a

GAO

United States Government Accountability Office

Report to the Ranking Minority Member, 

Committee on Energy and Natural 

Resources, U.S. Senate

May 2006 RENEWABLE 

ENERGY

Increased Geothermal 

Development Will 

Depend on 

Overcoming Many 

Challenges

GAO-06-629
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 2006

RENEWABLE ENERGY

Increased Geothermal Development Will 

Highlights of GAO-06-629, a report to the Depend on Overcoming Many Challenges 

Ranking Minority Member, Committee on 

Energy and Natural Resources, U.S. 

Senate 

The Energy Policy Act of 2005

(Act) contains provisions that

address a variety of challenges that

face the geothermal industry, 

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

revenue. The Act also changes how 

these royalties are to be shared 

with local governments 

(disbursements). This report

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 Recommends

GAO found that it will be difficult 

for the Department of the Interior 

to demonstrate that it intends to

collect the same level of royalties 

as called for in the Act because the 

Minerals Management Service

(MMS) does not systematically

collect the necessary revenue data

from electricity sales. Therefore,

GAO recommends that the

Secretary of the Interior instruct

the appropriate managers within 

MMS to systematically collect 

future sales revenues for

electricity, and Interior agreed. 

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 district 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 has 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.

Developers of geothermal electricity plants face many challenges including a 

capital intensive and risky business environment, developing technology, 

insufficient transmission capacity, lengthy federal review processes for 

approving permits and applications, and a complex federal royalty system. 

Direct use businesses face unique business challenges, 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 

that streamline federal leasing and that 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 the 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. Also, MMS does not collect sales 

data that are necessary to monitor these royalty collections. 

Glenwood Hot Springs, Colorado (left) and Geothermal Power Plant at The Geysers, 

California (right) 

www.gao.gov/cgi-bin/getrpt?GAO-06-629.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or wellsj@gao.gov. 
Page i GAO-06-629 Renewable Energy

Contents

Letter 1

Results in Brief 3

Background 6

Current Geothermal Development Is Limited, and Estimated 

Potential for Additional Development Varies 11

Geothermal Development Faces Many Challenges 18

Efforts by Federal, State, and Local Governments to Address 

Challenges Show Promise 27

Geothermal Royalty Disbursements Will Change Significantly, and 

Changes in Electricity Prices Could Alter Total Royalty 

Collections 33

Conclusions 39

Recommendation for Executive Action 40

Agency Comments and Our Evaluation 40

Appendixes

Appendix I: Objectives, Scope, and Methodology 42

Appendix II: Comments from the Department of the Interior 46

Appendix III: GAO Contact and Staff Acknowledgments 48

Tables Table 1: States with Power Plants and Their Capacity 12

Table 2: Estimates of Potential Electricity Generation from 

Geothermal Resources 13

Table 3: U.S. Geothermal Direct Use Applications as of 2005 15

Table 4: Example of Royalties Due under the Netback Process 35

Table 5: Impact of Changing Electricity Prices on Royalties Due 

under the Energy Policy Act and the Netback Process 36

Figures Figure 1: Tropical Fish Raised in Oregon with Geothermal Water 7

Figure 2: Geothermal Power Plant near Reno, Nevada 9

Figure 3: District Heating in Boise, Idaho 15

Figure 4: Raising Tropical Fish with Geothermal Resources in 

Idaho 16

Figure 5: Alligator Farm Using Geothermal Resources in Idaho 24

Figure 6: Nursery Heated with Geothermal Resources in Idaho 25
Contents

Page ii GAO-06-629 Renewable Energy

Abbreviations

BLM Bureau of Land Management

DOE Department of Energy

DOI Department of the Interior

EA environmental assessment

EIS environmental impact statement

FERC Federal Energy Regulatory Commission

KGRA known geothermal resource areas

MMS Minerals Management Service

NEPA National Environmental Policy Act of 1969

RPS Renewable Portfolio Standard

USGS U.S. Geological Survey

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-629 Renewable Energy

United States Government Accountability Office

Washington, D.C. 20548

A

May 24, 2006 Letr

The Honorable Jeff Bingaman

Ranking Minority Member

Committee on Energy and Natural Resources

United States Senate

Dear Senator Bingaman:

American families and businesses rely heavily on electricity and natural gas 

to heat and light homes and buildings, to power appliances, to manufacture 

goods, and to supply services. Increasing demand and rising prices for 

electricity and natural gas have increased interest in alternative forms of 

energy, including geothermal energy. Geothermal energy is a unique type of 

renewable resource in that it can provide power that is independent of 

weather and climate, thereby enabling a consistent and uninterrupted 

supply of heat and electricity. Geothermal energy also creates fewer 

environmental impacts than the production of natural gas and other 

conventional fossil fuels that are used to generate electricity. Because 

many areas that have the potential to produce additional geothermal 

energy are located on federal lands, the federal government is a major 

participant in the future development of geothermal energy. 

Geothermal energy is literally the heat of the earth. This heat is abnormally 

high where hot and molten rocks exist at shallow depths below the earth’s 

surface. Water, brines, and steam circulating within these hot rocks are 

collectively referred to as geothermal resources. Geothermal resources 

often rise to the surface naturally along fractures to form hot springs, 

geysers, and fumaroles. For centuries, people have used naturally 

occurring hot springs as places to bathe, swim, and relax. More recently, 

some individuals have constructed buildings over these springs, 

transforming them into elaborate spas and resorts, thereby establishing the 

first direct use of geothermal resources for business purposes. Businesses 

have also established other direct uses of geothermal resources by drilling 

wells into the earth to tap the hot water for heating buildings, drying food, 

raising fish, and growing plants. Where the earth’s temperature is not high 

enough to supply businesses with geothermal resources for direct use, 

people have made use of the ground’s heat by installing geothermal heat 

pumps. Geothermal heat pumps consist of a heat exchanger and a loop of 

pipe extending into the ground to draw on the relatively constant 

temperature there for heat in the winter and air conditioning in the 

summer.
Page 2 GAO-06-629 Renewable Energy

Geothermal resources can also generate electricity, and this is their most 

economically valuable use today. Only the highest temperature geothermal 

resources, generally above 200 degrees Fahrenheit, are suitable for 

electricity generation. When companies are satisfied that sufficient 

quantities of geothermal resources are present below the surface at a 

specific location, they will drill wells to bring the geothermal fluids and 

steam to the surface. Upon reaching the surface, steam separates from the 

fluids as their pressure drops, and the steam is used to spin the blades of a 

turbine that generates electricity. The electricity is then sold to utilities in a 

manner similar to sales of electricity generated by hydroelectric, coal-fired, 

and gas-fired power plants.

Geothermal resources are found throughout the world. In the United 

States, geothermal resources are concentrated in Alaska, Hawaii, and the 

western half of the country, primarily on public lands managed by the 

Bureau of Land Management (BLM). The Congress set forth procedures in 

the Geothermal Steam Act of 1970 for leasing these public lands, 

developing the geothermal resources, and collecting federal royalties. 

Today, BLM leases these lands and sets the royalty rate, and the Minerals 

Management Service (MMS)—another agency within the Department of the 

Interior (DOI)—collects the federal geothermal royalties and disburses to 

the state governments its share of these royalties as required by law.1

 In 

2005, the most recent year for which data are available, MMS collected 

$12.3 million in geothermal royalties, almost all of which was derived from 

the production of electricity.

Since 1970, determining the amount of royalty payments has become 

increasingly complex due to restructuring in the geothermal industry and 

changing economic conditions. Government and industry representatives 

formed a task force in late 2004 to devise a simpler royalty system that 

would address these changes. During deliberations on the Energy Policy 

Act of 2005 (Act), we briefed you on the findings of this task force and on 

challenges facing geothermal development. Shortly thereafter, the 

Congress passed the Act, which contains provisions to simplify the federal 

royalties on electricity generation and reduce royalties on direct use. The 

1

Beginning in 1978, the Congress passed laws that also gave the Secretary of each military 

department the authority to develop geothermal resources on lands under his jurisdiction. A 

comparison of BLM’s system for geothermal leasing and the Department of the Navy’s 

system for geothermal leasing at China Lake appears in GAO, Geothermal Energy: 

Information on the Navy’s Geothermal Program, GAO-04-513 (Washington, D.C.: June 4, 

2004).
Page 3 GAO-06-629 Renewable Energy

Act also contains other provisions designed to encourage the development 

of geothermal resources. This report formalizes the content of our briefings 

and our work since then, including: (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 disbursements and collections.

In responding to these objectives, we reviewed key studies on the extent 

and potential of geothermal development and interviewed BLM and 

industry officials in California, Nevada, and Utah. To identify the challenges 

facing geothermal developers and to assess actions taken by federal, state, 

and local governments, we interviewed a variety of government and 

industry officials, reviewed substantial supporting documentation and the 

Act, and toured geothermal electricity plants in California and Nevada and 

direct use facilities in Idaho, Nevada, and Oregon. To assess how provisions 

within the Act will affect federal geothermal royalties, we interviewed MMS 

and BLM employees; reviewed a report authored by the Royalty Policy 

Committee;2

 and analyzed geothermal royalty, production, and sales data 

from January 2000 through December 2004. We performed our work 

between May 2005 and May 2006 in accordance with generally accepted 

government auditing standards. A more detailed description of our 

objectives, scope, and methodology is provided in appendix I.

Results in Brief Although locally important in Hawaii, California, and Nevada, geothermal 

resources produce a very small portion of our nation’s total electricity and 

heating needs, and estimates of the potential for additional development 

vary. In 2004, geothermal resources generated about 0.3 percent of the 

nation’s total electricity and supplied heat and hot water directly to about 

2,300 businesses and organizations, including district heating systems, fish 

farms, greenhouses, food drying plants, spas, and resorts. In addition, the 

Geothermal Heat Pump Consortium estimates that 1 million geothermal 

heat pumps are installed in the 50 states, tapping the shallow heat of the 

earth to both heat and cool individual homes and businesses. Estimates of 

future electricity generation from geothermal resources vary widely based 

on methodology, sites considered, development costs, and future electricity 

2

The Royalty Policy Committee is a group of state, tribal, federal, corporate, and public 

representatives that provide advice on royalty management and mineral policies to the 

Secretary of the Interior.
Page 4 GAO-06-629 Renewable Energy

prices. The most recent assessments suggest that the current production of 

2,500 megawatts of electricity—enough to supply 2.5 million homes—could 

increase to between about 3,100 and 12,000 megawatts in 11 years. The 

future potential of using geothermal resources in direct use applications is 

less known because of the wide variety of applications and the widespread 

occurrence of suitable geothermal resources. However, the Geo-Heat 

Center at the Oregon Institute of Technology estimates that about 400 

undeveloped geothermal wells and hot springs have the potential to supply 

heat and hot water directly to a variety of businesses and other 

organizations. The potential for geothermal heat pumps, however, is almost 

unlimited in the United States. Heat pumps are the fastest growing sector 

of the geothermal industry, with about an 11 percent increase in units 

added each year. Finally, the potential for geothermal development is, to 

some extent, dependent on the federal government. Whereas nearly all 

direct use applications of geothermal resources are on private lands, 

geothermal power plants depend upon resources located on federal lands 

for about 50 percent of the electricity they generate.

Businesses and individuals face significant financial, technical, and 

logistical challenges when trying to develop geothermal resources. 

