The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Monday, September 22, 2008, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Charlie Borders, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Charlie Borders, Co-Chair; Representative Harry Moberly Jr., Co-Chair; Senators David E. Boswell, Denise Harper Angel, Ernie Harris, Dan Kelly, Alice Forgy Kerr, Bob Leeper, R.J. Palmer II, Richie Sanders Jr, Tim Shaughnessy, Brandon Smith, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W. Adams, Dwight D. Butler, Larry Clark, James R. Comer Jr., Jesse Crenshaw, Mike Denham, Bob M. DeWeese, Danny Ford, Derrick Graham, Keith Hall, Jimmy Higdon, Jimmie Lee, Lonnie Napier, Fred Nesler, Don Pasley, Charles Siler, Arnold Simpson, John Will Stacy, Tommy Turner, Robin L. Webb, and Brent Yonts.
Guests: Commissioner Donna Duncan, Department of Financial Incentives, Cabinet for Economic Development; Kris Kimel, Kentucky Science and Technology Corporation; Secretary Len Peter, Energy and Environment Cabinet; Dr. Rodney Andrews, Director of the Center for Applied Energy Research; Dr. Jim Cobb, Director of the Kentucky Geological Survey; Paul Kaplin, Finance and Administration Cabinet.
LRC Staff: Pam Thomas, Jennifer Hays, Charlotte Quarles, John Scott, and Sheri Mahan.
Senator Boswell moved that the minutes from the previous meeting be approved as written. The motion was seconded by Senator Harper-Angel. The motion carried by voice vote.
Commissioner Donna Duncan of the Department of Financial Incentives provided the committee with an update of energy projects approved to date under the Energy Independence Act (HB 1). She discussed the project review process, as defined in statute. She stated that the Incentives for Energy Independence Act (IEIA) program is different from other economic incentive programs in concept and process. This program does not require the Cabinet to have in-house energy technology expertise, but rather relies on the Office of Energy Police and the Center for Applied Energy Research as consultants.
Commissioner Duncan discussed the eligibility requirement for companies and projects. She stated that any project that constructs, retrofits, or upgrades a facility to increase production and sale of alternative transportation fuels would meet the requirements. Also, a company that would increase the production and sale of synthetic natural gas, chemicals, chemical feed stock, or liquid fuels from coal, biomass resources or waste coal through gasification or generates electricity for sale through alternative methods would meet the requirements for incentives. Each type of project has certain requirements, such as a minimum capital investment, carbon capture readiness, or minimum kilowatt generation.
Next, Commissioner Duncan discussed the different incentives available to companies meeting project requirements. She stated that tax incentives are available for up to 25 years and up to a maximum of 50% of the capital investment. The various tax incentives include sales and use tax refunds, coal severance tax incentives, corporate income or limited liability entity tax incentives, and wage assessment incentives. She said that some projects may qualify for advanced disbursement of the incentives which is structured like a loan where the future tax incentives earned are used to repay the loan.
Commissioner Duncan provided a basic outline of the approval process and how it flows through the Department of Financial Incentives. She ended by discussing the six projects which have been given preliminary approval to receive IEIA incentives.
Representative Webb asked how many projects have been denied. Commissioner Duncan replied that none to date have been denied, but there are several companies who are still under consideration because of some technical questions regarding the project.
Representative Denham asked for a description of the types of companies that are applying for the IEIA incentives. Commissioner Duncan answered that most companies are partnerships newly registered with the state.
Next, Mr. Kris Kimel and Mr. Matt McGarvey of the Kentucky Science and Technology Corporation provided an overview of the venture capital start up program established under HB 1. He stated that intent of the Kentucky New Energy Venture Fund (KNEV) is to encourage the growth of new alternative and renewable energy companies. He said that the fund is managed by the Kentucky Science and Technology Corporation (KSTC) and administered by the Department for Commercialization and Innovation (DCI). The guidelines for application and approval for funds were established by KSTC and approved by DCI.
Next, Mr. Kimel provided more detail, discussing the statutory definition of alternative fuels and renewable energies. He also discussed KNEV eligibility requirements, which include that the company be a high growth opportunity, developing and commercializing alternative fuels and renewable energy products, processes, and/or services. Also, that the business’ principal place of business be within Kentucky or at least 51% of its property and payroll located in Kentucky. Mr. Kimel stated that the funds may be used to support the achievement of operation milestones required to commercialize the product, which can include a business plan, market strategy, commercialization, or prototype development. The KNEV funds may be distributed through grants, investment or matching funds.
Mr. Kimel provided a timeline for the fund, stating that the first award notifications were distributed on July 7, 2008. He stated that by the first application deadline the fund received 17 applications, which included 4 investment and 13 grant applications. Mr. Kimel stated that the prospective project areas of interest include biofuel, coal, wind/solar, and other renewable projects. He then gave a brief overview of the companies who have received awards from the fund. Finally, Mr. Kimel briefly discussed alternative/renewable energy efforts in other states.
Representative Webb asked if there are factors that inhibit the receipt of applications for east Kentucky projects. Mr. Kimel stated that there have been a number of applications to the rural development fund, and the KSTC is actively seeking applications from companies in rural and east Kentucky locations.
