United States Government Accountability Office

GAO Testimony 

Before the Committee on Energy and 

Natural Resources, United States Senate

RENEWABLE ENERGY

Increased Geothermal 

Development Will Depend 

on Overcoming Many 

Challenges 

Statement of Jim Wells, Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 2:30 p.m. EDT

Tuesday, July 11, 2006

 

GAO-06-930T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 11, 2006

RENEWABLE ENERGY

Increased Geothermal Development Will 

Highlights of GAO-06-930T, a testimony to Depend on Overcoming Many Challenges 

Pete Domenici, Chairman, Energy and 

Natural Resources Committee, U.S. 

Senate 

The Energy Policy Act of 2005

(Act) contains provisions that

address challenges to developing 

geothermal resources, including 

the high risk and uncertainty of

developing geothermal power

plants, lack of sufficient 

transmission capacity, and delays 

in federal leasing. Among the

provisions are means to simplify

federal royalties on geothermal 

resources while overall collecting

the same level of royalty revenues. 

This testimony summarizes the 

results of a recent GAO report,

GAO-06-629. In this testimony, 

GAO describes: (1) the current

extent of and potential for 

geothermal development, (2) 

challenges faced by developers of 

geothermal resources, (3) federal,

state, and local government actions 

to address these challenges, and (4)

how provisions of the Act are likely 

to affect federal geothermal royalty 

disbursement and collections. 

What GAO Recommends

GAO concluded that it will be

difficult for the Department of the 

Interior (DOI) to demonstrate that 

it intends to collect the same level 

of geothermal royalties as called 

for in the Energy Policy Act 

because the Minerals Management

Service (MMS) does not 

systematically collect sales revenue 

data from electricity sales. 

Therefore, GAO recommends that 

the Secretary of the Interior

instruct the appropriate managers 

within MMS to systematically

collect these data, and DOI 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 heating systems, fish farms, 

greenhouses, food-drying plants, spas, and resorts. Recent assessments 

conclude that future electricity production from geothermal resources could

increase by 25 to 367 percent by 2017. The potential for additional direct-use 

businesses is largely unknown because the lower temperature geothermal 

resources that they exploit are abundant and commercial applications are 

diverse. One study identified at least 400 undeveloped wells and hot springs 

that have the potential for development. In addition, the sales of geothermal 

heat pumps are increasing.

The challenges to developing geothermal electricity plants include a capitalintensive and risky business environment, technological shortcomings, 

insufficient transmission capacity, lengthy federal review processes for 

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

Direct-use businesses face numerous challenges, including challenges that 

are unique to their industry, remote locations, water rights issues, and high 

federal royalties. The Act addresses many of these challenges through tax 

credits for geothermal production, new authorities for the Federal Energy 

Regulatory Commission, and measures to streamline federal leasing and 

simplify federal royalties, which totaled $12.3 million in 2005. In addition, 

the Department of Energy and the state of California provide grants for 

addressing technology challenges. Furthermore, some state governments 

offer financial incentives, including investment tax credits, property tax 

exclusions, sales tax exemptions, and mandates that certain percentages of 

electricity within the state be generated from renewable resources. 

Under the Act, federal royalty disbursement will significantly change 

because half of the federal government’s share will now go to the counties 

where leases are located. Although the Act directs the Secretary of the 

Interior to seek to maintain the same level of royalty collections, GAO’s 

analysis suggests this will be difficult because changing electricity prices

could significantly affect royalty revenues. Finally, MMS does not collect 

sales data that are necessary to monitor these royalty collections. 

Glenwood Hot Springs, Colorado (left) and geothermal power plant at The Geysers, California (right).

Source: GAO.

www.gao.gov/cgi-bin/getrpt?GAO-06-930T.