Developers of electric power plants that use geothermal resources face a 

capital intensive and risky business environment in which obtaining 

financing and securing a contract with a utility are difficult and where 

recouping the initial investment takes many years. Geothermal power plant 

developers must also use exploration and drilling technologies that are 

inadequate because of the unique attributes and high temperatures 

associated with geothermal reservoirs. Furthermore, because portions of 

the electrical grid lack adequate transmission capacity and because 

geothermal resources are often in remote locations, new geothermal power 

plants may face costly transmission expenses. Developers of electric 

power plants on federal lands face additional challenges, including: (1) 

lengthy administrative/regulatory reviews of lease and permit applications 

that can become complicated by lawsuits involving environmental and/or 

Native American issues, (2) scattered federal leases that make it difficult to 

develop an economically viable project, and (3) a complicated royalty 

payment system. Businesses and individuals trying to tap geothermal 

resources for direct use face unique marketing, financing, and technical 

challenges characteristic of their industry, as well as challenges that are 

unique to the site that they hope to develop. In some cases, these 

businesses and individuals must also contend with remote locations and 

state water rights that may restrict the use of geothermal resources. In 

addition, the developers of direct use facilities face higher federal royalties 
Page 5 GAO-06-629 Renewable Energy

because royalty payments are based on the price of natural gas, which has 

recently risen to levels that substantially reduce profit margins.

To address the many challenges of developing geothermal resources, 

federal, state, and local governments have implemented a number of 

incentives and initiatives, including tax credits, technology grants, 

requirements to use renewable energy, and leasing and royalty 

simplification. Many of these efforts show promise, but it is too early to 

assess their overall effectiveness. To address the capital intensive and risky 

business environment facing the developers of geothermal power plants, 

the Act grants developers a federal tax credit that allows them to recoup 

their investments more quickly. The Act also seeks to lower exploration 

risk by directing that the Secretary of the Interior update the U.S. 

Geological Survey’s 1978 assessment of geothermal resources. Some state 

governments are addressing the capital intensive and risky business nature 

of geothermal development by granting various tax credits for the 

production of electricity from renewable energy and for the construction of 

renewable energy facilities and systems. Twenty-two states and the District 

of Columbia have further encouraged the production of electricity from 

renewable resources with laws or policies containing renewable portfolio 

standards. Most of these standards mandate that public utilities provide a 

minimum percentage of their electricity from renewable energy such as 

geothermal resources. To address technological challenges, the federal 

government and the state of California have awarded grants for research 

and development efforts through the Department of Energy’s Geothermal 

Technologies Program and the California Energy Commission, respectively. 

To address transmission challenges, the Act gives the Federal Energy 

Regulatory Commission (FERC) new authorities to issue permits for 

transmission facilities in the national interest, increase their capacity, and 

develop incentives. Some states and local governments have also 

developed several planning initiatives aimed at transmission challenges. 

Finally, the Act contains provisions designed to improve the efficiency of 

the federal geothermal program, including simplifying the federal leasing 

process, improving coordination between leasing responsibilities of BLM 

and the Forest Service, consolidating small federal leases, and simplifying 

or reducing federal royalty rates on electricity generation and direct use 

facilities.

How federal geothermal royalties are to be shared with local governments 

will change significantly after passage of the Act, and the total amount of 

royalties collected could change significantly if electricity prices also 

change. Prior to passage of the Act, half of federal geothermal royalties 
Page 6 GAO-06-629 Renewable Energy

were disbursed to the states, and half were retained by the federal 

government. Now, half of the federal government’s share will be disbursed 

to the counties in which the geothermal resources are located, leaving the 

federal government with 25 percent of the total royalty revenue, instead of 

the original 50 percent. While, for most leases, the 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 royalty revenues collected in the future. Furthermore, it will 

be difficult for MMS to show that it plans to collect the same level of royalty 

revenues from electricity generation because it does not routinely collect 

revenue data from electricity sales, and these data are necessary to 

calculate and achieve the royalty percentages prescribed in the Act. Finally, 

while a provision within the Act lowers the royalties on direct use 

applications in order to encourage additional development, the monetary 

impact on collections is likely to be small because total royalty revenues 

from direct use applications on federal lands are already minimal.

To demonstrate their attempt to collect the same level of royalty revenues 

as prior to passage of the Act, we are recommending that the Secretary of 

the Interior instruct the appropriate managers within MMS to routinely 

collect future sales revenues for electricity when royalty payments are due.

Background The temperature of geothermal resources generally dictates their use. Low 

temperatures from 40 to 70 degrees Fahrenheit (F) that occur in the ground 

at shallow depths are best used for geothermal heat pumps. Geothermal 

heat pumps, also known as ground-source heat pumps, are devices that 

take advantage of the relatively constant temperature immediately beneath 

the earth’s surface to provide heat in the winter and air conditioning in the 

summer. During the winter, a heat pump transfers the heat of the ground to 

a fluid filled set of coils and then pumps this fluid to the building. A heat 

exchanger then transfers the heat to another set of coils filled with a 

refrigerant that boils. The resulting gas is then compressed and pumped to 

a condenser, where it gives up its heat as a fan blows over the condenser 

coils. During the summer, heat pumps work in reverse, extracting heat 

from the building and transferring it to the ground. Although heat pumps 

run on electricity, they produce three to four times the energy that they 

consume. As a result, they can reduce energy consumption by 20 to 70 

percent relative to conventional electrical heating and cooling systems. 

They also can produce hot water for free during the summer and for about 

half price during the winter.
Page 7 GAO-06-629 Renewable Energy

Direct use applications begin with geothermal resources that have 

temperatures as low as 70 degrees F and can include geothermal resources 

as hot as 300 degrees F. Geothermal waters can be mixed with groundwater 

or surface water to achieve the most desirable temperature for the specific 

application. Geothermal waters with temperatures between about 70 and 

125 degrees F are best used in spas and resorts for recreational swimming 

and bathing, in aquaculture operations for raising fish and other aquatic 

animals (fig. 1), and within sidewalks and roads for melting snow. 

Geothermal resources between about 125 and 300 degrees F can be used 

for various applications, each of which has optimal temperature ranges. 

Specific applications include food processing; fruit and vegetable drying; 

space and district heating; raising flowers, plants, and trees in greenhouses; 

processing pulp and paper; drying lumber, cement, and aggregate; curing 

concrete blocks; pasteurizing milk; dyeing fabric; making ice; and providing 

refrigeration.

Figure 1: Tropical Fish Raised in Oregon with Geothermal Water

Electricity generation requires geothermal resources of at least 200 degrees 

F, with higher generation capacity coming from temperatures above 350 

Source: GAO.
Page 8 GAO-06-629 Renewable Energy

degrees F. Geothermal power plants extract geothermal fluids—hot water, 

brines, and steam—from the earth by drilling wells to depths of up to 

10,000 feet (fig. 2). The geothermal resources are then used, in lieu of 

running water or the burning of fossil fuels, to produce a vapor that turns 

the blades of a turbine that spins a generator to produce electricity. 

Geothermal resources with temperatures from about 200 to 350 degrees F 

are best suited for binary power plants. In a binary plant, the geothermal 

fluids are passed through a heat exchanger to heat a secondary fluid, like 

isopentane, that vaporizes at a lower temperature than water and spins the 

power-producing turbines. The fluid is then condensed back into a gas and 

recycled, and the geothermal resources are injected back into the reservoir. 

When geothermal resources have temperatures over about 350 degrees F, 

flash plants are most appropriate. In flash power plants, highly pressurized 

hot water is brought to the surface, where the pressure decreases and part 

of the water explosively boils, or “flashes,” into steam. The steam is then 

separated from the remaining hot water and used to turn the turbines. 

Residual water is injected back into the reservoir. In some rare geothermal 

systems with temperatures above 455 degrees F, as at an area known as 

The Geysers Geothermal Field (The Geysers) in northern California, the 

geothermal resources may consist entirely of steam within the reservoir. 

Dry steam power plants use the steam directly to spin the turbines. 

Although some of the steam condenses back to water that can be injected 

back into the reservoir, much water is lost to evaporation in this process. 

Flash and binary power plants can also be combined in sequence for the 

most efficient generation of electricity. In these hybrid power plants, hot 

water is first flashed within a flash plant and then the steam is condensed, 

combined with the lower temperature water, and routed to a binary plant 

for further generation of electricity. 
Page 9 GAO-06-629 Renewable Energy

Figure 2: Geothermal Power Plant near Reno, Nevada

The leasing of federal lands for geothermal resources is governed by the 

Geothermal Steam Act of 1970, as amended.3

 To explore and develop 

geothermal resources on federal lands, developers must first obtain a 

federal lease from BLM. The lease is a contract between the federal 

government and the lessee that specifies certain terms for development 

and payment of rents and royalties. Regardless of the federal agency 

managing the lands where the geothermal resources are located, BLM has 

responsibility for issuing these leases after obtaining concurrence from the 

federal land managing agency. Before passage of the Act, BLM designated 

certain areas that it believed to have a reasonable potential for the 

commercial development of geothermal resources as “known geothermal 

resource areas (KGRA).” Within a KGRA, BLM was required to lease lands 

to the highest qualified bidder under a formal competitive bidding process, 

as long as the highest bid equaled or exceeded fair market value.4

 For land 

3

30 U.S.C. §§ 1001-1027.

4

Fair market value is the price agreed to by a willing buyer and a willing seller.

Source: GAO.
Page 10 GAO-06-629 Renewable Energy

outside of a KGRA, BLM was required to issue a lease noncompetitively to 

the first qualified buyer applying for the lease. Under provisions of the Act, 

BLM no longer establishes KRGAs, but instead accepts nominations from 

parties interested in leasing available lands and holds a competitive auction 

at least once every 2 years. If bids are not received for lands offered in the 

sale, the Secretary is to make them available for 2 years for noncompetitive 

leasing. BLM issues geothermal leases for 10 years and requires lessees to 

pay an annual rental of at least $1 per acre until commercial production is 

established. Thereafter, lessees pay a royalty from 10 to 15 percent of the 

value of production.

BLM will not issue federal geothermal leases until the federal land 

management agency completes an extensive environmental review 

process. The leasing and development of these lands must be consistent 

with the management objectives for the lands as documented in the 

appropriate resource or forest management plan. Should these plans not 

adequately address exploration and development of geothermal resources, 

the appropriate agency personnel may need to amend or rewrite the plans. 

Prior to leasing, agency officials must also comply with provisions of the 

National Environmental Policy Act of 1969, as amended (NEPA). NEPA 

requires federal agencies to prepare an environmental impact statement 

(EIS) for major federal actions that may have a significant affect on the 

quality of the human environment. When an agency is not sure whether an 

activity will have significant impact on the environment, the agency 

prepares a less detailed environmental assessment (EA). If an EA 

determines that the activity will significantly affect the environment, the 

agency then prepares an EIS. During these analyses, agency personnel 

analyze potential impacts of geothermal leasing to various resources such 

as air and water quality, vegetation, wildlife, threatened and endangered 

species, and visual and cultural resources. In California, state laws also 

require a similar environmental review. Agency personnel may also need to 

comply with provisions of other federal legislation, such as the Endangered 

Species Act of 1973, as amended, and the National Historic Preservation 

Act, as amended.

Under the Geothermal Steam Act of 1970, as amended, calculating 

geothermal royalties was relatively simple because the developers of the 

geothermal fields sold steam and hot water to power plants, establishing a 

sales price upon which royalties could be based. The statutory royalty rate 

specified in the lease, which was from 10 to 15 percent, was multiplied by 

the sales value of the geothermal resource each month to yield royalties 

due. In the 1980s, the developers sold the fields to the power plants, and 
Page 11 GAO-06-629 Renewable Energy

this basis for valuing the geothermal resource was lost. In 1991, MMS 

issued new regulations that were in effect until passage of the Act. These 

regulations established the value of the geothermal resource based on the 

value of the electricity sold. The regulations called for subtracting, or 

“netting back” from the electricity’s sales revenues, the costs of generation 

and transmission. Formulas for netting back these costs were complex due 

to different methods of accounting for depreciation, uncertainty over 

which costs qualified for deduction, and commingling of federal and 

nonfederal resources. The Act contains provisions aimed at simplifying this 

process by allowing lessees the option on existing leases to pay royalties 

based on a percentage of gross sales revenue and by prescribing a set 

schedule of royalty rates for future leases. In addition, royalties due on 

direct use facilities prior to passage of the Act were based on the price of 

natural gas, which has risen substantially in recent years, making the direct 

use of federal geothermal resources unattractive. The Act provides for 

replacing this system of direct use royalties with a schedule of fees that 

encourages the development of geothermal resources.

