill had an exploration tax credit
that differentiated between exploration on state land and
land that was not state land. It was originally 50/25
percent, but is changed to a flat 30 percent. In the
original version the applicability of the expenditures was
retroactive; in the current version it is not. These are
prospective expenditures made within the state. The carry-
forward language in the original bill was limited to 5-7
years and that has been changed to 20 years on page 1, line
13.
· Page 2, lines 2-6, subsection (c) introduces a development
tax credit - you have explored for a geothermal resource,
discovered that there is a commercial project there and
then step into the development phase. The development tax
credit is also a 30 percent tax credit. The unused carry-
forward tax credit on page 2, line 5, has been extended to
20 years. In the original version of the bill this was a 10
percent credit. The substantial departure that was made in
the bill is rather than a credit against income taxes, they
moved to a refundable credit (page 2, lines 12-15) for the
exploration expenditures (lines 12-13) that are refundable
on an annual basis. Once you move to the development of a
phase of a project (lines 14-15) the development credit is
only refundable after the project actually goes into
service. So you actually have to finish the project and
start producing gross income from the project and then you
can get your development credits. The reason carry-forward
language was included in a refundable credit is that
refundable credits are ultimately subject to legislative
appropriation. That is a risk project sponsors take when
they are looking at refundable credit. So, in the event the
Legislature didn't appropriate the money for a refundable
credit that unused credit could be rolled forward and
applied against income taxes or when the Legislature had
the money to appropriate for the credit.
· Page 2, lines 20-21, working with the Department of Natural
Resources (DNR) they developed a definition of when
exploration turns into development.
4:26:42 PM
CO-CHAIR WIELECHOWSKI said he supported the bill in concept but
the state could be put into a position of investing tens of
millions of dollars without getting any geothermal plant from
it, and he wanted to make sure that this credit is actually
needed. He had the same concern about any project.
MR. PAWLOWSKI responded that the original bill capped
exploration credits at $20M; a refundable credit for the actual
facility doesn't exist until you go into the development phase -
the facility has to be actually built and producing energy. In
terms of the overall risk of not ever getting a project, he was
correct there could be a lot of exploration that eventually
yields no project.
CO-CHAIR WIELECHOWSKI said he understands that the exploration
aspect of the Mt. Spurr project is about $137M, and so a 30
percent tax credit would be $40M-plus.
MR. PAWLOWSKI said he felt uncomfortable answering that. The
language that they used from the Division of Oil and Gas is
different than what the Ormat project sponsors thought in
determining exploration versus development. He would let them or
the representatives from Akutan speak about what would be
expenses in the exploration phase.
CO-CHAIR MCGUIRE said these are great questions to get on the
record. She had asked Ormat to model their internal rate of
return (ROR) and to show what every one of the government
incentives would look like and how that would benefit consumers,
in particular.
CO-CHAIR WIELECHOWSKI said he could wait and see that
presentation and then ask Mr. Pawlowski questions afterwards.
CO-CHAIR MCGUIRE set CSSB 242(RES) aside.
SB 242-GEOTHERMAL RESOURCE TAX CREDITS
4:57:05 PM
CO-CHAIR MCGUIRE said they would go to back to SB 242.
MR. THOMSEN said they reset their model in SB 242 to again say
at today's costs they would need $.14. If SB 243 were to pass
they would be eligible for a 30-percent refundable investment
tax credit and that would allow them to lower the price they
would need to develop this project by 2.5 cents. In dollars this
would be worth $82.5 million to this $275-million project. A
very small portion of that is in the exploration phase; the
majority is in the development phase.
When they originally look at resource development they are
talking about all the wells required for the development of the
project. In CSSB 242(RES) exploration is defined to stop after
drilling the second production well. To put that into
perspective, he said a good geothermal well today at a good
temperature is enough to produce approximately 4-5 MW. So, after
the second well is drilled and they can confirm that there is a
resource, they move into the development phase where they will
still drill many production and reinjection wells for the fluid
and covering the body of the power plant. So for total exposure
during this exploration phase they are looking at a number in
the vicinity of $15 million. If both of the production wells
were $5 million and the leases they have already acquired in
Alaska are about $3 million, any additional money in between
those would amount to an exposure of about $4.5 million. Since
this would be in the exploration phase they could get that tax
credit annually. Once they get past that point then there is no
exposure until the project is placed in service.
