TODAY’S STUDY: THE GREAT BARGAIN IN GEOTHERMAL ENERGY
The Economic Costs and Benefits of Geothermal Power
Benjamin Matek and Karl Gawell, June 2014 (Geothermal Energy Association)
This paper examines current publically available research that assesses the economic costs and benefits of geothermal energy. GEA, as a matter of policy, does not utilize unpublished or proprietary information regarding power prices or bids. Utilizing published sources also ensures accuracy and fairness of the paper.
Also, it should be noted this paper is not intended to be a criticism of other sources of renewable energy technologies, which will certainly be an essential part of a diverse portfolio of electricity resources. However, this report is meant to be a frank and forward discussion on the costs of geothermal power and those costs and benefits relative to other technologies. To achieve this understanding, it’s necessary to correct arguments that have misrepresented the costs of geothermal development.
An examination of recent studies published on the comparative costs of renewable technologies shows that geothermal power is an affordable renewable power resource. Its cost compares favorably with other technologies currently available according to three different analyses published in 2014.
When examining the costs of geothermal power, the most common resources available are analyses of the “levelized cost” of different technologies. This report looks at three recent reports, all published in 2014. The first is an analysis by U.S. Energy Information Agency, the second is the analysis by the Bloomberg New Energy Finance and the last is a discussion on RPS costs and prices published by the California Public Utilities Commission.
All three of these reports reached the conclusion that geothermal power is fundamentally an economical choice for power. They each caution, however, that typically due to external or policy factors net prices may differ. The World Energy Council (WEC) and Bloomberg New Energy Finance (BNEF) note in their World Energy Perspective report, “[Levelized Cost of Energy] demonstrate electricity generation costs only.”1 LCOE’s do not always represent or include all costs like costs of grid connection, balancing costs for integration of volatile and intermittent renewable energy resources, the costs of required back-up capacity based on conventional thermal plants, or occasional capacity shedding and other additional system costs the report notes.
LCOE’s also exclude all subsidies and support mechanisms. According to WEC & BNEF, “This facilitates a comparison of the total costs of each technology on an equal basis, but does not represent the net costs faced by developers in the market.”2
The difference between actual prices and levelized cost can be attributed to the additional market and system costs, as noted above, but also reflect contractual risks or liabilities, planning and permitting uncertainties, unexpected resource risks, actual versus planned project lead times, and other factors.
There are also substantial economic benefits to developing and producing power from geothermal resources that should be considered when examining the total cost. This paper also looks at some of the economic benefits of geothermal power based upon publicly available data. Geothermal power plants have numerous direct benefits including the tax revenues, induced investment they bring to the communities in which they operate, and new temporary and permanent jobs. While specific tax revenue figures are not published (reportedly to protect proprietary information), geothermal operators typically pay sales taxes, property taxes, mine taxes, business taxes, bonus bids, lease rental payments, royalties to federal, state and county governments, salaries and benefits to employees, and payments to a range of local vendors for products and services.
In the most recent year reported, 2013, $15 million was paid as royalties on federal leases which was distributed to federal, state and county governments. This revenue is one clear direct benefit of geothermal power production. In addition, geothermal production in western states may also involve state lands. For example, California state lands have generate over $4 million annually, and when leases involve school lands the revenues benefit the State Teachers’ Retirement System (STRS).3
Another substantial positive impact on the local economy that can be estimated is the job creation that comes with geothermal power development. For every 100 MW of geothermal capacity 170 permanent jobs are created, and for new projects of the same capacity an additional 640 annual construction and manufacturing jobs are produced. Lastly, geothermal power can be engineered to provide both firm and flexible solutions to the changing U.S. power system, including, but not limited to, baseload, regulation, load following or energy imbalance, spinning reserve, non-spinning reserve, and replacement or supplemental reserve.
Costs of Geothermal Power
Geothermal power is sometimes misconstrued to be an expensive source of electricity. While it is true geothermal power plants require a significant amount of start-up capital and some government assistance in the earliest phases of exploration, the overall capital costs and operating costs of geothermal power are significantly lower than many other technologies. When looking at the entire lifecycle of the plant, geothermal power is one of the most affordable and enduring technologies. Geothermal plants have no fuel costs, and minimal maintenance or ancillary costs. Once a plant is operating it can generate electricity for 30 years or longer if the field is engineered and maintained sustainably. This year the Geysers, one of the first geothermal fields in the world celebrated its 50th anniversary.
The total costs and values of geothermal energy are not always understood, which can lead to a misrepresentation of the true value of geothermal energy to the power market. A negative feedback loop occurs where cost competitive geothermal projects cannot win contracts because they are not valued fairly in the marketplace. For example, due the current methodology for estimating Least-Cost Best Fit in California, Investor Owned Utilities (IOUs) are required to use a zero value for integration costs. The result estimate of cost is an inaccurate Net Market Value for geothermal power, making other electricity sources appear to be more competitive when in truth they are more expensive.
Calculating the integrations costs, and thus addressing the total consumer cost of different energy options, is a very complex task. Few studies have approached this issue until recently. A new study released in January 2014 modeled the complex interactions between California’s generating resources and reached notable conclusions. It determined that higher levels of geothermal power in the state will result in consumer benefits.