Current Geothermal 

Development Is 

Limited, and Estimated 

Potential for Additional 

Development Varies

Electricity generated from geothermal resources is small, about 0.3 percent 

of the total electricity produced in the United States, with about half of this 

amount coming from federal resources. Recent estimates of the potential 

for additional electricity generated from geothermal resources vary from 

an increase of about 25 percent by 2015 to 367 percent by 2017. There were 

over 2,300 businesses and heating districts that used geothermal resources 

for heat and hot water in the United States in 2005, with only two 

businesses using federal geothermal resources. The total potential for 

direct use applications is largely unknown because of the widespread 

occurrence of lower temperature geothermal resources and the many 

diverse applications.

Electricity Generation from 

Geothermal Resources Is 

Small and Relies on Federal 

Resources

Geothermal resources currently produce about 0.3 percent of the annual 

electricity in the United States, or 2,534 megawatts—enough electricity to 

supply 2.5 million homes. Even though the percentage of electricity 

generated from geothermal resources is small nationwide, it is locally 

important. For example, geothermal resources provide about 25 percent of 

the Island of Hawaii’s electricity, 5 percent of California’s electricity, and 9 

percent of northern Nevada’s electricity. As of January 2006, companies 

were constructing geothermal power plants in California, Nevada, and 

Idaho that collectively will produce another 390 megawatts of electricity. 
Page 12 GAO-06-629 Renewable Energy

Table 1 shows the number, location, and capacity of geothermal power 

plants that currently produce electricity or are under construction.

Table 1: States with Power Plants and Their Capacity

Source: The Geo-Heat Center, the Department of Energy (DOE), and BLM.

Note: Each unit of capacity is a megawatt.

Over half of the nation’s electricity generated from geothermal resources, 

about 1,275 megawatts, comes from geothermal resources located on 

federal lands. Of the 54 geothermal power plants, 26 are located on federal 

lands managed by BLM, and 28 are located on private or state lands. As of 

January 2006, there were 50 federal geothermal leases from which 

electricity was produced—48 on BLM lands, and 2 on Forest Service lands. 

Twelve of these leases are located in The Geysers in northern California, 

and they account for over one-third of the electricity produced from federal 

geothermal resources. The other 44 producing federal geothermal leases 

are located in and near the Sierra Nevada Mountains of eastern California, 

near the Salton Sea in the southern California desert, in southwestern Utah, 

and scattered throughout Nevada.

Estimates of the Potential 

for Additional Electricity 

Generation from 

Geothermal Resources Vary 

Widely

Industry and government estimates of the potential for electricity 

generation from geothermal resources vary widely, due to differences in 

the date by which forecasters believe the electricity will be generated, the 

methodology used to make the forecast, assumptions about electricity 

prices, and the emphasis placed on different factors that can affect 

electricity generation. Five estimates published since 1999 indicate that the 

potential for electrical generation from known geothermal resources over 

the next 9 to 11 years is from about 3,100 to almost 12,000 megawatts. By 

2025, two of these sources estimate that electrical generation from these 

State

Number of existing 

geothermal 

power plants

Total 

capacity 

Number of power 

plants under 

construction

Additional 

capacity 

California 41 2,239 2 285

Hawaii 1 30 0 0

Idaho 0 0 1 10

Nevada 10 239 3 95

Utah 2 26 0 0

Total 54 2,534 6 390
Page 13 GAO-06-629 Renewable Energy

known resources will increase to between 6,800 and 13,000 megawatts. The 

difference in estimates could also be due to the different methodologies 

used to make the forecasts, such as surveys of experts in the geothermal 

industry and/or detailed economic modeling. Placing different emphasis on 

geothermal development costs, electricity prices, natural gas prices, and/or 

reservoir characteristics also probably led to differences in the estimates. 

Table 2 summarizes the estimates of potential electricity generation from 

geothermal resources.

Table 2: Estimates of Potential Electricity Generation from Geothermal Resources

Source: GAO. 

A detailed comprehensive study of electricity generation from all 

geothermal resources in the United States has not been undertaken since 

1978, when the U.S. Geological Survey (USGS) published Circular 790, 

“Assessment of Geothermal Resources of the United States—1978.” This 

assessment, based on the amount of thermal energy in place, estimated that 

known geothermal resources could generate 23,000 megawatts if all of 

them were developed, significantly more than that estimated by the five 

other studies. The other five estimates in table 2 differ from the USGS 

estimate in that they attempt to estimate how much electricity could be 

economically produced from known resources, given competing 

commercial sources of electricity, and they are based on more extensive 

reservoir, production, and economic data. In addition, none of the five 

Source and date of estimate Estimate of electricity generation 

U.S. DOE, Energy Information 

Administration’s Annual Energy 

Outlook, 2004

6,800 megawatts by 2025 for known geothermal areas based on stable natural gas prices. This 

estimate does not take into account Enhanced Geothermal Systems, which is a DOE program to 

create man-made geothermal reservoirs.

California Energy Commission, 

2005

11,822 megawatts by 2017 in California, Nevada, Arizona, Idaho, Utah, Oregon, and New Mexico 

from known geothermal resource areas based on amount of heat in place, reservoir characteristics, 

economic factors, and a Monte Carlo simulation.

Oregon Institute of Technology, 

Geo-Heat Center, 2005

3,160 megawatts based on all planned capacity at known geothermal areas coming on line by 2015. 

Western Governor’s 

Association, 2005

5,600 megawatts by 2015 and up to 13,000 megawatts by 2025, based on consensus of 

professional opinions for known geothermal resource areas and economic modeling of costs and 

electricity prices.

Geothermal Energy 

Association, 1999

Between 6,340 megawatts and 11,700 megawatts using 1999 technology and between 15,080 

megawatts and 25,390 megawatts using enhanced technology, based on a survey of expert 

opinions and known geothermal areas.

U.S. Geological Survey, 1978 23,000 megawatts from known geothermal areas and an additional 72,000 to 127,000 megawatts 

from undiscovered resources based on amount of heat in place, reservoir characteristics, 1978 

technology, and a Monte Carlo simulation.
Page 14 GAO-06-629 Renewable Energy

estimates include undiscovered resources; the USGS estimated that 

undiscovered resources could generate an additional 72,000 to 127,000 

megawatts. 

Direct Use Applications Are 

Numerous and Diverse, and 

Few Are Located on Federal 

Land

Over 2,300 businesses and heating districts in 21 states used geothermal 

resources directly for heat and hot water in 2005. About 85 percent of these 

users are employing geothermal resources to heat homes, businesses, and 

government buildings (table 3). While most users heat one or several 

buildings, some users have formally organized heating districts that pipe 

hot water from geothermal wells to a central facility that then distributes it 

to heat many buildings more economically than other available sources of 

energy. The largest concentration of geothermal heating districts occurs in 

Boise, Idaho, where four heating districts distribute geothermal waters to 

over 50 buildings, including the Capitol and City Hall (fig. 3). Geothermal 

heating districts supply heat to about 20 commercial and government 

buildings in Klamath Falls, Oregon, and to 400 homes in Reno, Nevada. The 

next most plentiful direct use applications are resorts and spas, accounting 

for over 10 percent of sites. About 244 geothermal resorts and spas offer 

relaxation and therapeutic treatments to customers in 19 states. Spas and 

resorts can be as primitive as an unsheltered hot spring in the backcountry 

to an elaborate resort with multiple soaking pools, an Olympic-sized 

swimming pool, a 100-room hotel, and gourmet restaurants. Two percent of 

geothermal direct use applications consist of heated greenhouses in which 

flowers, bedding plants, and trees are grown. Idaho leads the nation with 

the most geothermally heated greenhouses—13, and New Mexico leads the 

nation with the largest geothermally heated greenhouse—covering 32 

acres. Another 2 percent of geothermal direct use applications are for 

aquaculture operations that heat water for raising aquarium fishes for pet 

shops; catfish, tilapia, freshwater shrimp and crayfish for human 

consumption; and alligators for leather products and food (fig. 4). Other 

direct use geothermal applications include dehydrating vegetables, like 

onions and garlic, and melting snow on city streets and sidewalks. 

Geothermal direct use applications are summarized in table 3.
Page 15 GAO-06-629 Renewable Energy

Table 3: U.S. Geothermal Direct Use Applications as of 2005

Source: The Geo-Heat Center at the Oregon Institute of Technology.

Figure 3: District Heating in Boise, Idaho

Nearly all direct use businesses and heating districts are currently located 

on private lands. Only two direct use businesses that use federal 

geothermal resources are currently in operation. One of these businesses, 

located at Honey Lake in northern California, uses geothermal resources to 

preheat a boiler in which biomass is burned to create electricity. Four 

additional businesses—a nursery, a food processing plant, and two mines—

Application Number of sites

Space heating 1,976

District heating 20

Resorts and spas 244

Aquaculture 48

Greenhouses 44

Snow melting 6

Agricultural drying 3

Other industrial 3

Total 2,344

Source: GAO.
Page 16 GAO-06-629 Renewable Energy

have also used federal resources at one time in direct use applications. A 

nursery in New Mexico used federal geothermal resources for heating 

greenhouses, but the owner reported that he stopped using the federal 

geothermal resources because he considered the federal royalties to be 

excessive. Two gold and silver mines also used geothermal waters from 

BLM lands in Nevada to enhance their cyanide heap leeching operations 

but suspended these operations, due in part, to high federal royalties. The 

owner of the food processing plant, which dried garlic, reported being 

forced out of business by lower priced imports from China.

Figure 4: Raising Tropical Fish with Geothermal Resources in Idaho

The Potential for 

Developing Additional 

Direct Use Is Uncertain

The potential for additional direct use of geothermal resources in the 

United States is uncertain due to the geographically widespread nature of 

low-temperature geothermal resources and the many different types of 

applications. The USGS performed the first national study of lowSource: GAO.
Page 17 GAO-06-629 Renewable Energy

temperature geothermal sites in 19825 and estimated the amount of heat inplace that could be available for direct use applications across the United 

States. However, this study was neither specific enough to identify 

individual sites for development, nor did it estimate the amount of heat that 

could be recovered and converted into energy savings for homes or 

businesses. In 2005, the Geo-Heat Center at the Oregon Institute of 

Technology identified 2,211 geothermal wells and springs with 

temperatures appropriate for direct use. The Geo-Heat Center estimated 

that 404 of these wells and springs might be commercially developed 

because they are within 5 miles of communities. The study estimated the 

minimum amount of heat that could be produced at each site but did not 

assess the economics or business climate of the various direct use 

applications.

Geothermal Heat Pumps 

Show Increasing Use

Geothermal heat pumps have become a major growth segment of the 

geothermal industry by making use of the earth’s warmer temperature in 

the winter to heat buildings and using the earth’s cooler temperature in the 

summer for air conditioning. The Geothermal Heat Pump Consortium 

estimated that 1 million units were in operation in all 50 states as of 

January 2006. The number of geothermal heat pumps has steadily 

increased over the past 10 years. Because geothermal heat pumps are 

effective where ground temperatures are between 40 and 70 degrees F, they 

can be installed in almost any location in the United States and, therefore, 

are the most widespread geothermal application and have the greatest 

potential. 

