The 2nd meeting of the Special Subcommittee on Energy was held on Friday, July 18, 2008, at 10:00 AM, in Room 131 of the Capitol Annex. Representative Rick G. Nelson, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Brandon Smith, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Walter Blevins Jr., Charlie Borders, Tom Buford, Denise Harper Angel, Ernie Harris, Jerry P. Rhoads, Katie Stine, and Robert Stivers II,; Representatives Royce W. Adams, Rocky Adkins, Eddie Ballard, Dwight D. Butler, Leslie Combs, Tim Couch, Will Coursey, Jim Gooch Jr, Fred Nesler, Tanya Pullin, Tom Riner, and Brent Yonts.
Guests: Secretary Dr. Len Peters, Energy and Environment Cabinet; Chris McGill, Managing Director, Policy Analysis, American Gas Association; Dr. James Cobb and David C. Harris, Kentucky Geological Survey; Commissioner Deborah Clayton, Department of Commercialization and Innovation, Cabinet for Economic Development; Commissioner Donna Duncan; Department of Financial Incentives, Cabinet for Economic Development; Steve Jones, Director of Program Management, Incentives for Energy Independence Act, and David Armstrong, Chairman, Public Service Commission.
LRC Staff: Taylor Moore, and Susan Spoonamore, Committee Assistant.
Minutes of the June 20, 2008 meeting were approved, without objection, by voice vote, upon motion made by Sen. Stivers and seconded by Sen. Stine.
Rep. Nelson introduced Secretary Len Peters, Energy and Environment Cabinet. Secretary Peters discussed the Executive Reorganization Order 2008-531, effective June 16, 2008, relating to the creation and organization of the Energy and Environment Cabinet. He said that the new Cabinet incorporated the Departments for Environmental Protection and Natural Resources, and the Department for Energy Development and Independence. The Governor’s Office of Energy Policy was also added, but with a much broader mission than before.
Secretary Peters stated that the new Cabinet structure allowed better efficiency to more effectively implement many of the recent energy legislative mandates. The mission of the Cabinet is to create efficiency and innovative ideas; protect the environment, and to take advantage of a strong innovative energy plan and energy strategy in order to stimulate economic development and economic growth in the Commonwealth.
He said that the Department for Energy Development and Independence is now looking more to the future. The Department’s three divisions are: Energy Efficiency and Conservation; Electricity Generation and Transmission, and Transportation Energy Supply and Distribution. Acting Directors are in place at this time until the right persons for those positions are found. There are approximately 45 people in the Department for Energy Development and Independence.
Another element of the reorganization is to strengthen the ties between the Kentucky Geological Survey and the University of Kentucky Center for Applied Energy Research and the other academic institutions in the State.
Sen. Stivers asked about the status of the Peabody project.
Dr. Peters stated that the Peabody project is moving forward aggressively.
Sen. Stivers asked if there was a need for legislation regarding liability issues related to experiments with carbon sequestration.
Dr. Peters stated that he had been meeting with lawyers from the University of Kentucky and one attorney from the private sector regarding those issues.
Sen. Stivers asked Dr. Peters for his opinion of the coal to liquid or coal to gas issues.
Dr. Peters responded that if the primary intent is to develop energy independence, then we have to look at coal to liquids and coal to gas as a way to get there. Sequestration, geological or biological formation will be an integral part of it.
Rep. Adkins explained that House Bill 1, enacted in 2007, contained language regarding expansion of research and development in gasification and carbon capture. He said it was his understanding from the Cabinet of Economic Development, that the Cabinet is receiving more calls than all other parts of Economic Development.
Dr. Peters stated that Kentucky’s energy portfolio is creating a lot of opportunities for new types of economic development and we have to be ready.
Rep. Pullin stated that she would like for Kentuckians to hear from Secretary Peters that Kentucky is doing all that it can do to help with the expensive gasoline prices.
Dr. Peters stated that the Cabinet is doing all it can to protect all consumers.
Bob Hazelrigg, representing Delta Natural Gas, introduced Chris McGill, Managing Director, Policy Analysis, American Gas Association.
Mr. McGill discussed the natural gas markets and issues surrounding energy markets in general. He said that companies are seeing the potential for significant increases in customer bills because companies are flowing natural gas into storage. Gas used in the upcoming winter heating season will be at prices and rates that have never been seen before.
