tions may be defined as a component of the system. In this case, a minimum geothermal formation temperature (e.g., 80° C) may be specified to separate geothermal systems from water bodies. Ground fluids from lower temperature formations would not be considered a geothermal

resource.

Where fluids or vapors in geothermal formations are not defined as a component of the geothermal resource, they may still be distinguished from established water resources through appropriation procedures. The fluids produced from geothermal formations may be declared as developed waters or by some other method declared as distinct from established water resources; the developer's absolute right to such fluids could be rebutted only if interference with established water rights were demonstrated.

Interference with existing water rights is a concern in geothermal development however the fluids may be legally treated. Any adequate definition of geothermal resources will recognize that geothermal fluids grade into standard groundwater under some circumstances, but that a rule is needed to separate them where no interference exists. Water rights must be protected. At the same time, conjectured interference should not obstruct geothermal development. To satisfy both necessities, the States should provide by statute that regardless of their categorization, fluid or vapor production from geothermal formations is not restricted by established water rights unless substantial interference can be demonstrated.

(4) Provide by statute that where water appropriation is necessary for geothermal development, or for production of water for its heat content, only the consumptive use reasonably, necessary for the intended application need secure and appropriation right

In production, large volumes of fluid are drawn from geothermal formations. Over 98,000 acre-feet (31.6 billion gallons) per year of hot water may be required to supply a 200-MW powerplant. But in most cases less than 20 percent of the fluid is consumed, mostly in evaporation cooling. If groundwater at 85-100° F is used with heat-pumps for heating and cooling, virtually all of the water is available for subsequent use.

In some States (for example, Utah and Nevada), water rights are necessary for the entire water volume diverted for use. In others, water appropriation requirements may be limited by administrative practice to consumptive use. In all cases, however, geothermal power development, or other applications of ground fluid for its heat value, need statutory assurance that required permits for water appropriation will be restricted to consumptive use. If production of fluid depends on water rights for the entire volume, geothermal development may suffer severely from a legal water shortage.

(5) Establish uniform State guidelines for assessment of geothermal properties. In particular, stipulate in State assessment standards for taxation of real property that no income value will be attributed to prospective geothermal production before geothermal resources are produced from the property in commercial quantities

The geothermal market suffers now from the uncertainty of electric utilities about resource supply. Only deep drilling can prove the com

mercial potential of a geothermal reservoir, and few areas have been drilled. Reportedly, about 1 exploratory geothermal well has been drilled monthly, compared to 600 for oil and gas.

A large base of geothermal reservoirs defined through drilling would therefore strengthen the market for geothermal resources. But if anticipated income value for the property is assessed before income accrues, such a base would also be a large tax liability providing no income for several years. Long delays occur between the discovery of geothermal resources and their commercial use. The resource must be employed onsite, so that delays for siting permits and the construction of electric generating facilities are added to the time required for field development. Development is in fact uncertain even after the resource is proven, since there is no assurance that the resource will have a market. In contrast, petroleum development can generate revenue from the first producing well.

Ad valorem assessment of anticipated income from undeveloped geothermal properties for this reason creates a deterrent to widespread development. Property tax on a 200-MW field could be over $2 million annually.

In summary, difficulties with ad valorem assessment of geothermal resources before commercial production include the following: (1) it forces local assessors to make judgments for which there is insufficient knowledge and experience; (2) it taxes property long before the assessed income value can possibly be realized; (3) it imposes pressure for development irrespective of actual economic, environmental, and social values of the development; (4) it militates against investment to prove the capacity of geothermal reservoirs; and (5) it is ineffective in preventing land speculation.

To remove this tax obstacle, the States should assess geothermal income value only upon commercial production. Within the ad valorem structure, one approach is suggested by Arizona's provision concerning property speculation. The State code provides that where market data are used, the amount of property value due to speculation on future income is to be excluded from the appraisal. Because estimates of future income from undeveloped geothermal properties are quite speculative, commercial production should be required as proof that anticipated income from geothermal properties is nonspeculative.

(6) Extend income tax deductions for intangible drilling costs and percentage depletion to geothermal development to maintain parity with other energy industries. The Federal income tax code should be amended, and State income taxes independent of Federal provisions should extend these deductions to geothermal operations

Federal income tax is the largest levy faced by geothermal developers and investors alike. Tax benefits for investment in petroleum drilling funds, or percentage depletion deductions for income from coal or uranium properties, strongly affect the flow of capital to these investments. They reduce investment risk and enhance its return. The depletion deduction also provides developers with equity to expand operations.

To finance significant development of geothermal resources, the industry must go to the capital markets. An investor faced with a

decision between two drilling prospects, one for geothermal resources and one for oil and gas, will not need to hesitate if tax benefits are only associated with petroleum investments. Geothermal development is the unknown, and without tax benefits to ameliorate investment risk at least comparable to the other energy sectors, the geothermal industry will not command its share of investment capital.

(7) Review State geothermal leasing policy to eliminate provisions unsuited to geothermal development; also promote similar review and revision of leasing policy by the Federal Government

Lease terms and renewal arrangements, minimum acreage limitations and lease adjustment clauses should provide the scope and security necessary for widespread employment of geothermal resources. A hot-water geothermal reservoir may typically be expected to underlie 10 to 15 acres of land for every megawatt of electric generation capacity. Dozens of prospective fields will generally be explored before discovering a reservoir with commercial capacity. Large amounts of acreage must therefore be leased for exploration, and several tracts (7,000 to 20,000 acres each) will need to be examined simultaneously to offset the high exploration risk.

