Cleantech Investor

First published in Cleantech magazine, July/August 2010. Copyright Cleantech Investor Ltd

By Jon Mainwaring

Most renewable energy sources – including wind, wave and biomass as well as solar power – ultimately derive from the sun. Tidal energy is an exception, since it depends upon the moon. And geothermal energy is derived from the insides of the earth.

The geothermal power industry has been experiencing steady growth and support around the world from governments keen to find a cheap source of abundant energy. This support could see the geothermal industry take off during the coming decade in the same way as the wind and solar industries boomed in the last decade. According to the US Geothermal Energy Association (GEA), there is currently 10.7GW of geothermal power installed worldwide, compared with 8.9GW in 2005, which implies a growth rate of 4.8% annually.

Over the past five years, the top three countries in terms of new geothermal power installations were countries which already have a significant geothermal presence: the US (with 530MW of new geothermal power installations between 2005 and 2010); Indonesia (400MW); and Iceland (373MW).

But perhaps of more significance is the number of new countries that are exploring geothermal projects. Countries like Germany, Papua New Guinea and Australia are seeing their geothermal industries expand rapidly. In Germany there has been a 2,774% increase in geothermal energy installations during the past five years, with Papua New Guinea and Australia growing at 833% and 633% respectively.

In 2007, the GEA identified  46 countries that were considering geothermal power development. By 2010, that figure has risen to 70 countries with projects either under development or being actively considered.

There was some concern last year in the US that projects might stall because of financing and permitting problems. However, the GEA reports that strong growth is now occurring thanks, in part, to President Obama’s economic stimulus package. There are currently 188 projects under way across 15 US states that, according to a recent report by the GEA, could produce as much as 7.9GW of new electric power – enough to provide electricity for 7.6 million people or 20% of California’s total power needs.

“The federal stimulus, tax incentives, and strong state renewable standards continue to fuel the growth in geothermal power,” says Karl Gawell, the GEA’s executive director, who explains that cash grants are providing an effective incentive that quickly reduces the debt burden incurred by many projects.

Nevada remains the leading US state for new geothermal energy, with more than 3GW currently under development, while the fastest growing state is Utah – which quadrupled its geothermal power under development last year.

The US, of course, possesses the most famous development of geothermal plants in the world. Located in northern California, The Geysers is a group of plants, first developed in the 1960s, that today produces a combined 1.5GW of energy. (Partly due to The Geysers, California’s geothermal capacity exceeds that of every country in the world).

Major geothermal projects currently under development in the US include:

Blue Mountain – a 49.5MW project planned by Nevada Geothermal Power (NGP) for Nevada’s Humboldt County. In June this year, NGP secured a $99 million loan, backed by the US Department of Energy, to develop one of the plants that will form a part of the project. As well as Blue Mountain, Vancouver-based NGP has interests in four properties in Nevada and Oregon that it estimates could provide between 150MW and 300MW of power.

Silver Peak and Alum – two projects being developed in Nevada by Sierra Geothermal Power that can potentially deliver up to 190MW of geothermal energy.

Indonesia stands out as a potential  world leader in geothermal energy production. A highly volcanic country, Indonesia has abundant geothermal resources – with a potential of 28GW (or around 40% of the world’s geothermal reserves).

The traditional focus on oil has become less important with Indonesia’s withdrawal from OPEC in 2008. And although the country has extensive resources of coal, there is a recognition that Indonesia must focus on renewable energy. The Government’s target is for a reduction in greenhouse gas emissions of 26% by 2020.

So far, Indonesia has developed only 1,200MW of its geothermal resources. However, the Government has ambitious plans to develop 9,500MW by 2025, and it is targeting 4,000MW for development by 2015. Indonesia has received a US$400 million commitment from the World Bank’s Clean Technology Fund for the development of geothermal energy, technology and resources. The World Bank funding depends on co-funding.

Individual projects are already under way. For example, in the spring of this year several consortia, which included a number of geothermal players such as Chevron Corporation and Ormat Technologies, submitted bids to develop a geothermal power plant at Sorik Merapi in North Sumatra. The plant will have an initial capacity of 55MW, with plans to increase its output to 200MW.

Chevron has a track record in Indonesia, having already developed two geothermal projects – Darajat and Salak, both on the island of Java – which together generate more than 630MW of energy.

Iceland has traditionally been known as a centre of geothermal activity. The country obtains around one-quarter of its energy from five major geothermal power plants, which together supply approximately 570MW. The largest of these, providing 213MW of electricity, is Reykjavik Energy’s Hellisheiði Power Station, currently the second-biggest geothermal power station in the world. Plans for an increase in Hellisheiði’s capacity by almost 90 MW, to 300MW of electricity (and 400MW of thermal energy), would make the plant the world’s largest.