He stated that for January through April, 2008, the unit (million Btu) cost for natural gas was generally around $7.15. The projected cost for the 2008-2009 winter heating season is between $13 to $14 – 90% higher than last year’s heating season. He said the commodity price for natural gas is approximately 70% to 80% of the total consumer’s bill, with the remaining 20%-30% being for distribution and other transportation charges.
Mr. McGill gave an overview of the market to show some of the reasons why the increases are so significant. He explained that Kentucky produces 95 billion cubic feet (bcf) of natural gas annually, but also consumes approximately 225 bcf annually, thus requiring imports from out of state to make up the difference.
He said that the three major consuming sectors are domestic, industrial, and power generation. In Kentucky most of the gas being consumed is going to industrial concerns and to individual residential and commercial consumers.
Mr. McGill said that the peak for daily natural gas consumption by power generation is usually in the winter, but data provided by Bentek Energy, LLC shows that a peak in demand occurs in the summer as well. The peaks are weather driven and bring a lot of uncertainty into the market, which is reflected in the price of gas. The average residential and commercial consumer has been using approximately 30% less gas per customer. This is mostly from efficiency, but more recently from conservation.
Even though Kentucky is looking at energy independence, there is no national energy strategy. Infrastructure is part of the problem. It is catching up, but development of infrastructure is generally built as economics dictate.
Mr. McGill said that the possibility of supply disruptions and the demand for storage injection and power generation are key factors in the rising cost of natural gas. All of those have impact and will continue to influence the short term market.
In looking at the future of natural gas and energy, we are aware that Congress has looked at the issue around Greenhouse Gases. Cap and trade is popular as a national potential solution because it creates a lot of money.
In the longer term, the AGA’s members still view the natural gas market as relatively tight. On the policy side, increasing supply, generation diversity, direct use of natural gas and conservation and efficiency are areas where AGA and its members are trying to put themselves forward and deal with these issues on a national basis.
Rep. Pullin asked why Kentucky was not using more of its own natural gas.
Mr. McGill stated that Kentucky produces approximately 95 bcf per year, but Kentucky consumes about 225 bcf.
Rep. Pullin asked why Kentucky was not producing more.
Mr. McGill said that Kentucky was producing as much as it could, but perhaps it could produce more. He said that in his opinion, Kentucky would not be able to produce enough natural gas to become independent of the national grid.
Rep. Pullin asked if the Rocky Express Pipeline was an expensive project.
Mr. McGill responded that it was expensive.
Sen. Borders stated that it was still important to continue taking pro-active positions on achieving energy independence.
Sen. Stivers asked about the potential of using natural gas as a fuel source for automobiles.
Mr. McGill stated that about 15 years ago there was a push for compressed natural gas (CNG) powered vehicles. In today’s environment, perhaps there is another chance to look at CNG as an alternative.
Rep. Adkins asked what percentage of natural gas was being used on a daily basis for base load power to produce electricity.
Mr. McGill stated that approximately 20% of the electricity that is produced in this country comes from natural gas. It does not necessarily come as base load it is often intermediate or peaking loads.
Dr. James C. Cobb, State Geologist, and David C. Harris, Manager of Sequestration Research Projects; Kentucky Geological Survey, University of Kentucky presented information relating to Sequestration Research under House Bill 1.
He explained the ongoing projects in the following counties: Henderson, Hancock, Clark, Lee, Pike, Johnson, Perry, Leslie and Bell. He said the projects included drilling of deep wells in the coal fields to see if they will hold and accept CO2, and to test Devonian shale for enhanced gas recovery and sequestration potential.
He said that Western Kentucky’s CO2 storage demonstration project had progressed quickly. The estimated commencement of operations is during the 4th Quarter of 2008, and final reports to be completed by the end of 2009. Surface monitoring will continue through 2012 until the abandonment of the well and dissolution of the consortium.
Mr. Harris addressed the question posed by Sen. Stivers. He said that KGS is working with Peabody and ConocoPhillips everyday on the well and the results from the project will be a part of their decision process. The sequestration issues and carbon management issues which are a part of House Bill 1 will be critical in their decision on locating a plant in Kentucky.