Until 1999, few geothermal heat pumps were installed in federal facilities. 

The annual federal investment in geothermal heat pumps has increased 

substantially since then, from $6 million in 1999 to $74 million in 2001—the 

latest year for which data are available. As of November 2005, federal 

facilities had installed over 25,000 individual heat pumps—over 24,000 of 

them in military bases. The other 1,000 heat pumps were installed by the 

Department of Housing and Urban Development, DOI, the U.S. Postal 

Service, and the Environmental Protection Agency.

5

U.S. Geological Survey, Assessment of Low-Temperature Geothermal Resources of the 

United States, 1982.
Page 18 GAO-06-629 Renewable Energy

Geothermal 

Development Faces 

Many Challenges

The development of geothermal resources for electricity production faces 

major challenges, including high risk and financial uncertainty, inadequate 

technology, and insufficient transmission capacity. Developers of 

geothermal power plants face additional challenges when operating on 

federal lands. These challenges include: (1) a lengthy review process for 

the approval of leases and permits,(2) insufficient resources at BLM to 

conduct the necessary reviews, (3) different priorities between the BLM 

and the Forest Service when lands under their jurisdiction occur within a 

project area, (4) fragmented lease holdings that make it difficult to develop 

an economically viable project, and (5) a complex federal royalty system. 

Developers of geothermal resources for direct uses also face a variety of 

other business challenges, remote locations, water rights issues, and higher 

federal royalties over the past few years. The recently passed Act addresses 

some of these challenges and is discussed in the next section of this report.

Geothermal Power Plants 

Face High Risk, Financial 

Uncertainty, and 

Technological Impediments

Geothermal development for the production of electricity is a risky, 

expensive, and lengthy process. Geothermal groups reported that most 

attempts to develop geothermal resources are unsuccessful, that costs to 

develop geothermal power plants can surpass $100 million, and it can take 

3 to 5 years for plants to first produce and sell electricity. The development 

of geothermal resources for electricity generation follows a series of 

phases, starting with finding the geothermal resources through exploration, 

then confirming the magnitude and extent of the resource, and ending with 

full field development and power plant installation. Although some 

resources are easy to find because they produce telltale signs such as hot 

springs or fumaroles, most resources are buried deep within the earth—at 

depths sometimes exceeding 10,000 feet—and finding them often requires 

an in-depth knowledge of the area’s geology, geophysical surveys, remote 

sensing techniques, and at least one test well. The Geothermal Energy 

Association estimates that average wells cost from $2 million to $5 million 

and that only about 25 percent of the initial test wells are successful in 

finding commercial geothermal fields. Companies must then drill 

additional wells to assess the extent, temperature, pressure, and 

productivity of the reservoir, thereby allowing companies to confirm the 

magnitude and extent of the resource and decide whether it is 

economically viable. Estimates of failure rates for wells drilled during this 

phase run as high as 60 percent. According to the Geothermal Energy 

Association, developers typically spend about 10 percent of the total cost 

for this phase. It costs $75 million to develop a typical 25 megawatt power 

plant. Such a plant can produce enough electricity for 19,000 homes. The 
Page 19 GAO-06-629 Renewable Energy

drilling of additional wells to produce and manage the reservoir, installing 

the power plant, and connecting the wells to the plant with pipes generally 

account for another 23 percent, 54 percent, and 7 percent of the total costs 

of the plant, respectively. In addition, operating and maintenance costs for 

a plant of this size could be about another $5 million per year.

The risks and high initial costs associated with geothermal development 

limit financing and make financing more difficult. Energy consultants told 

us that few companies, including venture capitalists, are willing to provide 

funding for geothermal projects, particularly for the initial phases of 

exploration and confirmation. Industry officials who do provide funding for 

geothermal development told us that they would only fund projects that are 

either fully confirmed or are in areas of well-known geothermal potential. 

Even when fully confirmed, moreover, few lenders will finance a 

geothermal project until a contract has been signed by a utility or energy 

marketer to purchase the expected electricity. Geothermal industry 

officials describe the process of securing a contract as complicated and 

costly, especially for small geothermal developers who are generally 

unfamiliar with the various bidding mechanisms that utilities use to 

establish electricity prices. Officials with a large utility expressed their 

reluctance to purchase more costly electricity from geothermal plants and 

cited an inability to pass on the additional cost to ratepayers. Electricity 

from geothermal resources may also be unavailable during time frames 

specified by the contract because of delays due to environmental litigation 

or lack of available transmission. In addition, an energy consultant told us 

that most utilities are unfamiliar with geothermal resources, and they are 

unlikely to invest the necessary time to assess geothermal projects because 

geothermal electricity would make up a small percentage of their total 

energy portfolio.

Inadequate technology adds to the high costs and risky nature of 

geothermal development. Since geothermal systems are geologically more 

complex than oil and gas systems, exploration tools commonly used in the 

oil and gas industry, such as geophysical surveys, are less effective. In 

general, geothermal reservoirs are located in very hard and fractured rocks 

that make drilling difficult. Operators often experience difficulty in drilling 

because drill bits wear quickly and because the medium used to lubricate 

the borehole and remove rock fragments, called drilling fluid, is commonly 

lost into the many fractures in the rock. Compared with oil and gas wells, 

the temperatures encountered when drilling are considerably higher and 

the geothermal resources are more corrosive, resulting in corrosion of 

drilling equipment and production casing and the failure of electronic 
Page 20 GAO-06-629 Renewable Energy

components. Geothermal wells are also larger in diameter than oil and gas 

wells drilled to the same depth, which drives up drilling costs. The recent 

boom in oil and gas drilling has added to the scarcity and higher costs for 

drilling rigs and equipment.

Lack of Adequate Electrical 

Transmission Hinders 

Geothermal Development

Lack of available transmission creates a significant impediment to the 

development of geothermal resources for electricity production. To send 

electricity produced at geothermal power plants to utilities, geothermal 

companies often need to construct new transmission lines from their plant 

to existing lines. In the West, however, many geothermal resources are 

located far from existing transmission lines, making the construction of 

additional lines economically prohibitive, according to federal, state, and 

industry officials. For example, there are no significant transmission lines 

between the geothermal resources in northern Nevada and the populated 

area of Las Vegas in southern Nevada. In California, there is a need for new 

or upgraded transmission to access renewable resources in Nevada and in 

the Imperial Valley of southern California, which has significant geothermal 

potential. Even when geothermal resources are near major transmission 

lines or developers can fund the construction of an additional transmission 

line, adequate transmission capacity may still be unavailable. Many existing 

transmission lines are operating at or near capacity and may not be able to 

transmit electricity without significant upgrades.

Paramount among transmission concerns is who will pay for the needed 

transmission capacity. Transmission costs can be very large. In Nevada, a 

BLM official told us that transmission lines there cost over $500,000 per 

mile. The California Energy Commission said in a June 2005 report that 

new transmission lines with interconnections cost between $375,000 and 

$3.3 million per mile for single circuit lines, depending on their voltage. In 

the summer of 2005, FERC denied a request from a utility to pass the costs 

for transmission lines on to ratepayers. According to utility officials, this 

reaffirms that developers must pay for the costs since utilities will not 

voluntarily absorb the costs directly. Under current rules, when a developer 

requests new transmission capacity, the bulk of the costs are assigned to 

the project that first pushes the transmission system beyond its existing 

capacity. In addition, federal, state, and industry officials note that small 

geothermal plants are discouraged from connecting to these large 

transmission lines because utilities do not want to bother with the small 

amounts of electricity unless there are many of them in the same area. 
Page 21 GAO-06-629 Renewable Energy

Cumbersome planning and permitting processes have hindered the 

addition of necessary transmission capacity. In a July 2005 report, a 

consultant for the Edison Electric Institute noted that nationally the task of 

getting a transmission project planned, approved, permitted, and financed 

remained daunting. The authors stated that the investment climate for 

transmission remained fragmented by different procedures, incentives, and 

constraints from one region of the country to another. The California 

Energy Commission noted in a November 2005 report that the state’s 

inefficient transmission planning and permitting processes were 

contributing to worsening the state’s transmission problems. Addressing 

the same issue, an official of a large California utility told us that obtaining 

agreement on where to construct transmission lines, addressing 

environmental issues, obtaining approvals, and a “not in my backyard” 

philosophy, contributed to the uncertainty and long lead times in building 

additional transmission capacity. In addition, a geothermal developer 

complained about extensive hearings and an inability to determine 

jurisdictions between the state and the federal government and between 

agencies within California. 

Geothermal Power Plants 

on Federal Lands Face 

Delays in Processing 

Applications, Fragmented 

Lease Holdings, and a 

Complex Royalty System

Geothermal developers state that the process for approving leases and 

issuing permits to drill wells and construct power plants has become 

excessively bureaucratic. BLM and Forest Service officials often have to 

amend or rewrite resource or forest management plans, which can add up 

to 3 years to the approval process, depending upon the complexity of the 

proposal and when the last plan was written. Delays in finalizing resource 

and forest management plans and in conducting environmental reviews 

have resulted in a backlog of 31 lease applications in California, with an 

average age of 7.4 years, and 136 lease applications in Nevada, with an 

average age of about 2 years. Despite the high backlog in Nevada, BLM 

officials noted that they processed 177 lease applications from January 

2001 through June 2005. In contrast, during the same period, BLM did not 

process any lease applications in California. Nevada BLM officials reported 

that they can generally make decisions on whether to allow leasing and 

development faster because the public raises fewer issues and BLM 

documents its decision within a shorter document known as an EA. In 

California, however, the public raises more environmental issues and 

concerns involving Native American spirituality so BLM often prepares a 

more detailed document called an EIS, which typically takes 2 years to 

complete. While geothermal developers told us that they support 

environmental analyses, they complained about the duplication of federal 

and state documentation in California and of the appeals and lawsuits filed 
Page 22 GAO-06-629 Renewable Energy

by groups opposing the federal and state decisions, citing that it often takes 

years for their resolution. The California Energy Commission reported in a 

June 2005 report that the entire process from exploration to the first 

production of electricity can take more than a decade and that it was not 

unusual to redo environmental documents because they became outdated.

Geothermal applications, permits, and environmental reviews are also 

delayed because of a lack of staff and budgetary resources at the BLM state 

and field offices that conduct the necessary work. Nevada and California 

BLM officials noted that lack of funding and dedicated staff to work on 

lease applications was a constant problem. Lack of funding in California 

has slowed completion of BLM resource management plans and EISs 

necessary for lease approvals and drilling permits. BLM officials noted in 

California that they received only $90,000 to conduct two extensive EISs 

for which staff had requested $1.2 million while Nevada BLM received a 

one-time allocation of $700,000 for processing a backlog of lease 

applications and writing several less extensive EAs, which generally cost 

$80,000 to $90,000 each.

Approvals for leases and permits may also be delayed when BLM must 

coordinate with the Forest Service, which manages land in some project 

areas. The Forest Service manages significant lands on geothermal projects 

in Oregon, Washington, California, and Nevada. Although BLM is the lead 

federal agency for geothermal development, the Forest Service must 

concur with leasing and development, and it has its own permitting 

process. BLM and industry officials report that there can be a lack of 

coordination between the Forest Service and BLM because of differing 

objectives and directives. While both agencies manage their lands 

according to the multiple use doctrine, they may have different priorities 

for land use and the public often submits more negative comments 

concerning geothermal development on Forest Service lands. A Forest 

Service official noted that it is important to balance the competing issue of 

geothermal development with other land uses such as preservation and 

recreation. He cited a limited budget for updating forest management 

plans, which can lead to delays, and noted that since geothermal 

development generates far less revenue than logging and coal mining on 

Forest Service Lands, geothermal development receives less priority.

