Description:On December 11, 1990, the Department received a request from PGV for an 8-year waiver of 60% of the geothermal royalties payable to the State. PGV's estimate was based on a resource (steam) value equaling 33% of the total electrical revenues generated. PGV uses an internal rate of return on their investment of 18%, and includes all costs in its cash flow projections, including "resource" costs that are believed to be acquisition, development and permitting costs. Assuming that the amount of steam and electricity produced is constant, two factors (i.e. assumed rate of return on capital and allowable costs) determine the amount of royalties and whether or not enough funds are available to pay the royalties. PGV's proposal (based on a 40% royalty payment) is to pay the state $1,893,000 over eight years instead of the estimated $4,731,000. Using PGV's assumptions regarding steam production and electricity sales, DWRM's staff and their consultants have investigated several methods to value the resource and determine royalties. Our estimates of the first year's royalties for a 25MW project range from $497,000 to $517,000 depending on the method selected. Overall, our consultants' and staff's estimates are close. One method suggested by PGV resulted in a first year royalty amount of zero. Three valuation methods are discussed: the netback method, the proportion of profits method, and the expanded netback method. For more information on this resource, please see the link provided.
Publication Date: Jan 01, 1991