Geothermal Power
Geothermal Power: Beginning To Get The Attention It Deserves

By Tom Konrad
October 22, 2007

This Last Thursday and Friday I attended the Geopowering the West Investors' Forum in
Montrose, CO (hosted by the Delta-Montrose Electric Association, Colorado's most
progressive Rural Electric Cooperative.) I've long been interested in geothermal
stocks, and I first started adding them to managed portfolios in 2003. As a
whole, those stocks have more than doubled in the 1-4 years since they were purchased.

Fundamental Advantages of Geothermal Electricity

Why did I make those first purchases? Geothermal power has some unique
advantages over other forms of renewable energy.

Geothermal is base load power. Utilities have a strong preference towards base
load and dispatchable power generation (basically power which is always on, or
power which they can turn on at will.) In fact, geothermal plants often have
capacity factors 86-95%, well above traditional base load generation such as
coal. So geothermal power is a premium electricity because of its reliability.
Until a recent fire (not caused by the geothermal facility), the plant
installed last year at Chena Hot Springs in Alaska was running at 99.4% availability.

It is inexpensive. Depending on the resource, the price of geothermal power is
comparable to that of wind power, new coal plants, or biomass. It is
considerably less expensive than solar photovoltaic or nuclear power, or the
cost projections for "Clean Coal" otherwise known as Internal Gasification
Combined Cycle with carbon capture and sequestration. Using numbers presented
at the conference, a geothermal power plant will cost $3-4 per rated watt, but
produce about five times as much electricity as a similarly rated (and more
expensive) photoelectric panel because of the much higher capacity factor.
Geothermal has a small environmental footprint. Where solar and wind farms
gather energy over large areas, a geothermal plant gathers heat from the hot
rock or fluids below ground by means of one or a few wells. Because of this,
the footprint needs to be only the size of the turbines which actually
generate the power, smaller than the footprint of a coal fired plant
generating the same amount of power, without the the necessity of coal mining
and without significant emissions of carbon dioxide or other pollutants.
In the later life of a geothermal plant, operations produce excellent income
streams. While the plants often require refurbishment, with careful management
geothermal reservoirs need not degrade over time, and net margins often exceed 60%.

New Developments

Why are people only now starting to talk about geothermal power?
Geothermal electric is not a new industry. The first geothermal electric power
plant was built in the 1920s. But now we have a maturing industry seeing
progress in new technology. Not only can lower temperature resources now be
used, but United Technologies (UTX) has recently introduced a low temperature
capable generator based on proven water chiller technology. This has the
potential to rapidly increase the speed and lower the cost of project development.

There is a growing awareness of the need for carbon-free sources of power. The
IGCC's and Al Gore's recent win of the Nobel Peace Prize is just one recent sign of this.

Energy Policy Act of 2005 changed the regulatory environment. There is a new
commitment from national government to simpler lease structures and royalty payments.

Current projects typically developed over a three year period, which is
actually quite quick when compared to typical 5 year lead times for coal plants.

There exists an abundance of overlooked resources because of greater
temperature reach. Historical studies assumed that electricity simply could
not be generated below 300 F, but new technologies can handle temperatures
below 200F, which geometrically increases the number of sites with potential for generation.

Was seen as relatively small potential until the MIT Study which came out this
year. Enhanced (aka Engineered) Geothermal Systems (EGS) hold out the promise
that the extractable amount of energy is not limited by the resource size or
availability. There is simply so much heat stored in the Earth's crust, that
only extracting a fraction of a percentage of it would allow us to meet our
energy needs for the foreseeable future. While EGS holds out promise, the
technologies needed still require significant research. From an investor's
perspective, more concerned with the prospects for the next ten years than the
next fifty years, EGS is much more important for the interest it generates in
geothermal than it is for investment opportunities. Nevertheless, in terms of
meeting our long term energy needs, I expect Enhanced Geothermal Systems to be
a much cheaper and simpler solution than Carbon Sequestration from Coal plants.

Geothermal as oil co-product. Many existing oil wells also bring up sizeable
quantities of water at temperatures sufficient to run small binary cycle
turbines. While this resource at any one oil well is likely to be small (less
than a megawatt), aggregating all the wells in a large oil field could produce
significant power at low cost given that the costs of exploration and
exploratory drilling need not be paid for by the geothermal electricity generated.