Companies may also encounter difficulties in developing geothermal 

resources for electricity production due to a patchwork of lease ownership. 

Geothermal resources within a project area may be owned by the federal 

government, state government, or private entities. Even when all resources 
Page 23 GAO-06-629 Renewable Energy

within a project are under federal lease, several lessees with competing 

interests and objectives may own these leases. Some BLM officials noted 

that some developers have reported difficulty in consolidating the various 

geothermal leases into an economically viable project that can recover the 

costs of the power plant and transmission line. These developers, 

according to these BLM officials, say that speculators often lease 

geothermal resources not for development purposes but rather to resell the 

leases at a significant profit, running up the cost of the project.

Geothermal developers, BLM officials, and MMS officials concur that the 

complex federal royalty system in effect before passage of the Act was a 

challenge to the development of geothermal electricity plants. While 

developers did not consider this royalty system to be a major obstacle in 

constructing a geothermal power plant, some described calculating royalty 

payments as burdensome and reported expending considerable time and 

expense on royalty audits. Several industry officials cited the complex 

royalty system as a reason for advocating revisions to the Geothermal 

Steam Act of 1970, as amended.

Direct Uses of Geothermal 

Resources Face Business 

Challenges, Remote 

Locations, Water Rights, and 

Royalty Issues

The small business owners, operators of heating districts, and individuals 

who commonly develop geothermal resources for direct use face a variety 

of business challenges. Foremost among these challenges are obtaining 

capital, overcoming specific challenges unique to their industry, containing 

costs, and securing a competitive advantage. While the amount of capital to 

start a business that relies on geothermal resource is small compared with 

the amount of capital necessary to build a geothermal power plant, this 

capital can be large relative to the financial assets of the small business 

owner or individual. Unforeseen problems in well construction, piping, and 

water disposal can also increase original funding estimates. Obtaining 

funding is difficult as commercial banks are often reluctant to loan money 

for unproven projects and ideas that appear risky. Even district heating 

systems that are operated by municipalities have encountered financing 

difficulties as city or state legislatures may be reluctant to provide funding 

or customers may be reluctant to pay for modifications that are necessary 

to use geothermal resources in their current heating systems. We observed 

a number of business challenges unique to various industries that the 

successful owners of direct use businesses were able to overcome. They 

used their extensive knowledge of their respective industries to combat 

diseases in fish farms; to combat corrosive waters used in space heating; 

and to control temperature, humidity, and light according to the 

specifications of the various plant species they grew in nurseries. 
Page 24 GAO-06-629 Renewable Energy

Escalating costs also pose a challenge to direct use operations. Rising labor 

costs and cheaper imports closed a food processing plant in Nevada. 

Greenhouses in Idaho and Oregon remained profitable by shifting from 

high-cost natural gas to cheaper geothermal resources for heating. 

Successful operators of direct use businesses have secured competitive 

advantages by entering specialty niches (see figs. 5 and 6). For example, 

the operators of two aquaculture facilities in Idaho and Oregon sell 

alligator meat, tilapia, and freshwater shrimp to restaurants. Also, a resort 

operator in Alaska that relies on geothermal resources constructed and 

markets an “ice museum” where guests can spend the night with interior 

furnishings sculptured from ice. We noticed that some greenhouse 

operators gained a marketing advantage by selling from their retail outlet 

rather than selling at a lower price to wholesalers.

Figure 5: Alligator Farm Using Geothermal Resources in Idaho

The remote location of many geothermal resources hampers their 

development for direct use. Geothermal direct use is constrained because 

the geothermal waters cannot be economically transported over long 

distances without a significant loss of heat. An official with the Geo-Heat 

Source: GAO.
Page 25 GAO-06-629 Renewable Energy

Center noted that for space heating, spas, and resorts, the geothermal 

resources should be located within 5 miles of the location where they will 

be used. While some greenhouses, aquaculture operations, and food 

processors that rely on geothermal resources have successfully produced 

their products far from consumers, they still need access to adequate 

transportation and a cheap labor market, both of which are generally 

dependent on proximity to population centers. The distant location from 

major population centers of geothermal resources on federal lands 

contributes to their unattractiveness for direct use applications.

Figure 6: Nursery Heated with Geothermal Resources in Idaho

Obtaining water rights can be a significant challenge to direct use 

development. Western states are not uniform in classifying geothermal 

resources, considering them legally to be mineral, water, or having 

characteristics of both minerals and water. Depending sometimes on the 

depth and/or the temperature at which they occur, geothermal resources 

can be subject to state water laws in the western states and are then 

managed by the state agency responsible for protecting groundwater. Even 

when not legally classified as water, the production of geothermal 

Source: GAO.
Page 26 GAO-06-629 Renewable Energy

resources for direct use applications may still fall under regulations 

enforced by a state agency responsible for groundwater protection. In 

areas of high groundwater use, the western states generally regulate 

geothermal water according to some form of the doctrine of prior 

appropriations, under which specific amounts of water are appropriated to 

users in the order when they first made beneficial use of the water. 

Additional amounts, if available, are appropriated in the future to 

applicants on a first-come basis. Those that have more senior rights have 

priority in using the water when use exceeds supply, such as during a 

drought. Western states that generally follow the prior appropriations 

doctrine when managing the production of geothermal water for direct use 

include Utah, Idaho, Oregon, New Mexico, and Nevada.6

 Developers of 

geothermal resources for direct use would face problems obtaining 

appropriations in the Snake River Basin of Idaho, which consists of much 

of the state below the panhandle, because groundwater is fully 

appropriated there and used predominantly for irrigation. Over half of the 

state of Utah also includes areas in which geothermal resources for direct 

use would be excluded or restricted due to prior appropriations, and the 

state water engineers in Nevada and New Mexico may also restrict 

appropriations in some areas of their states. In addition, applications for 

development of geothermal resources for direct use on federal lands may 

also be subject to state water laws. Unless the federal government has 

reserved water rights on land in which a geothermal developer is interested 

and the geothermal development fulfills the specific purpose of the federal 

reservation, the development may still be subject to restrictions under state 

water laws.

Developers interested in using federal geothermal resources for direct use 

were concerned about high federal royalties prior to passage of the Energy 

Policy Act of 2005. Royalties were computed according to a formula that 

relies on the amount of heat extracted from the resource and the cost of a 

reasonably available alternative form of energy. Since most inquiries into 

the use of federal resources have been by operators of greenhouses, this 

alternative form of energy—natural gas—has been the source generally 

used to heat greenhouses. Average wellhead natural gas prices in recent 

years have increased about two and a half times from $3.68 per million 

British thermal units in 2000 to $9.50 in September 2005. Operators of 

greenhouses have told us that heating greenhouses with natural gas is no 

6

California treats geothermal resources as minerals, and they are managed by the California 

Division of Oil, Gas, and Geothermal Resources.
Page 27 GAO-06-629 Renewable Energy

longer economically feasible as the costs of raising plants would exceed 

the price they obtain for these plants. During meetings between BLM, MMS, 

state, and industry officials, general consensus was reached that natural 

gas was too expensive an energy source upon which to base royalties, and 

a working group was formed to propose an alternative energy source. In 

the report they drafted,7

 the group proposed Powder River Basin coal, 

which averages about 30 cents per million British thermal units—a fraction 

of the price of natural gas. The report states that lower royalties on direct 

use may encourage development and result in higher royalty revenues in 

the long run. However, based on other challenges facing the development 

of direct use applications, the lowering of federal royalties alone is unlikely 

to stimulate the direct use of federal geothermal resources. 

Efforts by Federal, 

State, and Local 

Governments to 

Address Challenges 

Show Promise

The Act includes a variety of provisions designed to help the geothermal 

industry address numerous challenges, including the high risk and financial 

uncertainty of developing renewable energy projects, lack of sufficient 

transmission capacity, delays in federal leasing, and complex federal 

royalties. Although these efforts show promise, it is too early to assess their 

effectiveness. Through the Department of Energy (DOE) and the California 

Energy Commission, the federal government and the state of California are 

attempting to overcome technical challenges by awarding cost-share grants 

for research and development. State and local governments have also made 

efforts to address challenges to geothermal development. Chief among 

these efforts are financial incentives, such as tax credits for production 

from renewable energy sources, sales and property tax exemptions, and 

mandates that certain percentages of the electricity generated within the 

state come from renewable energy sources, such as geothermal resources.

Financial Incentives Are 

Used to Address the High 

Risk and Uncertainty of 

Geothermal Development

Provisions within the Act address the high risk and financial uncertainty of 

producing renewable energy by providing tax credits and other incentives 

for renewable energy producers, including the producers of geothermal 

electricity. Starting on January 1, 2005, section 1301 of the Act extends for 

10 years a tax credit on the production of electricity from geothermal 

resources for already existing plants and for any new plants producing by 

December 31, 2007. The credit is now 1.9 cents per kilowatt-hour and has 

future adjustments for inflation. Although government and industry 

7

Royalty Policy Committee, Geothermal Valuation Subcommittee Report, May 2005.
Page 28 GAO-06-629 Renewable Energy

officials praised this provision, they told us that for the credit to be more 

effective, the date by which plants must produce electricity needs to be 

extended. They explained that since it can take 3 years or longer for the 

construction of geothermal electricity plants, plants probably will not 

qualify unless they are ready to break ground immediately. The Act also 

provides a financial incentive for tax-exempt entities that cannot take 

advantage of the production tax credit. Section 1303 of the Act permits the 

issuance of clean renewable energy bonds by tax-exempt entities, such as 

municipalities and rural electric cooperatives, for the construction of 

certain renewable energy projects, including geothermal electricity plants. 

Investors can purchase the bonds, which pay back the original principal 

and also provide a federal tax credit instead of an interest payment. The 

Department of the Treasury will manage the issuance of these bonds and 

the setting of credit rates. The total issuance of bonds cannot exceed $800 

million, and the bonds are to be issued between December 31, 2005, and 

December 31, 2007.

The Act also extends the federal government’s Renewable Energy 

Production Incentive, which expired on September 30, 2003. This incentive 

entitled eligible electric production facilities, including not-for-profit 

cooperatives, public utilities, and various government entities who sell 

renewable electricity, including that generated from geothermal resources, 

annual financial incentive payments from the federal government. 

Additionally, section 1333 of the Act makes a $300 tax credit available to 

purchasers of geothermal heat pumps who place them in service in 2006 

and 2007.

Another provision in the Act may decrease the uncertainty inherent in 

geothermal exploration. The Act directs the Secretary of the Interior, acting 

through the USGS, to update the 1978 Assessment of Geothermal 

Resources made by the USGS. This assessment, published as Circular 790, 

is widely considered to be out of date and in need of revision. USGS 

officials reported that, since 1978, there have been significant 

advancements in technology that are not reflected in Circular 790. Now, 

electricity can be generated from lower temperature resources and from 

resources located deeper within the earth. Today, according to USGS 

officials, scientists and engineers can make more accurate resource 

estimates because they are more knowledgeable of reservoir 

characteristics and have benefited from the knowledge gained during the 

27 years of exploration and development that has occurred since the 

original study.
Page 29 GAO-06-629 Renewable Energy

State governments are also offering financial incentives to the geothermal 

industry by creating additional markets for their electricity through 

Renewable Portfolio Standards (RPS). An RPS is a state policy directed at 

electricity retailers, including utilities, that either mandates or encourages 

them to provide a specific amount of electricity from renewable energy 

sources, which may include geothermal resources. To date, 22 states plus 

the District of Columbia have RPSs, and three other states have set RPS 

targets. Requirements for the program vary by state as each RPS is unique, 

and not all states have significant geothermal resources. California and 

Nevada, which have large geothermal production and potential, have each 

established an ambitious RPS. California law mandates that retailers must 

supply 20 percent of their electrical energy from renewable energy by 2017, 

and the state is currently seeking to move this date up to 2010. Nevada 

requires certain percentages of its electricity to be generated from 

renewable energy each year, with 20 percent by 2015. Since California and 

Nevada requirements were implemented, one 20 megawatt-geothermal 

plant in Nevada, which has gone on line, and geothermal developers have 

signed contracts for three plants in California for as much as 260 

megawatts of future geothermal power, which can be attributed to RPSs. 