Conformance with limits on maximum leaseholdings per State, like the Federal limit of 20,480 acres/State, prevents adequate holdings. Evasion through dummy operators, et cetera, is hereby encouraged. And to the extent that proven or productive acreage is not excluded from acreage limitations, successful geothermal developers are blocked from further exploration. Such overly restrictive acreage limitations. should be revised upward to correspond with the practical needs of geothermal development.

Because geothermal resources are employed onsite, lease terms must provide long-range security necessary to amortize the facilities. Thirty to forty years are needed for geothermal powerplants. And since geothermal fields will be developed in stages-this is one of their attractions-lease arrangements also need to allow for amortization of facilities installed 10 or more years after the lease begins. Ambiguity in renewal and adjustment clauses will simply block large capital investments in powerplant or industrial facilities.

The Federal Government is a dominant landholder in most geothermal States. It is important, therefore, that the States also work to establish Federal lease provisions suited to geothermal development.

(8) State public utility commissions should adopt policies which strengthen the geothermal market

Policies should be examined which require access to established transmission lines for geothermal power producers. exempt commercial power producers from utility status, provide financial incentives for utility investments in geothermal powerplants, grant facility siting priority to geothermal applications, or otherwise encourage production of geothermal power.

Utilities plan and make construction commitments for installed capacity 10 years in advance. A geothermal reservoir developed in the service area of a utility fully committed must therefore wait a decade for income if access to transmission lines is obstructed. If that particular utility is unusually conservative, or has special commitments

to other power sources, marketing the resource may be impossible for the geothermal developer. At $150,000 to $200,000 per mile, construction of new transmission lines is not feasible for the incremental, small module (55–110 MW) development characteristic of geothermal power. Access to established transmission lines may therefore be critical to widespread development of geothermal resources.

Utilities can be directly encouraged to invest in geothermal projects through various financial incentives, and also indirectly by private or governmental demonstration projects for geothermal powerplants. Private demonstration can be stimulated by exempting commercial geothermal power suppliers from "utility" status, provided they generate electricity for sale to utilities. Regulatory control of electric power would in this way be maintained. Wheeling rights would still be necessary to expand the market for geothermal power.

(9) Promote nonelectric applications of geothermal resources State and local governments should appraise opportunities for direct use of the Earth's heat in agriculture, industrial processes, or the heating and cooling of buildings, and these uses should be encouraged through public information, zoning laws, building codes and financial incentives.

Heat applications at temperatures less than 250° C (typical of geothermal formations) account for 40 percent of total U.S. energy consumption. This heat is now supplied by natural gas, fuel oil, coal and electricity. The work potential of these high-grade fuels is largely wasted when consumed for such low-temperature purposes. This inefficient use may be unavoidable when no other adequate heat source is available. In the gulf and Western States, however, heat from the Earth may be used directly for agricultural and industrial processes and for heating and cooling of buildings. The drain on petroleum supplies can thereby be lessened and new electric demand reduced. Direct use of the Earth's heat is also its most efficient use. In general, no more than 20 percent of the heat's energy at these temperatures can be converted to electricity.

A TECHNOLOGY ASSESSMENT OF GEOTHERMAL ENERGY
RESOURCE DEVELOPMENT*

1.4 STUDY CONCLUSIONS AND RECOMMENDATIONS [1]

OVERALL POTENTIAL

Geothermal energy can be a relatively important energy source in the United States by the year 2000. It could supply on the order of 185,000 to 250,000 MWe, or more, compared to an expected U.S. total capacity of 2 million MWe. (For comparison, the State of California currently has a total generating capacity of 37,000 MWe.) At these levels, by 2000 geothermal sources will be contributing more to our energy supply than hydroelectric sources (sec. 3.5).

Because geothermal sources are located primarily in the western part of the United States, the effects of geothermal energy will be considerably greater there than elsewhere in the United States. For example, total expected electricity generation capacity in the western part of the United States is expected to reach about 480,000 MWe by the year 2000; geothermal sources can constitute 25 percent or more of the total supply in that region (sec. 3.5).

There is a great deal of uncertainty about the true extent of the total resource and the relative potential of its various forms (vapordominated, liquid-dominated, hot dry rock, geopressured, and magma). During the study, experts were asked to express their opinions about the likely extent of identified resources, resource development, and the level of energy conversion which could be realized in various years, constrained only by technology (sec. 3.1). Ranges of estimates of identified resources were the widest, varying for the year 2000 from the lowest level of 50,000 MWe to almost infinite supply. The higher level was predicated primarily on the potential discovery of large quantities of hot dry rock resources. The midrange of opinions of participating experts about the level of technologically feasible utilization of these resources for the generation of electricity was between 55,000 and 200,000 MWe in a normal program, and 270,000 and 500,000 MWe if a program unlimited by costs were implemented (sec. 3.1).

The contribution of geothermal resources to U.S. energy supplies seems likely to increase continuously; by 1985 it is reasonable to expect hat geothermal sources will be producing 7.000 to 20,000 MWe or so out of a total of about 1 million MWe in the United States. After 1985, growth could be more rapid (secs. 3.1 and 3.5).

Impediments to development

To achieve a high level of geothermal energy development, certain echnological, institutional, and political issues will have to be resolved

*The Futures Group. "A Technology Assessment of Geothermal Energy Resource Devel-pment." Apr. 15, 1975.