The E3 report, Investigating a Higher Renewable Portfolio Standard in California, published January 2014, modeled different future power mixes for California’s Renewable Portfolio Standards (RPS) and found that integration costs were a “primary driver” of increased costs. E3 also found that the scenario with the most diversity and most geothermal had the lowest overall cost. “The lowest-cost 50% RPS portfolio modeled here is one with a diversity of renewable resource technologies.”5 It is fair to assume that the E3 conclusion could be more reflective of the actual outcome of expanding geothermal power in California.
If geothermal power is so economical why are there not projects generating power across the western United States? High upfront cost, risk of exploratory drilling, uneven policies and subsidies, and flat demand often keep projects stranded in early stages of development. However, when companies can obtain power purchase agreements to move projects forward, the economics should be quite favorable according to the recent studies this paper examines.
The following sections summarize the costs of geothermal power according to a number of third party sources…
U.S. Energy Information Administration…Bloomberg New Energy Finance & Business Council for Sustainable Energy…California Public Utilities Commission’s Analysis of Geothermal Costs…
Economic Benefits of Geothermal Power
Despite the many environmental benefits associated with geothermal plants like the reduction of carbon emissions and environmental pollution, there are numerous direct economic benefits. About half of geothermal plants operate on public lands generating revenue for state, municipal and federal governments. Geothermal plants employ a vast diversity of workers from conception to completion. Lastly, they can be engineered to be a firm or flexible power source.
Royalties, Property Tax & Rent Revenues
Geothermal power has some direct, financial benefits that are not typical of other renewable technologies. Unlike wind and solar, geothermal plants pay federal and state royalties and significantly more property taxes, generating revenue in rural counties where these plants operate. Industrial solar is exempt from taxes and displacing tax bases in these communities. According to the Federal BLM, in 2013 they oversaw geothermal “production 818 geothermal leases, with 59 geothermal leases in producing status, with a total capacity of 1,500 megawatts of geothermal energy on public lands. This amounts to over 40 percent of U.S. geothermal energy capacity and supplies the electrical needs of about 1.5 million homes.”
In addition geothermal resources are competitively lease. “Competitive lease sales since 2007 have netted over $76 million in bonus bids for geothermal lease parcels in Colorado, Idaho, Oregon, Utah, Nevada, and California.”
The Department of the Interior’s Office of Natural Resources reports that geothermal power in 2013 produced about $15 million in royalties and rents in 2013 alone from federal lands used for geothermal production.16 Also, state lands generate additional revenues from geothermal development. Most western states received grants of federal land when they became states. These land grants were given to the states to generate income for public education and other state programs. States are required by law to use school trust lands for those purposes. The California State Lands Commission reports in 2011 annual geothermal royalty revenues over $4 million and a cumulative total since 1972 of $188 million.
Geothermal resources tend to be located in rural areas and require local workforce support. For example, of the staff employed directly by one company at the Geysers Geothermal Complex in California, 425 full-time and 225 part-time employees are residents of the local community.
In addition, the geothermal industry provides about 1.7 jobs per MW of power production capacity for power plant operation and maintenance and other geothermal development like research, consulting, legal and government regulators.
Temporary jobs in the manufacturing and construction sectors are also created by geothermal power plants. A construction workforce of 3.1 jobs per MW installed (including well drilling) and manufacturing of power plant equipment involves 3.3 jobs per MW for developing both flash and binary plant power facilities.19
Lastly, geothermal power plants require a variety of jobs skills, training, and education. This list includes but is not limited to: welders; mechanics; pipe fitters; plumbers; machinists; electricians; carpenters; construction and drilling equipment operators; surveyors; architects and designers; geologists; hydrologists; electrical, mechanical, and structural engineers; HVAC technicians; food processing specialists; aquaculture and horticulture specialists; managers; attorneys; regulatory and environmental consultants; accountants; computer technicians; researchers; and government employees who all play an important role in bringing geothermal energy online.
Reliable Energy Source
As mentioned earlier in this paper, geothermal power can be engineered to provide both firm and flexible solutions to the changing U.S. power system, including, but not limited to, baseload, regulation, load following or energy imbalance, spinning reserve, non-spinning reserve, and replacement or supplemental reserve. It is well known that geothermal plants can operate 24 hours a day with a steady output, regardless of environmental conditions, and are not subject to the unpredictability and voltage swings that variable energy resources face and, hence, can fulfill the necessary role as a renewable baseload power source in the western United States. As aging baseload fossil fuel plants retire, geothermal plants can provide the electricity these plants have historically provided to the power system. Baseload technologies provide important attributes for grid stability including inertia, voltage control, capacity, and in geothermal power’s case flexibility.
This combination of firm and flexible power capability positions geothermal energy as an ideal candidate to fill several roles historically performed by emission-heavy fossil fuels, such as baseload, regulation, load-following, and reserve functions. In addition to considerable environmental advantages over fossil fuels, geothermal plants generally lack the fuel costs of other baseload sources, or the ancillary and transmission costs associated with variable energy resources that often equate to the long-term stability in energy costs.20
And because of its baseload characteristics, every additional megawatt of geothermal power nay enable the installation of 3 to 5 megawatts of additional intermittent power like solar and wind on the grid.
Often in the United States, where geothermal resources are found, the lack of development is not because of economic barriers (such as too-expensive technology), but it is instead a structural, political, or policy barrier that prevents development…