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.