MR. THOMSEN said that $82 million would be quite a commitment
from the State of Alaska to make this project happen. Lowering
the rate by 2.5 cents would result in a $260 million savings to
Railbelt ratepayers for the life of the project and an economic
benefit for Ormat of $175 million.
Eighty-two million is an undiscounted number. Knowing the time
value of money and that $82 million in one payment up front is
worth a lot more than them paying the state for the next 26
years, they used a discounted rate of 7 percent and said with
the time value of money the estimated discount savings to
ratepayers would about $132 million, which still nets an
economic benefit of $50 million for Ormat. He said they were
trying to show that dealing in a fixed market if the state is
willing to partner with Ormat and give them $82 million up front
allowing them to get this PPA in place and move the project
forward more rapidly they would be able to discount the
wholesale price to the utility by 2.5 cents.
He explained that because they are regulated by the RCA they
will know what their construction costs were because the credit
is based on them reviewing the eligible construction costs and
giving them 30 percent of that in a cash rebate. They disclose
their rate of return and the RCA will know the price because not
only will Ormat have disclosed it but the utility will have
brought the contract to them. So, there should be very good
transparency with this model.
5:01:12 PM
SENATOR STEDMAN asked why the tax credit is 30 percent instead
of 10, 15, 50 or zero.
MR. THOMSEN replied that they are trying to get to what they
think utility expectations are today for a PPA. The savings is
less with 10 percent. To enter into a PPA in an aggressive time
frame they need to be around 10 cents; this gets them to that
price.
CO-CHAIR MCGUIRE said the earlier version had a 25 percent on
state land and 50 percent on federal land. The decision was made
to go to a flat 30 percent. It's just a question of what level
of partnering. The idea is that the state offers exploration
credits in Cook Inlet and other places; so is this a place the
state wants to help mitigate costs and absorb risk. If they
think they do, then they can argue about what the rate should
be. She appreciated them at least putting in the numbers so they
could understand what the benefits are.
5:02:59 PM
SENATOR FRENCH followed up on some questions from Senator
Wielechowski and asked how an amendment saying something like a
taxpayer accepting credits under this bill accepts RCA
regulation would be viewed.
MR. THOMSEN said he didn't see a problem with that. Ormat's
understanding is that they are currently regulated by the RCA
and will always be regulated by them as long as they are selling
power to anyone in the State of Alaska.
CO-CHAIR WIELECHOWSKI said if that 10 cents was a wholesale
price or retail to the consumer.
MR. THOMSEN replied that all prices his prices are wholesale.
CO-CHAIR WIELECHOWSKI said he understood that the wholesale
price for consumers in the Cook Inlet area is roughly 6.5 cents.
MR. THOMSEN answered that he just came from the House hearing on
GRETC and the Black & Veatch report had changed their estimate
from 5 cents to 17.5 cents. So he didn't know enough to tell him
what the wholesale price is today.
CO-CHAIR WIELECHOWSKI said he is curious as to the
competitiveness of the project because the state would be making
a pretty large up front contribution.
MR. THOMSEN said Ormat can be competitive. They have been
developing projects for 40 years and they make money doing it;
they typically have a 13-14 percent rate of return. What is
unique about this price is if they move quickly to lock it in -
whether it's 10 or 11 cents - that is a fixed price for 25
years. So, 10 years from now when they are trying to find the
prevailing rate of electricity, this is their hedge; 10 cents
locked in for this period of time is very competitive. He said
they brought on projects in Nevada in 1985 and had to compete
with and draw down their rate of return to compete at 6.5 cents.
They are still sitting on those projects today saying boy that
was a good investment.
5:07:16 PM
He said their project would diversify the state's energy
resources and remove the fuel cost risk; and while he didn't
know how to value that, but he didn't know of any other fuel
supply they could go to to get a 25-year fixed rate. They have
zero emissions, a closed loop system and are not depleting the
reservoir of any hot water, and they think in the long term this
will be 100-percent competitive. They might get to the point
someday where renewable resources will enable policy to be
changed on directing fossil fuel generation.
CO-CHAIR WIELECHOWSKI asked if his numbers are a fixed price for
25 years if in 2035 the utility would still be paying a
wholesale price of 11.5 cents.
MR. THOMSEN replied that they have negotiated a very modest
price escalation in the price contract for operations and
maintenance and the RCA would have to approve it.
