Policy

Renewable energy can reduce dependence on fossil fuels, reduce harmful pollution from energy production and consumption, and reduce emissions of greenhouse gases. However, most renewables have very different cost structures from conventional energy generating technologies, with high up-front costs and low operating costs. This is true for geothermal energy, which has high exploration and drilling costs in aditional to capital plant expenses. With additional technology development, these costs can be lowered, and geothermal energy can become more cost-competitive with other energy sources.

To spur geothermal technology and market development, the United States has developed policies at the federal and state government level offering a variety of tax incentives for the manufacture, installation, and use of renewables. This section discusses U.S. federal and state policies to promote geothermal energy, as well as policies in other nations with significant geothermal resources.

U.S. Federal Policies
With the oil embargoes and energy crisis of the 1970s, as well as growing environmental awareness, concerns about the United States continued dependence on conventional fossil fuels, as well as energy-related health and environmental hazards were raised. Policies to promote renewable energy and energy efficiency were developed to help decrease the Nation’s dependence on fossil fuels and increase domestic energy conservation and efficiency. This section focuses on the some approaches by the U.S. government to encourage the development of geothermal energy, including R&D funding, tax credits, and regulatory policy.

Federal Research and Development (R&D)
Federal energy R&D funding is important for maintaining technological progress in energy development since private industry cannot afford to fully fund, on its own, the continued research required. Energy R&D progress reduces cost, as well as increases energy yields from existing resources. Federal energy R&D includes nuclear, fossil fuel, renewable, energy conservation, and other energy technologies. Many geothermal energy R&D projects are undertaken in conjunction with industry partners and universities to ensure rapid deployment of the new technology into the marketplace.

During the mid-1990s, ongoing deregulation of the electric and natural gas utility industry in the United States, along with lower energy prices, resulted in a significant downturn in the private sector’s support for energy R&D. President Clinton, reacting to the trends, asked his Committee of Advisors on Science and Technology (PCAST) to perform an assessment of the U.S. energy R&D effort.⁵⁵ As a result of PCAST’s energy R&D assessment, a recommendation was made to set aside $51 million for geothermal energy R&D. This proposal included recommendations to expand advanced drilling R&D through the National Advanced Drilling and Excavation Technologies Institute, increase R&D on reservoir testing and modeling, and increase geothermal productivity. However, appropriations for FY’01 only amounted to $26.6 million, less than half of PCAST’s recommended funding. As demonstrated in Figure 6, appropriations for geothermal R&D have remained relatively flat from 1998 to 2003, at approximately half of the PCAST recommended level.⁵⁶ Increased federal geothermal R&D appropriations would help geothermal energy is to expand to its fullest potential.

Figure 6. U.S. Geothermal Energy R&D Budget, 1998–2003
Source: Department of Energy Office of Budget

Public Utility Regulatory Policies Act (PURPA)

The Public Utility Regulatory Policies Act (PURPA) is one of five statutes of the National Energy Conservation Policy Act of 1978, which sought to decrease the Nation’s dependence on foreign oil. The intent of PURPA is to encourage the development of independent, non-utility, fuel-efficient cogeneration plants and small renewable energy power projects by requiring utilities to buy power from such plants at the utility’s avoided cost. An avoided cost is that amount that a utility would otherwise have to spend to generate or procure power. As state above, PURPA requires utilities to buy power from two types of independent power producers: (1) small power producers using renewable energy sources; and (2) co-generators. Under PURPA, independent power producers are designated as qualifying facilities (QFs). A QF seeking a small power producer status must produce energy with at least 75 percent of the total energy input provided by renewable energy. A QF seeking co-generator status under PURPA must produce electricity and another form of energy sequentially while using the same fuel source. One of the benefits of PURPA is that it allows a period of fixed payments for both energy and capacity via long-term contracts which then makes a favorable environment for renewables, including geothermal, to obtain financing.

