The Dominion Post today reports that the Inland Revenue Department and Treasury have released a discussion paper that proposes tax deductions for unusable geothermal exploration and production wells, which the industry calls "black hole expenditure".

It is expected the government will introduce legislation regarding this next March but backdate it to the March 2003-04 tax year.

In recent years, geothermal power has become more competitive with other forms of power generation, particularly gas-fired. As well, the government wants to remove hurdles to further geothermal developments as the predicted gas supply shortfall later this decade looms large and highlights the necessity of electricity supply security.

Fossil-fueled (gas, coal or distillate) stations can currently supply up to about 30% of New Zealand’s electricity needs, with geothermal power providing another 7%.

Mighty River Power chief executive Doug Heffernan is quoted as saying that geothermal exploration costs were presently classed as capital expenditure and could not be accounted for as operating expenses or amortised.

He said the proposed changes would close a loophole that had created a higher risk for drilling in new geothermal areas and would place geothermal power exploration on a more level playing field with oil and gas exploration, though the rules would not be the same.

MRP had directly, or in partnership, drilled 20 geothermal exploration wells in the past 2½ years at a cost of about NZ$100 million with few failures. However, the proposed tax changes would reduce risks for greenfields developments in new geothermal areas.

Contact Energy spokesman Pattrick Smellie said the company had not made any serious calculations on the implications of the proposed tax relief but broadly supported the changes. Contact had drilled several production wells in the past year at the Te Mihi field and the Tauhara field with a high success rate.