CO-CHAIR WIELECHOWSKI asked who would build the long
transmission line.
MR. THOMSEN answered they assume that building a 40-mile
transmission line is a job for the utility.
SENATOR STEDMAN said if they were going to incentivize
geothermal electrical generation, maybe they should do modeling
to see if the state would be better off subsidizing the
transmission lines, which are the negative side of this whole
scenario. He didn't know the answer.
CO-CHAIR MCGUIRE remarked if you don't have a project to begin
with to connect to a transmission line who cares.
SENATOR STEDMAN said he assumed they had selected a physical
location.
MR. THOMSEN answered yes, because they are on state leases. He
added that these bills are independent of transmission lines
because they can impact other geothermal developments that may
not have the same transmission "log jams" they have. The Mount
Spurr development is 40 miles from the Beluga power plant where
they would tie in and be able to access the Railbelt grid. This
infrastructure would benefit future hydro plans in this area
like Chakachamna and Tyonek/CIRI.
SENATOR STEDMAN asked if they had done economic models for the
40-mile power line to Beluga.
5:14:32 PM
CO-CHAIR MCGUIRE explained that the bill was designed to
incentivize geothermal exploration and development generally in
any geothermal area that might be explored in the state of
Alaska. It is not project-specific. Interestingly, the contract
that Ormat has already entered into renders the royalty portions
of the bills before them meaningless.
MR. THOMSEN said he would be happy to provide them with a
presentation on those hurdles that they are already preparing
for another committee.
5:16:49 PM
RAYMOND MANN, Renewable Energy Program Manager, City of Akutan,
said they are currently pursuing development of both hydro
electric and geothermal power with feasibility and exploration
currently being funded by the Renewable Energy Grant Fund. He
thanked the legislature for continuing support of renewable
energy development which is critical to the development of
sustainable rural communities. They are committed to eliminating
their dependence on diesel fuel, reducing or eliminating PCE
subsidies, eliminating the 50,000 tons of carbon emissions per
year and providing residential and commercial power well below
the current 32 cents KWh that their residential users pay.
They are also committed to public private funding for the
development of their geothermal resource. It's currently
estimated that 3/4 of the total development cost of their
project will be borne by private investors. However, the ability
to attract private capital and development expertise will depend
heavily on reasonable tax incentives, carbon offsets,
exploration credits and a positive investment environment. They
believe that both SB 242 and SB 243 are the right approach and
would go a long way in creating the investment environment that
will allow Akutan and many other communities to create the
public private partnerships needed for geothermal development.
MR. MANN said they support the legislation in general although
its applicability to Akutan is not quite clear. They are
developing on private land, for example, and the royalty issues
may not be applicable to them.
5:19:38 PM
BRAD EVANS, CEO, Chugach Electric Association, said Chugach
generates 90 percent of its electricity with natural gas from
Cook Inlet and they are now facing tremendous pressures in
security in the price of their natural gas fuel supply. In
reaction to this, Chugach is embarked on a mission to diversify
its generation portfolio and reduce their reliance on a single
source of fuel. They also support the development of a rational
statewide energy policy that addresses where, when, and how the
state incentives should be applied for development of
alternative energy supplies. He said priority should be made for
those projects that are sustainable and geothermal is
sustainable; it is also good for future prosperity.
He said the potential for geothermal development in Alaska
appears viable; however the cost of development for this
resource in remote areas is significant. Even a location that
you might be able to see from a tall building in Anchorage is
still a long ways away in terms of getting a project built. In
these situations it makes an appropriate state energy policy to
lower costs barriers to development where possible. Both bills
want to lower costs and in each of these cases their primary
concern is the assurance these benefits flow through to the
consumers and not merely result in additional enrichment to the
developer. To be clear, their concerns do not stop just at the
incentives contemplated here today; they also apply to those
situations where any public money is loaned to developers
whether they are state or federal. If public money touches any
project directly or indirectly transparency should be demanded
ensuring the flow of the benefits to the public.
In this specific situation, Mr. Evans said, Ormat has
demonstrated a refreshing willingness to work towards an open
and transparent process. He said the efforts of this committee
are noteworthy, measurable and a step in the right direction.
5:22:56 PM
CO-CHAIR MCGUIRE thanked everyone for their testimony, set both
bills aside, and adjourned the meeting at 5:22 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 242 Version E.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 242 |
| SB 243 Version R.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 243 |