Nevada utilities currently are not meeting their annual RPS requirements. 

Officials from two large California utilities told us that they are interested 

in purchasing electricity generated from geothermal resources specifically 

because of RPS and noted that the RPS may be instrumental in 

constructing a new transmission line from the Imperial Valley to utilities in 

southern California. 

Additional state programs also provide tax credits and other financial 

incentives for renewable energy development, including electricity 

generation from geothermal resources. These incentives include property 

tax incentives, sales tax incentives, and business tax credits. For example 

in California, eligible geothermal developers can be awarded supplemental 

energy payments from the state if they have a contract for electricity at 

above market costs with one of California’s three investor-owner utilities. 

In Nevada, state law exempts from local sales and use taxes the sale, 

storage, and consumption of products or systems designed to generate 

electricity from renewable resources. In Utah, the purchases of equipment 

to generate electricity from renewable resources are excluded from state 

sales tax. Both Nevada and Oregon do not count the value added by 

renewable energy systems when assessing property taxes. Oregon also 

offers a business energy tax credit of up to 35 percent of the cost of certain 

renewable energy projects, including geothermal systems.
Page 30 GAO-06-629 Renewable Energy

Federal and State Grants 

Are Addressing Technology 

Challenges

DOE and the state of California provide financial assistance and grants to 

the geothermal industry in trying to overcome technical challenges. At 

DOE, the Geothermal Technologies Program’s mission is to work in 

partnership with U.S. industry to establish geothermal energy as an 

economically competitive contributor to the U.S. energy supply. Several 

goals of the program include reducing the cost of geothermal development 

to 5 cents per kilowatt-hour by 2010 and increasing electrical capacity from 

geothermal resources to 40,000 megawatts by 2040. The program seeks to 

accomplish these goals by competitively awarding cost-shared grants to 

industry for research and development. The program’s budget was $25.3 

million in fiscal year 2005. In the past, program funds have been used to 

pioneer new drill bits, demonstrate the large scale use of binary technology, 

produce new seismic interpretation methods, commercialize geothermal 

heat pumps, develop slimhole (reduced diameter) drilling for exploration, 

and produce a strategy for reinjection at The Geysers. Within the program, 

an initiative called GeoPowering the West provides technical and 

institutional knowledge on opportunities to use geothermal resources and 

on how to overcome challenges. Goals of this initiative are to increase the 

number of homes using geothermal energy to 7 million by 2010 and to 

double the number of states producing geothermal electricity to eight by 

2006.

California provides financial and technical support for geothermal 

development through grants under two programs administered by the 

California Energy Commission. Under the Geothermal Resources 

Development Account, grants are competitively awarded to promote 

research, development, demonstration, and commercialization of 

geothermal resources in California. Funding is provided from a portion of 

the federal geothermal royalties disbursed to the state. The program’s costs 

are shared with awardees. One noteworthy project funded by the program 

was the piping of treated wastewater from Santa Rosa, California, to The 

Geysers, where it was injected into the geothermal reservoir, increasing 

reservoir pressure and boosting electricity production by an estimated 10 

percent. For California’s fiscal year 2006, $3.9 million in funding is available 

for 12 to 15 projects. The state’s Public Interest Energy Research Program 

also funds awards for renewable resource projects, including geothermal 

projects. Money comes from a surcharge on California residents’ electricity 

bills. Of the $62 million collected by the state in 2005, $2 million was 

available for geothermal projects.
Page 31 GAO-06-629 Renewable Energy

Expanded FERC Authority 

and Planning Initiatives Are 

Aimed at Transmission 

Challenges

The Act may also address transmission challenges by providing FERC with 

new authorities in permitting transmission facilities and in developing 

incentive-based rates for electricity transmission in interstate commerce. 

FERC can now approve new transmission lines in certain instances in a 

“national interest electric corridor” when a state fails to issue a permit 

within 1 year of a company’s filing of an application. The Act also 

authorizes companies that obtain FERC permits for transmission facilities 

to acquire rights of way through eminent domain proceedings. In addition, 

the Act directed FERC to develop incentive-based rates for transmission of 

electricity in interstate commerce to promote increased investments in 

transmission. Within 1 year of passage of the Act, FERC is to issue a rule 

establishing incentive based rates. In November 2005, FERC initiated the 

rulemaking process for establishing these rates.

Several planning initiatives are aimed at addressing challenges to 

transmission. In the West, a number of regional entities composed of state 

public utility commissions, local governments, utilities, and others are 

working on transmission planning. These entities include Southwest 

Transmission Expansion Planning, the Northwest Transmission 

Assessment Committee, and the Rocky Mountain Area Transmission Study. 

Certain utilities are also being proactive. The Los Angeles Water and Power 

District is proposing that the City of Los Angeles spend $240 million to help 

construct or upgrade a transmission line from the Salton Sea, an area rich 

in geothermal resources near the Mexican border, to the Los Angeles area. 

Similarly, San Diego Gas and Electric is proposing a new transmission line 

from the Imperial Valley to its service area. 

Provisions within the 

Energy Policy Act and BLM 

Planning Efforts May 

Address Leasing and 

Royalty Issues

Provisions within the Act are aimed at streamlining or simplifying the 

federal leasing system, principally by mandating competitive geothermal 

lease sales every 2 years, by combining prospective federal lands into a 

single lease, and by improving coordination between DOI and the 

Department of Agriculture, which manages lands in the National Forest 

System. Since companies can nominate tracks of federal land for sale, 

some geothermal companies see the competitive sale provision as a 

mechanism to jump start leasing in areas where it has stalled in recent 

years. BLM officials speak positively of both this provision and the 

provision that allows combining prospective lands into a single lease, 

saying that these provisions make it more likely that companies with the 

financial resources to develop the lands can do so. The Act also requires 

the Secretary of the Interior and the Secretary of Agriculture to enter into a 
Page 32 GAO-06-629 Renewable Energy

memorandum of understanding that establishes an administrative 

procedure for processing geothermal lease applications and that 

establishes a 5-year program for leasing of Forest Service lands and 

reducing its backlog of lease applications, as well as establishing a joint 

data retrieval system for tracking lease and permit applications. A senior 

official with the Forest Service’s Geothermal Program said that, since the 

Forest Service already has a memorandum of understanding with BLM, 

drafting the new memorandum should not be difficult.

The Act also contains provisions that simplify federal geothermal royalties 

on resources that generate electricity and simplify and or reduce royalties 

on resources put to direct use. For electricity production, the Act defines 

three types of leases and provides different incentives for each. For the 

first type—leases that currently produce electricity—the Act allows lessees 

to negotiate a royalty rate equal to a percentage of gross sales revenues, 

instead of using the significantly more complex process known as 

“netback.” For the second type of lease—those that were issued prior to 

the Act and will first produce electricity within 6 years following the Act’s 

passage—lessees can elect for the first 4 years of production to pay 50 

percent of the royalties that would have been due. For the third type of 

lease—those that have not yet been issued—lessees will pay according to a 

schedule in which royalties are equal to certain percentages of gross sales 

revenues. In addition, the Act significantly changes royalties due in the 

future on direct use applications. The Act directs the Secretary of the 

Interior to establish a schedule of fees, in lieu of the current complicated 

system, that encourages the development of direct use resources.

BLM’s 5-year strategic plan for its geothermal program also attempts to 

address some challenges to federal leasing. The plan calls for annual 

workforce planning documents to reflect the skills and staffing necessary 

to implement an active geothermal program. A BLM official within the 

Geothermal Program said that this provision will allow the state and field 

offices to identify current budgetary needs so that they can process 

geothermal applications and permits in a timely manner. The strategic plan 

also calls for BLM to develop an inspection and enforcement plan, which it 

currently does not have. Such a program could help in ensuring that the 

federal government collects the correct royalty revenues from the sale of 

electricity generated from geothermal resources.
Page 33 GAO-06-629 Renewable Energy

Geothermal Royalty 

Disbursements Will 

Change Significantly, 

and Changes in 

Electricity Prices 

Could Alter Total 

Royalty Collections 

Under provisions of the Act, geothermal royalties retained by the federal 

government will be cut in half because half of the royalties that originally 

were retained by the federal government will now have to be disbursed to 

the counties in which the federal leases are located. Although provisions 

within the Act may change the royalties due on specific types of leases, the 

overall revenue impact of these provisions should be minor if electricity 

prices remain relatively stable and if the Secretary of the Interior relies on 

past royalty histories in determining future royalties. However, it is not 

possible to predict with reasonable assurance how electricity prices will 

change in the future, and price changes could significantly impact future 

royalty collections if they are not accounted for in royalty calculations.

The Energy Policy Act 

Redistributes a Greater 

Portion of Federal Royalties

A royalty provision of the Act redistributes the federal royalties collected 

from geothermal resources—cutting in half the overall geothermal 

royalties previously retained by the federal government. Set by the 

Geothermal Steam Act of 1970, as amended, the prior distribution provided 

for 50 percent of geothermal royalties to be retained by the federal 

government and the other 50 percent to be disbursed to the states in which 

the federal leases are located.8

 The Act changes this disbursement. While 

the Act provided that 50 percent of federal geothermal royalties will 

continue to 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.

The Act also changes how the federal government’s share of geothermal 

royalties can be used. Prior to passage of the Act, 40 percent of the federal 

government’s share was deposited into the reclamation fund created by the 

Reclamation Act of 1902, and 10 percent was deposited into the general 

fund of the Department of the Treasury. For the first 5 fiscal years after 

passage of the Act, the federal government’s share is now to be deposited 

into a separate account within the Department of the Treasury that the 

Secretary of the Interior can use without further appropriation and fiscal 

year limitation to implement both the Geothermal Steam Act and the Act. 

DOI officials explained that some of these funds could be used for activities 

8

30 U.S.C. § 191 (a). The state of Alaska is an exception to this provision, receiving 90 

percent.
Page 34 GAO-06-629 Renewable Energy

such as issuing geothermal leases, conducting environmental reviews, 

collecting geothermal royalties, and inspecting geothermal leases.

Provisions of the Energy 

Policy Act Are Likely to 

Have Little Impact on 

Overall Royalty Revenues 

Only if Electricity Prices 

Remain Relatively Constant

Despite several provisions of the Act that alter the amount of royalties due 

on both the generation of electricity and direct use operations, federal 

geothermal royalties could remain about the same, but only if electricity 

prices remain stable. However, electricity prices are not possible to predict 

with certainty, and price changes could significantly impact royalty 

revenues on electricity sales, which account for about 99 percent of total 

geothermal royalty revenues. The Act contains provisions for each of three 

specific types of leases that generate electricity: (1) leases that currently 

produce electricity, (2) leases that were issued prior to passage of the Act 

and will first produce electricity within 6 years following the Act’s passage, 

and (3) leases that have not yet been issued. There is also a provision in the 

Act that replaces the current method of calculating royalties due on direct 

use operations with a schedule of fees that shall encourage the 

development of geothermal resources. Since direct use royalties accounted 

for less than 1 percent of total geothermal royalties from 2000 through 

2004, the financial impact of the switch to a schedule of fees is likely to be 

minimal.

