In 2005, over 2,300 businesses and heating districts in 21 states used  geothermal resources directly for heat and hot water. Geothermal Development Faces Many Challenges

The development of geothermal resources for electricity production faces  major challenges, including high risk and financial uncertainty, insufficient  transmission capacity, and inadequate technology. Power plant developers state that the process for approving  leases and issuing permits to drill wells and construct power plants has  become excessively bureaucratic. In addition, developers of geothermal resources for both power  plants and direct uses faced a challenging federal royalty system prior to  the Energy Policy Act. Efforts by Federal, State, and Local Governments to Address the Challenges of Developing Geothermal Resources Show Promise

The Energy Policy Act of 2005 includes a variety of provisions designed to  help address the challenges of developing geothermal resources, including  the high risk and financial uncertainty of developing renewable energy  projects and the lack of sufficient transmission capacity. Provisions within  the Act address high risk and financial uncertainty by providing tax credits  and other incentives. These  incentives include property tax incentives, sales tax incentives, and  business tax credits. To address technological challenges, the state of California and the  Department of Energy provide financial assistance and grants to the  geothermal industry. Finally, the Act also contains provisions that simplify and/or reduce  federal geothermal royalties on resources that generate electricity and on  resources put to direct use. Geothermal Royalty Disbursements Will Change Significantly, and Changes in Electricity Prices Could Alter Total Royalty Collections

A royalty provision of the Energy Policy Act redistributes the federal  royalties collected from geothermal resources—cutting in half the overall  geothermal royalties previously retained by the federal government. While the Energy Policy Act  continues to provide that 50 percent of federal geothermal royalties be  disbursed to the states in which the federal leases are located, an  additional 25 percent will now be disbursed to the counties in which the  leases are located, leaving only 25 percent to the federal government. While, for most leases, the Energy Policy Act directs that the Secretary of  the Interior seek to maintain the same level of royalty revenues as before  the Act, our analysis suggests that this will be difficult because changing  electricity prices could significantly affect the percentage of future royalty  revenues collected. Finally, MMS does not routinely collect data from the sales of electricity  that are necessary to demonstrate that MMS is seeking to maintain the  same level of royalty collections from geothermal resources, as directed  by the Energy Policy Act.
Why GAO Did This Study

The Energy Policy Act of 2005 (Act) contains provisions that address challenges to developing geothermal resources, including the high risk and uncertainty of developing geothermal power plants, lack of sufficient transmission capacity, and delays in federal leasing. Among the provisions are means to simplify federal royalties on geothermal resources while overall collecting the same level of royalty revenues. This testimony summarizes the results of a recent GAO report, GAO-06-629 . In this testimony, GAO describes: (1) the current extent of and potential for geothermal development, (2) challenges faced by developers of geothermal resources, (3) federal, state, and local government actions to address these challenges, and (4) how provisions of the Act are likely to affect federal geothermal royalty disbursement and collections.

What GAO Found

Geothermal resources currently produce about 0.3 percent of our nation's total electricity and heating needs and supply heat and hot water to about 2,300 direct-use businesses, such as heating systems, fish farms, greenhouses, food-drying plants, spas, and resorts. Recent assessments conclude that future electricity production from geothermal resources could increase by 25 to 367 percent by 2017. The potential for additional direct-use businesses is largely unknown because the lower temperature geothermal resources that they exploit are abundant and commercial applications are diverse. One study identified at least 400 undeveloped wells and hot springs that have the potential for development. In addition, the sales of geothermal heat pumps are increasing. The challenges to developing geothermal electricity plants include a capital-intensive and risky business environment, technological shortcomings, insufficient transmission capacity, lengthy federal review processes for approving permits and applications, and a complex federal royalty system. Direct-use businesses face numerous challenges, including challenges that are unique to their industry, remote locations, water rights issues, and high federal royalties. The Act addresses many of these challenges through tax credits for geothermal production, new authorities for the Federal Energy Regulatory Commission, and measures to streamline federal leasing and simplify federal royalties, which totaled $12.3 million in 2005. In addition, the Department of Energy and the state of California provide grants for addressing technology challenges. Furthermore, some state governments offer financial incentives, including investment tax credits, property tax exclusions, sales tax exemptions, and mandates that certain percentages of electricity within the state be generated from renewable resources. Under the Act, federal royalty disbursement will significantly change because half of the federal government's share will now go to the counties where leases are located. Although the Act directs the Secretary of the Interior to seek to maintain the same level of royalty collections, GAO's analysis suggests this will be difficult because changing electricity prices could significantly affect royalty revenues. Finally, MMS does not collect sales data that are necessary to monitor these royalty collections.