Mr. Cobb addressed the question posed by Rep. Pullin regarding more production of natural gas in Kentucky. KGS thinks that Kentucky can produce more natural gas. He said there is a big basin that contains a lot of gas and he would be willing to discuss that later.
Rep. Adkins stated that the research being done by the KGS is very important to Kentucky and the Nation. This is a historic day because we are getting ready to do something that a lot of people say cannot be done.
Sen. Stine asked for more information on collaborating with three DOE sequestration partnerships: Illinois Basin, Appalachian Basin and Southern States-Duke Energy, Boone County. She said she was particularly interested in the Duke Energy – Boone County test.
Dr. Cobb said that the Boone County test would be a sequestration well drilled by Duke Energy.
Sen. Stivers asked how much money had come in on the match or the effort to work with KGS from other private or government sources, and how many other states or nations are taking Kentucky’s approach by working through agencies such as KGS or CAER in looking at carbon sequestration.
Dr. Cobb stated that $6 million in matching funds has come from the industry, and we applied for $25 million from the state of Illinois. We have in-kind contributions that have no figures attached, but those contributions are enormous.
He said that Texas and Illinois are the big players. Illinois has a huge project going on with ADM, but the project with ADM has major federal backing and Kentucky has no federal money as of yet. He said that Ohio has also been pro-active in committing state money to research carbon sequestration.
Deborah Clayton, Commissioner, Department for Commercialization and Innovation, Cabinet for Economic Development, presented an overview of Kentucky’s New Energy Ventures Fund. She said that the Department initiated a Request for Proposal process in October, and received two responses. Kentucky Science and Technology Corporation (KSTC) was selected and was responsible for drafting the guidelines and applications for the program.
In order to be eligible, companies must have high growth in developing and commercializing alternative fuel and renewable energy product(s), process(es), and/or services. The business must have its principal place of business in Kentucky or at least 51% of its property and payroll in the Commonwealth. She said the funds could also be used to support the achievement of operational milestones. She said that funding for qualified businesses has two components: grants and investments.
Ms. Clayton said that the Department began accepting applications on March 12, 2008 with a deadline of April 10, 2008. She said they received 17 applications requesting a total of $6.64 million. The award notification will be released on September 10, 2008. The areas of interest were: 8 projects for biofuels; 5 coal-related projects; 3 wind/solar projects, and 1 miscellaneous project.
As a part of monitoring funds, KSTC and the companies will submit quarterly reports and financials. The Department of Commercialization and Innovation and KSTC will jointly file an annual report to the Governor and the General Assembly.
Donna Duncan, Commissioner, Incentives for Energy Independence Act (IEIA) and Steve Jones, Director of Program Management, Incentives for Energy Independence Act, presented an update on Incentives for Energy Independence.
Ms. Duncan explained that eligible companies are companies that construct, retrofit, or upgrade a facility to increase the production and sale of alternative transportation fuels and generate electricity for sale through alternative methods. The requirements to qualify for incentives are: (a) alternative fuel facility or gasification facility that is carbon capture ready and uses coal as the primary feedstock with a minimum capital investment of $100,000,000; (b) alternative fuel facility or gasification facility that is carbon capture ready and uses biomass resources as the primary feedstock with a minimum capital investment of $25,000,000; and (c) renewable energy facility that meets the minimum electrical output requirement of at least one megawatt of power for: wind, hydro, biomass, landfill methane; or generation of 50 kilowatts for solar with the minimum capital investment of $1,000,000.
She also explained the four sources for recapture of capital investment using tax incentives: sales and use tax refunds; severance tax incentives; corporate income or limited liability entity tax, and wage assessment. To date, no advance disbursements have been made.
Ms. Duncan said that approximately 40 requests for information had been received: 70% coal related, 25% biomass related and 5% renewable energy related. Within the next 6 months, the Department expects some potential projects to be ready for preliminary approval.
She said that six projects had been preliminarily approved: Ecofin LLC- Washington County; Kentucky Syngas, LLC – location undecided; Louisville Clean Energy, LLC – Shelby County; Cash Creek Generation, LLC – Henderson County; Coal Synthetics – location undecided; and Clean Coal Power Operations (KY) LLC – McCracken County.
Meeting adjourned at approximately 11:50 a.m.