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.