Senator Leeper asked what has caused the decline in applications. Mr. McGarvey stated that the fund accepts applications four times a year, which is very frequent compared with other funds. This is to make the fund as accessible as possible. He stated that there was some build up anticipation with all the press that HB 1 received so there was an initial flood of applications. He said he believes that the second application period will be more indicative of future application activity.
Senator Sanders asked how many jobs will be created by the approved projects. Mr. McGarvey replied that there is no job creations requirement for approval in KNEV funds.
Senator Boswell asked if the volatility of the energy industry is a factor for companies considering entering the market. Mr. Kimel replied that yes the volatility can be a factor in the decision making process for companies considering entering the energy marketplace.
Next, Secretary Len Peter or the Energy and Environment Cabinet discussed the Carbon Management Report and the Center for Renewable Energy and Environmental Stewardship. Secretary Peters provided a general overview of the Carbon Management Report, briefly discussing the need for further investigation and decisions to be made regarding the legal issues surrounding carbon sequestration. He stated that issues such as legal liability and ownership of stored CO2 need to be clarified. He discussed proposed carbon management legislation at the federal level. Secretary Peter discussed the need to utilize multiple technologies in the sequestration of carbon and gave a brief overview of several technologies for carbon management.
Secretary Peter then provided an update regarding the Center for Renewable Energy and Environmental Stewardship, stating that currently the cabinet is working on appointments to the board. The goal is for the board to meet at least twice before the coming legislative session.
Dr. Rodney Andrews, Director of the Center for Applied Energy Research (CAER), and Dr. Jim Cobb, Director of the Kentucky Geological Survey discussed the carbon sequestration project. Dr. Andrews discussed various carbon capture and mitigation projects being developed by the CAER which were funded in HB 1. The funds provided in the bill were directed to be used for the upgrade of the center’s existing Fischer-Tropsch facility, the study of biomass in the production of Fischer-Tropsch fuels, the development of a biofuels laboratory at CAER, and the expansion of programs for the study of capture and utilization of carbon dioxide. He discussed how the funds are being used to leverage federal match monies.
Dr. Andrews stated that with the funds provided the CAER has been able to double the size of its biomass/biofuels laboratory. Also, they have started a study in biological carbon capture, utilizing algae systems for scrubbing. He said that the algae system uses CO2 as feedstock and the byproduct can be converted to biodiesel. He provided further details of the process and future demonstration project. Dr. Andrews discussed the CAER’s post-combustion CO2 capture pilot plant and various research projects. He also briefly discussed the Carbon Management Research Group, which is a state-CAER-industry consortium. This group will work to develop more energy and cost effective technologies, develop guidelines for technology selection for specific sites, and provide firsthand experience in CO2 capture.
Representative Hall asked if the algae process also captured sulfur dioxide (SO2) and nitrogen dioxide (NO2). Dr. Andrews stated that there are over 50,000 varieties of algae and some do consume sulfur, but further study is needed to see if SO2 and NO2 removal is achieved in the process.
Next, Dr. Jim Cobb and Mr. David Harris of the Kentucky Geological Survey (KGS) discussed CO2 sequestration research project being done under HB 1. Dr. Cobb stated that this project is the largest carbon sequestration project in the country without federal funding. He discussed the funding for the test project, stating that the total of state and industry funding totals $14.89 million. Dr. Cobb stated that the project will be located in Hancock County and will be 8300 feet deep.
Dr. Cobb detailed the various goals for the CO2 sequestration project. He stated that the project will demonstrate CO2 storage in deep saline reservoirs in the Mt. Simon and Knox geological layers in the western part of the state. The project will also demonstrate the integrity of reservoir sealing strata for long-term storage, and appropriate technologies for the evaluation of CO2 storage. Dr. Cobb provided an overview of the drilling program for the sequestration well, and he briefly discussed the testing program and timeline. He stated that the project should be completed sometime in 2012. Dr. Cobb stated there are several oil drilling companies who have volunteered use of their depleted wells to test oil extraction enhancement utilizing CO2.
Finally, Mr. Glen Mitchell, Deputy Secretary of the Finance and Administration Cabinet, Mr. Jim Abbott, Commissioner of Facilities and Support Services, and Mr. Paul Kaplin discussed the implementation of the “Kentucky Bluegrass Turns Green” program provided for in HB 1. Mr. Kaplin discussed the requirement under HB 2 that the renovation or construction of all public buildings for which 50% or more of the total cost is paid for by the state be designed, constructed, or renovated to meet high performance building standards. Also, high performance buildings are to be given preference in leasing by the state. He discussed the qualifications for high performance buildings and the importance of green building construction. He discussed the LEEDS, Green Globes and Energy Star rating systems for construction and energy efficiency performance. Mr. Kaplin discussed the “Kentucky Bluegrass Turns Green” program, discussing the grant fund and the private sector loan fund. He stated that the cabinet is currently drafting administrative regulations to outline the application process.
There being no further business, the meeting was adjourned at 3:10 p.m. A cassette tape of this meeting and all meeting materials are available in the Legislative Research Commission library.