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. 
Mr. Chairman and Members of the Committee: 

We are pleased to participate in the Committee’s hearing to discuss the 

development of geothermal energy on federal lands and the role of 

geothermal resources in the nation’s portfolio of alternative energy 

sources. We previously testified that fossil fuels, such as coal, oil, and 

natural gas, provide about 86 percent of our nation’s total energy 

consumption, with the rest coming from other sources, including nuclear 

energy and renewable resources, such as hydroelectric energy, wind, solar 

energy, and geothermal resources.1

 Our nations’ long-standing reliance on

imported crude oil and natural gas and disruptions in their supply highlight 

the need to develop renewable energy sources. Among these sources is 

geothermal energy. Geothermal energy is a unique 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. 

Because many areas that have the potential to produce additional 

geothermal energy are located on federal lands, the federal government 

plays a major role in the future development of geothermal energy. 

Harnessing geothermal energy, however, is not easy. Developers of 

geothermal energy face many challenges, including the high risk and 

uncertainty of developing geothermal power plants, lack of sufficient 

capacity to transmit electricity from these plants to consumers, inadequate 

technology, and delays in leasing federal lands, which supply about 50 

percent of the geothermal resources used to generate electricity. To 

address these and other challenges, the Congress included detailed 

provisions in the Energy Policy Act of 2005. 

My testimony today is based on a report we recently completed entitled 

“Renewable Energy: Increased Geothermal Development Will Depend on 

Overcoming Many Challenges.” In this report, we addressed: (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 Energy Policy Act are likely to affect federal geothermal royalty 

disbursements and collections. In addressing these issues, we reviewed 

 1

See Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions,

GAO-05-414T (Washington, D.C.: March 16, 2005).

Page 1 GAO-06-930T 
key studies on the extent and potential of geothermal development, 

interviewed a variety of government and industry officials, reviewed 

substantial supporting documentation and the Energy Policy Act, analyzed 

geothermal royalty data, and toured geothermal electricity plants and 

other facilities in California, Idaho, Nevada, and Oregon. 

In summary, we found the following:

• Although locally important, geothermal resources produce a very small 

portion of our nation’s total electricity and heating needs. 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 district 

heating systems, fish farms, greenhouses, food drying plants, spas, and 

resorts. The most recent estimates of future electricity generation from 

geothermal resources suggest that the current production of 2,500 

megawatts of electricity—enough to supply 2.5 million homes—could 

increase to as much as 12,000 megawatts in 11 years. Although the future 

potential of other geothermal applications is less known, about 400 

undeveloped geothermal wells and hot springs could supply heat and hot

water directly to a variety of businesses and other organizations. 

• The developers of geothermal resources face significant financial, 

technical, and logistical challenges. Geothermal electric power plant 

developers face a capital intensive and risky business environment in 

which obtaining financing and securing a contract with a utility are 

difficult, where recouping the initial investment takes many years, and 

where transmission expenses could be costly due to remote locations or 

capacity constraints on the electric grid. These developers must also use 

exploration and drilling technologies that are inadequate for the unique 

attributes of geothermal reservoirs. Developers of electric power plants on 

federal lands face additional administrative and regulatory challenges and 

a complicated royalty payment system. Businesses and individuals trying

to tap geothermal resources for direct use face unique marketing, 

financing, and technical challenges and, in some cases, must contend with 

remote locations, restrictive state water rights, and high royalties. 

• To address the many challenges of developing geothermal resources, 

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

incentives and initiatives, many of which show promise. However, it is too 

early to assess their overall effectiveness. To address the capital intensive 

and risky nature of developing geothermal power plants, the Energy Policy 

Act grants developers a federal tax credit. Some states also encourage the 

production of electricity from renewable energy by granting various tax 

credits or by passing laws or adopting policies requiring that public 

Page 2 GAO-06-930T 
utilities provide a minimum percentage of their electricity from renewable 

energy. To address technological challenges, the federal government and 

the state of California awarded research and development grants through 

the Department of Energy’s Geothermal Technologies Program and the 

California Energy Commission, respectively. The Energy Policy Act gives 

the Federal Energy Regulatory Commission new authorities to address 

transmission limitations and contains provisions designed to improve the 

efficiency of federal geothermal leasing and to simplify or reduce federal

geothermal royalties. 