Tricks of the Trade

What does a geothermal investor need to watch out for?

Exploration risks. Prospecting for geothermal resources using remote sensing
and surface sampling is useful for defining the drilling target, but does not
significantly reduce the risk of not finding a resource sufficient to produce
power. This is in distinct contrast with oil prospecting, where prospecting
significantly reduces risk.

Risks to resources currently in use. Attendees were treated to a Jeep tour
through the geothermal history of the town of Ouray. Over twenty years ago,
the city started a series of test wells around the town with the hope of
finding enough geothermal hot water for a district heating system, and to keep
their Hot Springs Pool open year round. All did not go as planned, and three
of the owners of springs around the city filed lawsuits against the city
charging that the city's drilling had reduced their flows. The parties
settled, but the city was forced to discontinue drilling. While the city of
Ouray officials did not admit to decreasing flow rates of other pools, after
listening to both sides, I think the owners of the springs had real grievances
(and the courts seemed to agree with that assessment.)

Unexpected effects of new technology. One large potential problem is induced
seismicity [MS Word document] when trying to stimulate reservoirs in hot dry
rock for EGS. One reason for an investor to consider geothermal development
companies rather than geothermal equipment suppliers is that a company with a
known geothermal resource will generally benefit from the evolution of
technology, while a technology supplier could easily lose market share to competitors.

A geothermal resource developer must be able to connect to the grid. No matter
how hot the resource nor how close it is to the surface, the developer must be
able to connect to the electric grid at a point where there is sufficient
available capacity to sell the electricity. The ability to negotiate a Power
Purchase Agreement with a local utility having a respectable credit rating
will also enable the developer to gain access to financing on more favorable terms.

Ownership of geothermal resources is legally complex. As the City of Ouray
found in the dispute mentioned above, unless an owner has put a resource in
use, they may find that a court of law will not uphold their ownership of that resource.

Many of the future resources to be developed are likely to be "blind." That
is, there is no surface indication of the hot rock below. Exploration for such
resources is likely to be more lengthy and costly than past exploration.
As with any industry, quality management and personnel will be able to find
opportunity in a crisis, while less able teams will be unable to exploit all
the opportunities available.

Skill in managing geothermal reservoirs is essential. Pumping a reservoir too
quickly or reinjection of cool fluids in the wrong place can greatly reduce
the production from geothermal reservoirs.

Except when the developer plans to use less efficient and more expensive air
cooling, the availability of low temperature cooling water in sufficient
quantities will be necessary to generate electricity.


Here is a short list of interesting companies involved in geothermal power
production and some reasons you may want to consider them for investment.
Ormat (ORA). Ormat is the granddaddy of geothermal stocks. A vertically
integrated company, they not only explore and develop their own resources,
they also will contract to manage resources for other developers (such as US
Geothermal's Raft River project). Their long history and current profitability
gives them the safest pure-play geothermal stock available. They are experts
with binary cycle turbines and reservoir management, as well as applying their
binary cycle technology to waste heat recovery as well as a concentrating
solar power experiment.

United Technologies (UTX) is not really a geothermal company at all, but I
include them because of their recent innovation in producing low temperature
binary cycle turbines on an assembly line basis, using an adaptation of their
industrial chiller technology, for which they recently won a R&D 100 award.
While this may never become a significant part of UTX's bottom line, it is
likely to change the economics of geothermal development for the better. I
also expect to see the PureCycle turbine applied to a myriad of waste heat
applications, quite possibly more than to geothermal.

Raser Technologies, (RZ), Nevada Geothermal (NGLPF.OB) , US Geothermal
(UGTH.OB), Sierra Geothermal (SRAGF.PK), Polaris Geothermal (PGTHF.PK), and
Western GeoPower Corp (WGPWF.PK) are geothermal developers. I find it very
difficult to determine which will succeed and which will fail, and so prefer
to own a little of each, buying when I feel the stocks are relatively
inexpensive from a technical analysis standpoint. Raser is not a pure
geothermal developer; they also develop high performance electric motor
technology which is interesting to me, but the synergies are far from obvious.)

Geothermal has long been an under-appreciated renewable energy technology. That
seems to be changing, which will be an excellent thing both for our hope of
moving to a less carbon-intensive economy, and for early investors in the sector.


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