For leases that currently produce electricity, the Secretary of the Interior is 

to seek to collect the same level of royalties over the next 10 years but 

under a simpler process. Prior to passage of the Act, lessees of 13 of the 15 

geothermal electricity projects paid federal royalties according to a 

provision within MMS’s geothermal valuation regulations referred to as the 

“netback process.” To arrive at royalties due under this process, lessees are 

to first subtract from the electricity’s gross sales revenue9

 their expenses 

for generation and transmission and then multiply that figure by the royalty 

rate specified in the geothermal lease, which is from 10 to 15 percent.10 The 

Act simplifies the process by stating that within the 18 months after the 

effective date of the final regulations issued by DOI, lessees who were 

9

The valuation regulations 30 C.F.R. § 206.352 (c) (1) (ii) actually call for using gross 

proceeds, not sales revenue, in this calculation. The Act also refers to the term gross 

proceeds. Gross proceeds are all financial compensation accruing to the lessee from the 

sales of electricity. Since sales revenues are generally the largest component of gross 

proceeds, we use the two terms synonymously in this report for simplicity. 

10Deductions are estimates that are to be recalculated at the beginning of each year. Prior 

year’s deductions are to be adjusted based on actual costs during that year.
Page 35 GAO-06-629 Renewable Energy

producing electricity prior to passage of the Act have the option to request 

a modification to their royalty terms. This modification allows for royalties 

to be computed as a percentage of the gross sales revenues from the 

electricity so long as this percentage is expected to yield total royalty 

payments equal to what would have been received for comparable 

production under the royalty rate in effect before passage of the Act. MMS 

has already implemented a procedure similar to this provision for the two 

projects that produce electricity at The Geysers, setting their future 

royalties equal to a percentage of gross sales revenues based largely on 

past royalty histories and future projections.

Royalty revenues from a geothermal lease currently producing electricity 

will remain the same if the lessee elects not to convert to the new provision 

within the Energy Policy Act. In this case, the lessee will continue to 

calculate and pay royalties just as the lessee did before passage of the Act. 

Royalty revenues from a geothermal lease currently producing electricity 

should also remain about the same if the lessee does convert to the simpler 

method of calculating royalties in the Act, provided that DOI negotiates 

with the lessee a future royalty percentage based on past royalty history 

and provided that electricity prices remain relatively constant. This 

situation is illustrated in table 4, which uses data based on actual royalty 

data from a geothermal project on federal lands. According to table 4, the 

lessee pays royalties equal to $20,000 under the netback process. Royalties 

are equal to the production of 8,000 megawatt hours times the sales price of 

$100 per megawatt hour less $600,000 in expenses times the statutory 

royalty rate of 10 percent. Figures in table 4 represent averages over a 5-

year period and show that royalties are equal to 2.5 percent of gross sales 

revenue. If production remains the same and if electricity prices average 

$100 per megawatt hour, future royalty revenues will remain the same 

whether royalties are calculated under the netback process or if royalties 

are calculated at 2.5 percent of gross sales revenues.

Table 4: Example of Royalties Due under the Netback Process

Source: GAO. 

Note: Production is in megawatt hours, and sales price is dollars per megawatt hour.

Production Sales price

Gross sales 

revenue Expenses

Net sales 

revenue

Statutory 

royalty rate Royalties due

Royalties as a 

percent of 

gross sales 

revenues

8,000 $100 $800,000 $600,000 $200,000 10% $20,000 2.5%
Page 36 GAO-06-629 Renewable Energy

However, if electricity prices increase and royalties are based on historic 

percentages of gross sales revenues, royalty revenues will actually 

decrease relative to what the federal government would have collected 

prior to passage of the Act. More revenue would have been received under 

the netback process because expenses for generation and transmission do 

not increase when electricity prices increase and the higher 10 percent 

statutory royalty rate would have applied to all of the increase in sales 

revenues. This impact is illustrated in table 5. Using the historic average of 

2.5 percent computed in table 4, the royalties will actually be $12,000 less 

than what would have been collected under the netback process when the 

average price increases by $20 per megawatt hour. On the other hand, if 

average electricity prices drop by $20 per megawatt hour, royalty revenues 

will increase by $12,000 relative to what would have been collected under 

the netback process.

Table 5: Impact of Changing Electricity Prices on Royalties Due under the Energy 

Policy Act and the Netback Process 

Source: GAO.

Note: This example is for currently producing leases for which the lessee elects to change royalty to a 

percentage of gross sales revenue. The sales price is per megawatt hour. The example assumes 

constant production of 8,000 megawatt hours, constant expenses of $600,000, royalty rate equal to 

2.5% of gross sales revenue under the Act, and 10% under netback.

For the second type of lease—leases that were issued before the Act and 

that will first produce electricity within 6 years after the Act’s passage—

royalty revenues are likely to drop somewhat because lessees are likely to 

take advantage of an incentive within the Act. The Act allows for a 50 

percent decrease in royalties for the first 4 years of production so long as 

the lessee does not elect to pay royalties based on a percentage of gross 

sales revenues and continues to use the netback process.11 Because of the 

substantial reduction in royalties, it is likely that lessees owning leases 

Sales price 

Change in 

sales price

Gross sales 

revenue

Royalties 

due under 

the Act

Royalties 

due under 

netback

Change in 

royalties 

due

$100 $0 $800,000 $20,000 $20,000 $ 0 

$120 +$20 $960,000 $24,000 $36,000 - $12,000

$80 -$20 $640,000 $16,000 $4,000 +$12,000

11Pub. L. No. 109-58 § 224 (2005).
Page 37 GAO-06-629 Renewable Energy

issued before passage of the Act will elect to pay only 50 percent of the 

royalties due on new production for the 4-year period allowed by the Act. 

This incentive also applies to sales revenues from the expansion of a 

geothermal electricity plant that exceeds 10 percent. Owners of geothermal 

electricity plants currently paying royalties under the netback process may 

elect to take the production incentive for new plant expansions if they 

perceive that the royalty reduction is worth the additional effort and 

expense in calculating payments under the netback process and worth the 

possibility of being audited. BLM officials said that leases in Utah, 

California, and Nevada may become subject to the royalty reduction 

provisions within the Act for new production and new plant expansions. 

It is difficult to predict exactly how royalty revenue from the third type of 

lease—leases that have not yet been issued—will change, but it appears 

that revenue impacts are likely to be minor, based on our review of historic 

royalty data. The Act specifies that the Secretary of the Interior should seek 

to collect the same level of royalty revenues over a 10-year period as before 

passage of the Act, but it will be difficult for DOI to compare an estimate of 

what royalty revenue would have been without the Act with royalty 

revenues after the Act because the production and expenses of future 

plants could vary substantially due to their unique geological, engineering, 

and economic attributes. The Act provides that, for future leases, royalties 

on electricity produced from federal geothermal resources should be not 

less than 1 percent and not greater than 2.5 percent of the sales revenue 

from the electricity generated in the first 10 years of production. After 10 

years, royalties should be not less than 2 percent and not greater than 5 

percent of the sales revenue from the electricity.

We attempted to analyze the revenue impact on future leases by using 

historic royalty data maintained by MMS and sales revenue data maintained 

by BLM. A detailed description of our methodology is in appendix II. First, 

we attempted to analyze revenue impacts on the first 10 years of electricity 

production, but we had difficulty obtaining relevant royalty data so we 

could not complete this analysis. Next, we examined the impact on 

royalties after the first 10 years of production by analyzing data for seven 

geothermal projects from 2000 through 2004. In analyzing royalty data, we 

found that MMS did not maintain gross sales revenue data so we used data 

that BLM supplied to MMS. We also found that 40 percent of the royalty 

data maintained by MMS was erroneous or missing so we corrected or 

obtained these data as necessary. We then calculated royalties paid as a 

percentage of gross sales revenues for each project. This analysis showed 

that lessees were paying a wide range of percentages—from 0.2 to 6.3 
Page 38 GAO-06-629 Renewable Energy

percent. Three of the seven projects paid under the minimum 2 percent 

royalty rate prescribed in the Act, suggesting that some projects in the 

future could pay more under the Act’s new provisions than they would 

otherwise have paid. On the other hand, one project paid greater than the 

maximum 5 percent prescribed in the Act, suggesting that it is possible for 

a plant to pay less in the future than it would otherwise have paid. 

However, both the royalty revenue that the one plant would have overpaid 

and the total of the royalty revenues that the three plants would have 

underpaid are small—about 0.2 percent and 0.01 percent, respectively, of 

all geothermal royalties reportedly paid during the period of our analysis.

Even though provisions within the Act may decrease royalties on direct use 

applications, the impact of these provisions is likely to be small because 

total royalty collections from direct use applications are minimal. In fiscal 

years 2000 through 2004, MMS reported collecting annually about $79,000 

from two direct use projects, or less than 1 percent of total geothermal 

royalties. In addition, MMS reported collecting an additional $222,000 

during this period in settlement for royalties owed on a direct use project 

from 1987 through 2003. While a provision within the Act may encourage 

the use of federal geothermal resources for direct use by lowering the 

federal royalty rate, we believe based on challenges facing developers that 

it is unlikely that this royalty incentive alone will stimulate substantial new 

revenues to compensate for the loss in revenue due to the lower royalty 

rate. We believe that, in order to substantially increase the development of 

federal direct use applications, developers must overcome the relatively 

high capital costs for investors, unique business challenges, and water 

rights issues.

MMS Does Not Routinely 

Collect the Royalty Data 

Necessary to Maintain the 

Same Level of Royalty 

Collections

MMS does not routinely collect meaningful data on the revenue from 

electricity sales. Since the Act requires the Secretary of the Interior to seek 

to achieve the same level of royalty revenues when issuing new royalty 

regulations, these data are necessary to know how future royalties will 

compare with what would have been collected before passage of the Act. 

To make these comparisons, MMS needs to calculate the percentage of 

gross sales revenues that lessees pay in royalties. MMS requires royalty 

payors to record sales revenue data on Form MMS-2014 under the data field 

“sales value.” MMS’s Geothermal Payor Handbook instructs royalty payors 

using the netback method to record in this field its net sales revenue, which 

is equal to gross sales revenues less deductions for expenses such as 

generation and transmission. As such, this sales value cannot be used as 
Page 39 GAO-06-629 Renewable Energy

one of the factors to calculate the percent of gross sales revenues paid in 

royalties.

In preparing an analysis for the Royalty Policy Committee, MMS obtained 

gross sales revenue data from BLM for many of the geothermal projects. 

While BLM regulations require geothermal plant operators to report to BLM 

the amount of electricity produced, these regulations do not require the 

reporting of gross sales revenues. Nevertheless, BLM officials said that they 

collect the sales revenue data. BLM officials in Nevada and southern 

California reported examining the production and gross sales revenue data 

for reasonableness and patterns in order to check on the accuracy of 

royalty reporting. A BLM official also reported collecting sales revenue and 

production data at The Geysers in northern California, but he said that BLM 

lacked the resources to examine these data and was unable to compile 

these data either for MMS or for us. These data from The Geysers are 

important because they represent about 61 percent of total federal 

geothermal royalties. Some royalty data from The Geysers were obtained 

and audited by the state of California, but an MMS official said that it would 

be more efficient and timely if MMS collects gross sales revenue data 

directly, rather than having to ask BLM or the states for these data. The 

official also said that MMS could use the gross sales revenue data in the 

future to conduct general compliance audits by comparing the percent of 

gross sales revenue paid in royalties with percentages prescribed within 

the Act and by examining trends in the data, without having to undertake 

lengthy and expensive on-site visits to the geothermal plants.

