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while again, those in government generally did not feel the offtaker tax incentive would be quite as beneficial.31 Admittedly, this type of incentive in Chile might be politically very challenging, considering most of the offtakers would be very heavy users of energy (i.e., big industry). The public may be wary of the government’s providing additional tax relief to large businesses rather than the average electricity consumer, who must purchase energy through a distributor. n Incentives for project developers A Production Tax Credit (PTC) is a per-kilowatt-hour credit that is granted for generating and selling electricity produced from qualified energy resources. Simply put, renewable energy companies are entitled to a tax credit for each kWh generated, which they can use to offset taxable income. In the United States, since most power projects are formed as special-purpose entities and have very little taxable income in the early years, typically outside investors, known as “tax equity,” invest cash in projects in exchange for tax benefits. On average, individuals interviewed in industry and academia felt tax credits for developers could be a strong incentive in Chile. Meanwhile, those in government, on average, did not feel such a tax incentive would be as beneficial.32 In the United States, the PTC for renewable energy has gone through several rounds of expiration and restart, and it is important to note that the effect of such a tax credit depends on a company’s tax exposure. According to Bloomberg New Energy Finance, in recent years the PTC has not been a significant driver of geothermal development in this country; rather, the key driver has been a treasury cash grant program.33 Under the 1603 Program from the U.S. Treasury, developers can receive a cash grant equal to up to 30 percent of a project’s total eligible cost basis when the project goes into service.34 Some type of incentive for developers of geothermal energy might be an interesting option to consider in Chile because of the way in which some energy projects are being developed. Some private companies—particularly those in the mining sector—have been forced to stray from their core businesses to develop their own energy projects to ensure supply.35 That is, a company may not necessarily be just the offtaker; it may also be the generator. Tax incentives could both encourage companies to sign PPAs and spur them to choose geothermal projects over non-NCRE projects when developing their own generation facilities. 2. reducing legal and regulatory ambiguity Geothermal development companies in Chile face a myriad of regional regulations and, at times, complex negotiations with landowners near project sites, and in this they are not unique. Developers in many countries, including the United States, face similar issues when federal regulations and incentives coexist with additional and distinct state policies.36 However, years of experience with geothermal energy production in the United States has made certain states friendlier environments for development, particularly those in the western half of the country.37 Chile does not benefit from the same history of development or the same shared understanding of the resource by federal, regional, and/or local officials. In Chile, individuals in industry and academia, on average, found the current legal and regulatory framework in the country to be insufficient and felt the government could make improvements at both federal and regional levels.38 Actors in government generally felt the legal framework was sufficient, suggesting that there is clear disagreement about the efficacy of the existing framework. Policy changes in this area may be particularly challenging to achieve in a short time frame, especially given the lack of agreement that issues identified are in fact barriers. A primary concern among developers is site access. While a geothermal concession confers temporary rights to explore and/or exploit the geothermal resources on a given piece of land, Chile’s concession system offers companies limited help in navigating difficult issues related to the ownership (or perceived ownership) of other resources within the boundaries of the concession. After approval of the concession, companies may deal with legal issues related to access to the site, access to water (an element crucial to the production of geothermal energy), transmission lines, and claims to the territory by local communities. Indeed, there is no guarantee that, if exploration yields a viable resource, there will be a clear path to exploitation. Geothermal concessions do not clearly or sufficiently address the broader resource needs of the geothermal company at the start of a project. Equally important, the concession law does not address the needs of local communities near the project site. The potential legal costs and time delays associated with these issues add to the already high exploration costs and can severely damage public sentiment about geothermal energy development. In fact, some geothermal resources are located on environmentally, economically, and/or culturally sensitive areas and careful consideration of the unique qualities of such sites is necessary before a concession is granted and a project moves forward. It would be helpful if the Chilean government better defined areas that are too risky for exploration and exploitation or are off-limits for other reasons. At present, geothermal projects are forbidden only in national parks. Reserves and other areas of special designation remain open to geothermal development, though not all of them are smart places for such development. A government initiative to prepare a geothermal planning study that would assess resource development through 2050 has been held up since 2011 due to questions regarding the legality of the study’s tender process.39 When this study moves forward it should carefully evaluate resource locations to determine PAGE 6 | Geothermal Energy: Unleashing the Earth’s Power to Fuel Chile’s FuturePDF Image | Geothermal Energy 2013
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