• How federal royalties are shared will change significantly since passage of 

the Act, and the total amount of royalties collected could change 

significantly if electricity prices also change. While the Act continues to 

provide that 50 percent of federal geothermal royalties will 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 directs for 

most leases that the Secretary of the Interior seek to maintain the same 

level of royalty revenues as before the Act, but our analysis suggests that 

this will be difficult because of two factors. First, because lessees in 

certain situations will have the option of choosing a different formula for 

calculating royalties, changing electricity prices could significantly affect 

the percentage of future royalty revenues that they pay. Second, the 

Minerals Management Service (MMS) does not routinely collect from 

royalty payors the gross sales revenue figures for the electricity they sell

so MMS cannot determine if or how these future royalty revenues differ 

from what lessees would have paid before the Act. We have made 

recommendations to the Secretary of the Interior to instruct the 

appropriate managers within MMS to collect from royalty payors the gross 

sales revenue figures from electricity sales. MMS has agreed to do so. 

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 naturally to the surface 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 

Background 

Page 3 GAO-06-930T 
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. 

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, coalfired, and gas-fired power plants. 

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. In 2005, MMS collected $12.3 million in 

geothermal royalties, almost all of which was derived from the production 

of electricity. 

Page 4 GAO-06-930T 
Geothermal resources currently account for about 0.3 percent of the 

annual electricity produced 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 Hawaii’s electricity, 5 percent of California’s 

electricity, and 9 percent of northern Nevada’s electricity. As of January 

2006, 54 geothermal power plants were producing electricity, and 

companies were constructing 6 additional geothermal power plants in 

California, Nevada, and Idaho that collectively will produce another 390 

megawatts of electricity. Over half of the nation’s electricity generated 

from geothermal resources comes from geothermal resources located on

federal lands in The Geysers Geothermal Field of northern California; 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. 

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. Estimates published since 1999 by the Department 

of Energy, the California Energy Commission, the Geothermal Energy 

Association, the Western Governor’s Association, and the Geo-Heat Center

at the Oregon Institute of Technology 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. A more 

comprehensive and detailed study of electricity generation from all 

geothermal resources in the United States was published in 1978 by the 

U.S. Geological Survey (USGS). This assessment estimated that known 

geothermal resources could generate 23,000 megawatts if all of them were 

developed. The USGS estimate is greater because it did not consider how 

much electricity could be economically produced, given competing 

commercial sources of electricity. In addition, the USGS estimated that 

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

megawatts. In short, geothermal resources that could generate electricity 

are potentially significant but largely untapped. 

In 2005, over 2,300 businesses and heating districts in 21 states used 

geothermal resources directly for heat and hot water. Nearly all of these 

are on private lands. About 85 percent of these users are employing 

geothermal resources to heat homes, businesses, and government 

Current Geothermal 

Development Is 

Limited, and 

Estimated Potential 

for Additional 

Development Varies 

Page 5 GAO-06-930T 
buildings. 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. 

The next most plentiful direct use application is for use by resorts and 

spas, accounting for over 10 percent of sites. About 244 geothermally 

heated resorts and spas offer relaxation and therapeutic treatments to 

customers in 19 states. Two percent of geothermal direct use applications

consist of heated greenhouses in which flowers, bedding plants, and trees 

are grown. Another two 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. Other direct 

use geothermal applications include dehydrating vegetables, like onions 

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

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. USGS preformed the first national study of low-temperature 

geothermal sites in 1982, but this study was not specific enough to identify

individual sites for development. In 2005, the Geo-Heat Center at the 

Oregon Institute of Technology identified 404 wells and springs that might 

be commercially developed for direct use applications—sites that had the 

appropriate temperatures and are within 5 miles of communities. 

Geothermal heat pumps have become a major growth segment of the 

geothermal industry. They make use of the earth’s warmer temperature in 

the winter to heat buildings and use 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. 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, constitute the 

most widespread geothermal application and represent the greatest 

potential for future development. 

The development of geothermal resources for electricity production faces 

major challenges, including high risk and financial uncertainty, insufficient

transmission capacity, and inadequate technology. Geothermal groups 

reported that most attempts to develop geothermal resources for 

electricity generation are unsuccessful, that costs to develop geothermal 

power plants can surpass $100 million, and that it can take 3 to 5 years for 

Geothermal 

Development Faces 

Many Challenges 

Page 6 GAO-06-930T 
plants to first produce and sell electricity. Although some geothermal 

resources are easy to find because they produce tell-tale signs such as hot 

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

sometimes exceeding 10,000 feet—and finding them often requires an indepth knowledge of the area’s geology, geophysical surveys, remote 

sensing techniques, and at least one test well. The risks and high initial 

costs associated with exploring for and developing geothermal resources 

limit financing. Moreover, few lenders will finance a geothermal project 

until a contract has been signed by a utility or energy marketer to 

purchase the anticipated electricity. Geothermal industry officials describe 

the process of securing a contract to sell electricity as complicated and 

costly. In addition, lack of available transmission creates a significant 

impediment to developing geothermal resources for electricity production. 

In the West where most geothermal resources are located, many 

geothermal resources are far from existing transmission lines, making the 

construction of additional lines economically prohibitive, according to 

federal, state, and industry officials. Finally, inadequate technology adds to 

the high costs and risky nature of geothermal development. For example, 

geothermal resources are hot and corrosive and often located in very hard 

and fractured rocks that wear out and corrode drilling equipment and 

production casing. 

Developing geothermal resources for direct use also faces a variety of 

business challenges, including obtaining capital, overcoming specific 

challenges unique to their industry, securing a competitive advantage, 

distant locations, and obtaining water rights. While the amount of capital

to start a direct-use business that relies on geothermal resources is small 

compared to the amount of capital necessary to build a geothermal power 

plant, this capital can be substantial relative to the financial assets of the 

small business owner or individual, and commercial banks are often 

reluctant to loan them money. Challenges that are unique to certain 

industries include avoiding diseases in fish farms; combating corrosive 

waters used in space heating; and controlling temperature, humidity, and 

light according to the specifications of the various plant species grown in 

greenhouses. Even when overcoming these unique challenges, successful 

operators of direct use businesses may need to secure a competitive 

advantage, and some developers have done so by entering specialty 

niches, such as selling alligator meat to restaurants and constructing an 

“ice museum” in Alaska where guests can spend the night with interior 

furnishings sculptured from ice. Furthermore, developing direct uses of 

geothermal resources is also constrained because geothermal waters 

cannot be economically transported over long distances without a 

significant loss of heat. Even when these resources need not be moved, 

Page 7 GAO-06-930T 
obtaining the necessary state water rights to geothermal resources can be

problematic. 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 

may have already been appropriated to prior users, and additional water 

may not be available. 

Developing geothermal power plants on federal lands faces additional 

challenges. Power plant 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. Delays in finalizing the resource 

and forest management plans and in conducting other environmental 

reviews have resulted in backlogs of lease applications in California and 

Nevada, particularly when the public has raised more environmental 

issues. Geothermal applications, permits, and environmental reviews are 

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

and field offices that conduct the necessary work and when BLM must 

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

areas. In addition, developers of geothermal resources for both power 

plants and direct uses faced a challenging federal royalty system prior to 

the Energy Policy Act. While developers of geothermal power plants 

generally did not consider the federal royalty system to be a major 

obstacle in constructing a geothermal power plant, some described paying

royalties as burdensome and reported expending considerable time and 

expense on royalty audits. On the other hand, some developers of 

geothermal resources for direct use stated that the federal royalty system 

was a major obstacle and no longer economically feasible. 

Page 8 GAO-06-930T 
The Energy Policy Act of 2005 includes a variety of provisions designed to

help address the challenges of developing geothermal resources, including

the high risk and financial uncertainty of developing renewable energy 

projects and the lack of sufficient transmission capacity. Provisions within 

the Act address high risk and financial uncertainty by providing tax credits 

and other incentives. For example, starting on January 1, 2005, 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 Act also provides a financial 

incentive for tax-exempt entities, such as municipalities and rural electric

cooperatives, by allowing the issuance of clean renewable energy bonds 

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. Another provision in the Act may decrease the high

risk of geothermal exploration by directing the Secretary of the Interior to

update USGS’s 1978 Assessment of Geothermal Resources, which is in 

need of revision because significant advancements in technology have 

occurred since its publication. The Act addresses transmission challenges

by providing the Federal Energy Regulatory Commission (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 when 

a state fails to issue a permit within 1 year of a company’s filing of an 

application, and companies that acquire FERC permits for transmission 

facilities can acquire rights of way through eminent domain proceedings. 

In November 2005, FERC initiated the rulemaking process for establishing 

these rates.

State governments are also addressing the financial uncertainty of 

developing renewable energy projects 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, although not all states have significant 

geothermal resources. 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. 

Efforts by Federal, 

State, and Local 

Governments to 

Address the 

Challenges of 

Developing 

Geothermal 

Resources Show 

Promise 

Page 9 GAO-06-930T 
To address technological challenges, the state of California and the 

Department of Energy provide financial assistance and grants to the 

geothermal industry. California’s Geothermal Resources Development 

Account competitively awards grants to promote research, development, 

demonstration, and commercialization of geothermal resources. 

California’s Public Interest Energy Research Program also funds awards 

for renewable resource projects, including geothermal projects. On the 

federal side, the Department of Energy’s Geothermal Technologies 

Program competitively awards cost-sharing grants to industry for research 

and development. In the past, program funds have been used to pioneer 

new drill bits, demonstrate the large scale use of low-temperature 

geothermal resources to generate electricity, 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 Geothermal Field. The program’s 

budget was $23 million in fiscal year 2006. However, the President’s 

budget contains no funding for fiscal year 2007, and the House’s proposal 

for fiscal year 2007 is to appropriate a substantially reduced amount of $5 

million. In contrast to these funding decisions, the Senate Energy and 

Water Appropriations Subcommittee just recently approved a budget of 

$22.5 million for geothermal research and development. While the future 

impacts of reduced or eliminated funding for geothermal technology is 

uncertain, industry representatives believe that this funding is necessary to 

address the near-term need to expand domestic energy production and the 

long-term need to find the breakthroughs in technology that could 

revolutionize geothermal power production. 

The Energy Policy Act also contains provisions aimed at addressing the 

challenges of developing geothermal resources on federal lands. Specific 

provisions are aimed at streamlining or simplifying the federal leasing 

system, combining prospective federal lands into a single lease, and 

improving coordination between DOI and the Department of Agriculture. 

The Act also requires the Secretary of the Interior and the Secretary of 

Agriculture to enter into a 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. 

Finally, the Act also contains provisions that simplify and/or reduce 

federal geothermal royalties on resources that generate electricity and on

resources put to direct use. MMS is in the early stages of implementing 

these provisions, and hence it is too early to assess their overall 

effectiveness. 

Page 10 GAO-06-930T 
A royalty provision of the Energy Policy Act redistributes the federal 

royalties collected from geothermal resources—cutting in half the overall

geothermal royalties previously retained by the federal government. 

Established by the Geothermal Steam Act of 1970, as amended, the prior

distribution provided that 50 percent of geothermal royalties be retained

by the federal government and the other 50 percent be disbursed to the 

states in which the federal leases are located.2

 While the Energy Policy Act 

continues to provide that 50 percent of federal geothermal royalties be 

disbursed to the states in which the federal leases are located, an 

additional 25 percent will now be disbursed to the counties in which the 

leases are located, leaving only 25 percent to the federal government. 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 Energy Policy Act. 

While, for most leases, the Energy Policy Act directs that the Secretary of

the Interior seek to maintain the same level of royalty revenues as before 

the Act, our analysis suggests that this will be difficult because changing 

electricity prices could significantly affect the percentage of future royalty

revenues collected. Electricity prices are not possible to predict with 

certainty, and as discussed below, changing prices could significantly 

impact royalty revenues because electricity sales 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.

For leases that currently produce electricity, future geothermal royalty 

revenues will depend on electricity prices. The Act specifies that the 

Secretary of the Interior is to seek to collect the same level of royalties 

Geothermal Royalty 

Disbursements Will 

Change Significantly,

and Changes in 

Electricity Prices 

Could Alter Total 

Royalty Collections 

 2

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

percent.

Page 11 GAO-06-930T 
from these leases over the next 10 years as it had before the Act’s passage 

but under a simpler process. Prior to passage of the Act, lessees of most 

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 revenue3

 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.4 The Act simplifies the process by allowing lessees, within a 

certain time period, the option to request a modification to their royalty 

terms if they were producing electricity prior to passage of the Act. This 

modification allows for royalties to be computed as a smaller percentage

of the gross rather than the net sales revenues from the electricity so long 

as this percentage is expected to yield total royalty payments equal to 

what would have been received before passage of the Act. Royalty 

revenues from a geothermal lease currently producing electricity will 

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

the Act. On the other hand, if the lessee converts to the new provision, 

royalty revenues should remain about the same only if DOI negotiates with 

the lessee a future royalty percentage based on past royalty history and if 

electricity prices remain relatively constant. If royalties are based on 

historic percentages of gross sales revenues and electricity prices 

increase, however, royalty revenues will actually decrease relative to what 

the federal government would have collected prior to passage of the Act.

The federal government will receive less revenue under this situation 

because expenses for generation and transmission do not increase when 

electricity prices increase, and the higher royalty rate specified in the lease 

is not applied to the increase in sales revenues. 

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 

 3

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 Energy Policy 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. 

4

Deductions 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 12 GAO-06-930T 
the lessee continues to use the netback process.5

 Because of the 

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

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, so long as the expansion exceeds 10 percent

of the plant’s original production capacity. 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. 

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. The Act also simplifies the calculation 

of royalty payments by providing 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. Our analysis of data for seven 

geothermal projects showed that lessees were paying a wide range of 

percentages after 10 years of production—from 0.2 to 6.3 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, neither 

the amount that the one plant would have overpaid nor the amounts that 

the three plants would have underpaid are significant. 

Even though provisions of the Energy Policy 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 

 5

Pub. L. No. 109-58 § 224 (2005). 

Page 13 GAO-06-930T 
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. While a provision of 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. 

Finally, MMS does not routinely collect data from the sales of electricity

that are necessary to demonstrate that MMS is seeking to maintain the 

same level of royalty collections from geothermal resources, as directed 

by the Energy Policy Act. For most geothermal leases, MMS will need to 

calculate the percentage of gross sales revenues that lessees will pay in 

future royalties from electricity sales and compare this to what lessees 

would have paid prior to the Act. However, MMS does not routinely collect 

these data. Accordingly, we are recommending that the Secretary of the

Interior instruct the appropriate managers within MMS to collect from 

royalty payors the gross sales revenues from the electricity they sell. MMS 

has agreed to do so. 

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 provide financial incentives for further development and make

federal processes more efficient. However, the Act was only recently 

adopted, 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 not occur 

overnight. Agencies will also need to spend considerable time and effort in

working out the details for implementation and securing the necessary 

budgets. Hence, the fate of a significant portion of our nation’s geothermal 

resources depends on the actions of these federal agencies.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions that you or other Members of the Committee 

may have at this time. 

Conclusions 

Page 14 GAO-06-930T 
For further information about this testimony, please contact me, Jim 

Wells, at 202-512-3841 or wellsj@gao.gov. Contributors to this testimony 

include Ron Belak, John Delicath, Dan Haas, Randy Jones, Frank Rusco, 

Anne Stevens, and Barbara Timmerman. 

Page 15 GAO-06-930T 

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