Conclusions The Energy Policy Act of 2005 addresses a wide variety of challenges facing 

developers of geothermal resources. The Act incorporates many of the 

lessons learned by state governments and federal agencies in an attempt to 

make federal processes more efficient and provide financial incentives for 

further development. However, the Act is new and insufficient time has 

passed to assess its effectiveness. Several of the Act’s major provisions will 

be left to the federal agencies within DOI for implementation, and the 

drafting and public comment period for regulations that implement these 

provisions will take time. Agencies will also need to spend considerable 

time and effort in working out the details for implementation and securing 

the necessary budgets to implement the new system. To assist in these 

efforts, the Congress has authorized the agencies to use the federal 

government’s share of royalty collections to implement the geothermal 

program for 5 years.
Page 40 GAO-06-629 Renewable Energy

All the while, the Act directs the Secretary of the Interior to seek to 

maintain the same level of geothermal royalty revenues over the next 10 

years as would have been collected prior to the Act. This is a tall mandate, 

as one of the factors that can most affect geothermal royalty revenue—the 

price of electricity—is outside the control of the managing agencies. 

Although it is impossible to predict with reasonable assurance how these 

prices will change in the future, the federal agencies must make their best 

effort to mitigate the impact of changing prices if federal royalty revenue 

are to remain the same. This mitigation can only be achieved if there is 

timely and accurate knowledge of the revenues that lessees collect when 

they sell electricity. Without such knowledge, MMS will have difficulty 

collecting the same level of royalties from lessees that elect to use the new 

royalty process.

Recommendation for 

Executive Action

To assist in achieving the same level of geothermal royalties as would have 

been collected prior to the Energy Policy Act of 2005, we recommend that 

the Secretary of the Department of the Interior instruct the appropriate 

managers within the Minerals Management Service to take the following 

two actions: 

• Correct erroneous and missing royalty data, when necessary, so that it 

will have an accurate baseline of royalty collections for each payor; and 

• Routinely collect from royalty payors the gross sales revenues for 

electricity sold in order to compare these revenues with past royalty 

collections and to verify compliance with the percentages prescribed 

within the Act for leases to be issued in the future.

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Department of the Interior for 

review and comment. DOI provided written comments, which are 

presented in appendix II. DOI agreed with our recommendations and 

emphasized the importance of correct and relevant data in fulfilling the 

requirement to collect the same level of geothermal royalties as would have 

been collected prior to the Energy Policy Act of 2005. Specifically, DOI 

stated that MMS plans to take steps to correct erroneous and missing 

royalty data, including initiating an audit and directing payors to correct 

data. DOI also stated that MMS is drafting new geothermal regulations as 

part of implementing the Act and that these regulations will refer to 

instructions that require payors to report to MMS the gross sales revenues 
Page 41 GAO-06-629 Renewable Energy

for electricity sold. MMS also provided several technical comments that we 

have incorporated in the report.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 15 days from the 

report date. At that time, we will send copies to other interested 

congressional committees. In addition, we will send copies of this report to 

the Secretary of the Interior, the Director of BLM, the Director of the 

Minerals Management Service, the Secretary of the Department of 

Agriculture, the Chief of the Forest Service, and the Secretary of Energy. 

We also will make copies available to others upon request. In addition, the 

report will be available at no charge on the GAO Web site at 

http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841 or WellsJ@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Key contributors to this report are listed in appendix III.

Jim Wells

Director, Natural Resources

and Environment
Page 42 GAO-06-629 Renewable Energy

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

In this report, we discuss (1) the current extent 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 Energy Policy Act of 2005 (Act) 

are likely to affect federal geothermal royalty collections.

To describe the current extent and potential for geothermal development, 

we reviewed key studies on the extent and potential of geothermal 

development that were published by the Department of Energy, the 

California Energy Commission, the U.S. Geological Survey, the Western 

Governors’ Association, the Geo-Heat Center at the Oregon Institute of 

Technology, the Geothermal Energy Association, and the state of Utah. We 

contacted and visited the authors of the studies prepared by the 

Department of Energy in Golden, Colorado; the California Energy 

Commission in Sacramento, California; and the Geo-Heat Center in 

Klamath Falls, Oregon. We also visited the Geothermal Resources Council 

in Davis, California. We obtained statistics on federal geothermal leases 

from the Bureau of Land Management (BLM) and data on geothermal heat 

pumps from the Geothermal Heat Pump Consortium, the Department of 

Energy’s Geothermal Technologies Program, and the General Services 

Administration.

To identify the challenges facing geothermal developers and to assess 

actions taken by federal, state, and local governments, we interviewed a 

variety of government and industry officials, reviewed substantial 

supporting documentation and the Act, and visited geothermal facilities. 

We interviewed BLM officials in Washington, D.C.; California; Nevada; and 

Utah, as well as Forest Service officials in Washington, D.C.; Minerals 

Management Service (MMS) officials in Lakewood, Colorado; and 

Department of Energy officials in Washington, D.C.; and Golden, Colorado. 

We contacted state officials in California, Nevada, and Idaho. We also 

interviewed geothermal industry representatives in Washington, D.C.; 

California; Nevada; and New Mexico and toured geothermal electricity 

plants in California and Nevada and direct use facilities, including heating 

districts, food processing plants, greenhouses, aquaculture operations, and 

a spa in Idaho, Nevada, Oregon, and Colorado. Specifically to assess 

financial challenges faced by the geothermal industry, we also interviewed 

officials with public utilities and officials who specialize in arranging 

financing for geothermal plants. In assessing challenges specific to federal 

lands, we also reviewed processes for approving lease applications and 

conducting environmental analyses under the National Environmental 

Policy Act of 1969; examined federal regulations addressing leasing, 
Appendix I

Objectives, Scope, and Methodology

Page 43 GAO-06-629 Renewable Energy

geothermal operations, and royalty valuation for both electricity 

production and direct use; and read the 148-page Geothermal Valuation 

Handbook.

To assess how provisions within the Act will affect federal geothermal 

royalties, we interviewed MMS employees in Lakewood, Colorado, and 

BLM employees in California, Utah, and Nevada and reviewed a report 

authored by the Royalty Policy Committee. We reviewed in detail how 

provisions of the Act address the disbursement of federal geothermal 

royalties and specifications for geothermal royalty collections from leases 

that are currently producing electricity, leases that will first start to 

produce electricity within the 6 years following passage of the Act, and 

leases that have not yet been issued.

To assess how provisions of the Act could impact royalty revenue from the 

sale of electricity, we started by trying to obtain monthly geothermal 

royalty data and sales revenue data from MMS for January 2000 through 

December 2004 for 10 geothermal projects paying royalties according to 

the netback process. We discovered that MMS does not require payors to 

submit gross sales revenue data but instead collects these data from BLM. 

We assessed whether MMS’s royalty data and BLM’s sales revenue data 

were complete enough and accurate enough for MMS to determine what 

percentage of gross sales revenues is equivalent to the current level of 

royalties being paid, should lessees elect to convert to paying a percentage 

of gross sales revenues, as allowed by the Act. We reviewed MMS’s and 

BLM’s data for reasonableness and completeness. While we found BLM’s 

data to be reasonably complete and accurate for the 10 geothermal 

projects, we found that BLM could not furnish us with sales revenue data 

for the 2 steam projects at The Geysers Geothermal Field in northern 

California. We also found that about 40 percent of the monthly royalty data 

maintained by MMS for the 10 projects was missing or erroneous. The most 

common error, accounting for 73 percent of erroneous and missing data, 

was not paying the 0.1 percent minimum royalty required by MMS 

regulations. This error did not result in significant monetary 

underpayments; monthly underpayments for this type of error generally 

amounted to less than $500. After assuming that the correct royalty due 

was 0.1 percent of net sales revenue for those months in which 

underpayments were less than the minimum royalty calculation, we 

determined that royalty data was reasonably accurate and complete for 

January 2000 through December 2004 for 6 of the projects and for January 

2003 through December 2004 for one additional project.
Appendix I

Objectives, Scope, and Methodology

Page 44 GAO-06-629 Renewable Energy

In assessing revenue impacts from leases that were currently issued and 

producing electricity, we considered MMS’s past history of approving 

royalty calculations based on a percentage of gross sales revenues at The 

Geysers. We also reviewed MMS’s calculations of the percentages of gross 

sales revenues that appear in the report to the Royalty Policy Committee. 

Based on these considerations, we assumed that MMS could determine a 

percentage of gross sales revenues equal to what would have been 

collected prior to the Act if electricity prices do not change. We also 

determined the impact of changing prices on royalty revenues as illustrated 

in table 5. In assessing revenue impacts from leases that were currently 

issued and not producing, we contacted BLM officials to ascertain the 

likelihood for these leases to first start producing in the next 6 years and 

the likelihood of producing leases to expand their production by more than 

10 percent. We also discussed with industry officials their opinions on 

paying royalties according to the netback process.

To assess how royalty collections from future leases could be impacted, we 

began to examine royalty data from the first 10 years for the 15 federal 

geothermal projects, all of which first started producing prior to 1987. We 

abandoned this attempt after conversing with MMS officials. MMS officials 

noted that contracts for the sale of electricity prior to 2000 were different 

and would probably not be representative of future situations. In addition, 

sales in the 1980s often involved the sale of geothermal resources such as 

steam and hot water rather than electricity, complicating the use of MMS’s 

royalty data. Although some industry officials said that their projections 

suggest that royalties during the first 10 years of a project’s life are 

substantially less than the royalties during the remainder of the project’s 

life, we could not verify this estimate without actual royalty data.

To assess how royalty collections from future leases could be impacted 10 

years after they first produce, we proceed with examining royalty data for 7 

of the projects from our original sample of 10 geothermal projects. We 

calculated royalties as a percentage of gross sales revenues from January 

2000 through December 2004 and compared their range with the range of 

percentages prescribed within the Act for production after the first 10 

years. We also compared royalties as the percentages of gross sales 

revenues for five of the flash plants with royalties as a percentage of gross 
Appendix I

Objectives, Scope, and Methodology

Page 45 GAO-06-629 Renewable Energy

sales revenues for two of the binary plants.1 We found that flash plants paid 

royalties from 0.6 to 6.3 percent of gross sales revenues while binary plants 

paid from 0.2 to 2.6 percent of gross sales revenues. It appeared to us that 

each project, whether flash or binary, faces unique geological, economic, 

and engineering situations that can combine to yield different percentages 

of gross sales revenues. In addition, the small number of observations and 

the significant overlap in range of the data indicated to us that 

generalizations about the difference in percentages between the two types 

of plants would be inaccurate.

To determine the impact of the Act on royalties from direct use of 

geothermal resources, we obtained direct use royalty data from MMS and 

reviewed the calculations on an alternative to the current calculation of 

direct use royalties that appears in the report to the Royalty Policy 

Committee.

1

Of the 15 geothermal projects on federal lands, two other geothermal projects pay royalties 

on a negotiated percentage of gross sales revenues and three other projects have both 

binary and flash operations—one of which has produced electricity intermittently and is 

currently shut down.
Page 46 GAO-06-629 Renewable Energy

Appendix II

Comments from the Department of the 

Interior ApendxiI
Appendix II

Comments from the Department of the 

Interior

Page 47 GAO-06-629 Renewable Energy
Page 48 GAO-06-629 Renewable Energy

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Jim Wells (202) 512-3841

Staff 

Acknowledgments

In addition to the individual named above, Dan Haas, Assistant Director; 

Jeanne Barger; Ron Belak; John Delicath; Randy Jones; Frank Rusco; Anne 

Stevens; and Barbara Timmerman made key contributions to this report.

(360566)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER