Saturday, May 2, 2009

Another Look at Geothermal Energy

I've decided to do a follow up on Geothermal Energy. Back in December of '08 I did some research on the industry, which you can read here:

Alternative Energy: A Look at Geothermal.

More News on the Geothermal Front.

Since that point, we've seen economic pressures increase, and very recently (maybe) improve. The key to growth in the Geothermal, or any alternative energy for that matter, relies on a couple of key factors:

1) Political will. This means commitment of enticements (tax credits) or legislation requiring a switch (such as renewable portfolio standards).

2) Private capital.

#1 is happening. The Obama administration had shown that they are not going to let the financial situation stop them from plowing through their agenda. This can be both good and bad, but politics aside, its good for alternative energy. For example: Energy Sec. announces $193M for energy research.

#2 is also happening: Nevada geothermal growth: Full steam ahead. One of the main concerns about this is that lower traditional energy prices (oil and gas specifically) will cause private capital to lose focus on alternative energy because of higher costs. This hasn't totally happened, which is good. The reflation trade is starting to gain traction too, and most feel energy prices are going to rise again soon.

I found an interview with U.S. Geothermal CEO Daniel Kunz for some more insight on this.

  • Currently the biggest obstacle to geothermal development is the lack of sufficient direct economic incentives for the drilling of geothermal resources. There are no significant technical obstacles that are curtailing current growth and development.

  • The prospects look good now for some stimulus of the renewable energy sector with the Obama administration's recognition of the long-term strategic imperative to develop domestic, renewable and clean energy sources to secure the future of our country.

  • Renewable energy projects can still attract investors and funding. Geothermal energy is base-load power that can be more reliable than intermittent sources like wind and so is more desirable to a utility. The primary financing problem goes back to the cost of initial geothermal reservoir discovery and development drilling. This type of capital is higher-risk and harder to find in the difficult financial environment that Wall Street and Washington has placed upon us.

Kunz mentions a couple of the key factors:

1) Geothermal is base-load power. This means that it can provide a continuous amount of power that utilities need to provide to its customers. Wind and Solar are intermittent depending on conditions, and thus, can't provide this.

2) With Geothermal, you are basically paying for your power up-front. The infrastructure to build a plant is very expensive, but cheap once its going. That's why its difficult to secure private capital for Geothermal (the payback can be many years, which can be forever on Wall Street).

Here are the expected costs of Geothermal vs other energy types (in 2030, which is an expected date for these technologies to mature):

Geothermal energy is expected to cost about 7.3 cents per kilowatt hour by 2030 compared to 8.1 cents per kilowatt for wind, 12.5 cents per kilowatt hour for concentrating solar thermal and about 22.9 cents per kilowatt hour for solar photovoltaic, according to the Energy Department.

The stock I focused on in previous articles was Ormat Technologies (ORA). Ormat is one of the best pure plays on Geothermal. The stock remains expensive, at 22x forward earnings. They report earnings on May 11, and that's when we'll get our best take on their outlook, so I'll wait and write a follow up then.

There is also U.S. Geothermal (HTM). They've got a great name, but are still quite small. Still a little speculative, but this is the type of company that could really take off.

Raser Technologies (RZ) is another. Smallish company with plenty of debt. Still, lots of potential upside.

You've also got Calpine (CPN) and Chevron (CVX) who are major players in Geothermal, but you lose the pure-play buying these. This is sort of like buying GE for their exposure to wind.

Investment wise, none of these are jumping out to me as screaming buys, but I still like Ormat Technologies the best in this sector. The stock has seen some nice movement in price and volume in the past week, but I'd wait until earnings (May 11) before I buy.

Disclosure: Author has no positions in stocks mentioned.

1 comment:

Keith Skibare said...

I think Nevada Geothermal could be one of the better geothermal plays out there for the future