Tax credits
Tax credits are used as a tool to encourage certain behaviors or influence decisions. The U.S. government has been using tax credits to influence energy production decisions for decades. The first energy tax incentives arrived on the scene in 1978 with the passage of the Energy Tax Act of 1978. Tax incentives have been created, terminated, and reactivated in the United States over the past 20 years. In 1978, the Energy Tax Act extended a 10% business energy tax credit for investments in solar, wind, geothermal, and ocean thermal technologies. In 1986, the Tax Reform Act repealed the 10% business energy tax credit. In 1992, the 10% business energy tax credit returned as a permanent tax credit under the Energy Policy Act, but the credit could only be applied to investments in solar and geothermal equipment.

Other factors influence the ebb and flow of tax credits, such as politics, economics, and energy supply. Variability in the political support of tax incentives creates uncertainly in long-term renewable markets, therefore, making it difficult for developers to maximize the opportunities for development of renewables. However, without tax credits, the penetration of renewable energy, such as geothermal, into the energy production sector would be more difficult. Including geothermal energy under the federal Production Tax Credit (PTC) could provide a significant boost to the geothermal sector.

U.S. State Policies

State governments, in addition to the federal government, have initiated programs and policies to drive the diversification of the nation’s energy portfolio by incorporating renewable energy into the energy supply. Identified below are some policy measures that are influencing energy policy decisions at the state level.

Public Benefit Funds

Public Benefit Funds (PBF) are generated from a few sources such as a customer charge on utility bills and new user access fees to fund various public programs. These programs include low-income energy assistance, energy efficiency, consumer energy education, and renewable energy technology development and demonstration. California was the first state to create a PBF. In 1996, California placed a charge on all electricity bills from 1998 through 2001 that would provide $540 million for “new and emerging” renewable energy technologies. As of 2002, at least 24 states have a Public Benefit Fund program in place. See REPP’s map of state PBF policies for specific details of these policies at http://www.repp.org/sbf_map.html.

Renewable Portfolio Standards

Renewable Portfolio Standards (RPS) mandate a state to generate a percentage of its electricity from renewable sources or meet a specific renewable capacity requirement. Each state has a choice of how to fulfill this mandate using a combination of renewable energy sources, including wind, solar, biomass, geothermal, or other renewable sources. As of 2002, 12 states have adopted an RPS as part of their restructuring processes. California, for example, has an aggressive renewable portfolio standard requiring utilities to purchase 20% of their electricity from renewable sources by 2017. In 1999, Texas initiated a capacity-based standard to ensure that 2,000 megawatts (MW) of new generating capacity from renewable energy technologies be installed by 2009. Geothermal energy will most likely help fulfill RPS requirements in western states where geothermal energy is more prevalent. See REPP’s map of state RPS policies for specific details of these policies at http://www.repp.org/rps_map.html.

Policies in Other Nations
The Philippines, the world’s second largest user of geothermal energy for power generation, provides an example of several incentives to attract geothermal development. They are as follows:

• Recovery of operating expenses not exceeding 90% of the gross value in any year with carry forward of unrecovered cost,
  
• Service fee of up to 40% of net proceeds,
  
• Exemption from all taxes except income tax,
  
• Income tax obligation paid out of government’s share,
  
• Exemption from payment of tariff duties and compensating tax on the importation of machinery, equipment, share parts and all materials for geothermal operation,
  
• Depreciation of capital equipment over a 10-year period,
  
• Easy repatriation of capital equipment investment and remittance of earnings, and
  
• Entry of alien technoical and specialized personnel (including members of immediate families)

Endnotes
55. President’s Committee of Advisors on Science and Technology: Panel on Energy Research and Development: Report to the President on Federal Energy Research and Development for the Challenges of the Twenty-First Century. http://www.ostp.gov/Energy, accessed Nov 19, 2002.
56. Department of Energy Office of Budget. Detailed Budget Justifications: Energy and Water Development Appropriations—Renewable Energy. http://www.mbe.doe.gov/budget/index.htm
57. The Philippine Department of Energy. Geothermal Resource Development: Statistics. Capacity Additions for the Period 2000–2010. http://www.doe.gov.ph, accessed Oct 9, 2003.