The financial crisis in Iceland has had repercussions for the geothermal sector. Most project owners are state or municipal energy companies which are unlikely to be able to supply the financing required for the existing plans for the sector, given the current economic situation. The country's geothermal sector needs to attract investment of an estimated US$840 million in equity and a massive $1.53 billion in debt financing for all planned projects until 2017, according to a recent report by Icelandic Íslandsbanki.  Many of the planned projects in Iceland will generate electricity for the export oriented industrial sectors, notably for aluminium smelters. Thus, they meet the criteria for the European Investment Bank (EIB), which has already become a significant investor in the sector. The EIB provided Reykjavik Energy with a €170 million loan for the Hellisheiði project and for the construction of a new 90MW plant at Hverahlíð.

Recent strong growth in geothermal energy installations notwithstanding, Germany’s installed capacity is still tiny compared to the US or Iceland. Of Germany’s eleven largest geothermal units, which have a combined capacity of approximately 210MW, seven are located in the Molasse Basin in the south of the country.

The Molasse Basin contains the Upper Jurassic sediment known as ‘Malm’, which is one of the most important hydro-geothermal energy reservoirs in central Europe. This highly productive reservoir is present throughout almost the whole of the 300-kilometre long Molasse Basin.

Meanwhile, the world’s only commercially-operated enhanced geothermal system (EGS) power station is located at Landau, in south west Germany. EGS involves locating hot rocks well below the surface of the earth, fracturing them and artificially introducing water in order to create a geothermal system. The Landau scheme, which provides between 3MW and 3.8MW of electricity as well as district heating to the town, was the subject of some controversy last August after locals blamed the plant for a minor earthquake that registered 2.7 on the Richter scale.   

However, the bulk of Germany’s geothermal energy capacity is in the form of heat pumps. According to the Leibniz Institute for Applied Geophysics, of the country’s estimated 2,490MW of installed capacity for geothermal heat, 90% can be attributed to around 178,000 decentralised units that exploit heat from a shallow depth,.

The Australian Government has identified geothermal energy as a key source to provide sustainable electricity and heating, and it provides support in the form of government-sponsored projects and grants for individual geothermal energy schemes. To date there are are only a few, very small geothermal projects – such as the 80kW Birdsville plant in Queensland. However, dozens of Australian companies aim to play key roles in developing the country’s geothermal industry.

Owing to a lack of naturally-occurring hydrothermal systems in Australia, EGS appears to be the geothermal technology of choice. Very hot rocks have been identified in various locations around the country. Currently, the largest EGS project in the world – a 25MW demonstration plant – is being developed by Geodynamics in the Cooper Basin, South Australia. Research suggests that the Cooper Basin has the potential to generate up to 10GW of geothermal power.

Papua New Guinea (PNG)’s geothermal sector is also growing. In common with the other Pacific ‘Ring of Fire’ countries, Indonesia and the Philippines, PNG has an abundant resource of geothermal energy.

So far, the country’s geothermal resources have tended to be developed by companies with a vested interest in generating energy in PNG. These include Australian mining company Lihir Gold, which supplies 75% of its PNG operation’s electrical power requirements from two geothermal plants providing a combined 56MW.

KUTh Energy, also from Australia, believes that PNG offers great potential for geothermal energy for electricity generation, and is currently assessing the country for suitable projects.

A sign that geothermal energy is taking off has been the increasing ability of small, geothermal explorers to raise funds on stock markets. The biggest pure-play geothermal energy company, Ormat Technologies, has been listed on the New York Stock Exchange since 2004. Several other companies involved in the sector have listed on North American exchanges more recently:  Raser Technologies (also on the NYSE); Nevada Geothermal Power (OTC Bulletin Board); and  US Geothermal (AMEX). Three geothermal firms – Sierra Geothermal Power, Magma Energy and Ram Power – are traded on the Toronto Stock Exchange (TSX).

The TSX, well known as a home to many of the world’s oil exploration companies, is positioning itself as a suitable stock exchange for geothermal energy businesses, with investors who are well positioned to understand the risks involved in geothermal exploration. Geothermal energy projects that aim to exploit existing hydrothermal sources need the right combination of water, heat and rock fractures in order to work – so these projects tend to have similar risk profiles to oil or mining exploration projects.

With a market capitalisation of $1.3 billion, Ormat Technologies would be the daddy of geothermal energy production were it not for Chevron, which not only pioneered the development of The Geysers in California but also developed four projects in Indonesia (Salk and Darajat) and the Philippines (Tiwi and Makiling-Banahaw) that have a combined capacity of 1.3GW.

Even so, Ormat, which is based in Reno, Nevada, has a 30-year track record of geothermal power plant development. To date, Ormat has built power plants, for both itself and third parties, that total approximately 1.3GW of gross capacity.

Ormat’s own portfolio of geothermal plants generated 917,000MW-hours of electricity during the first quarter of this year, compared with 875,000MW-hours in Q1 2009.

Vancouver-based Magma Energy is striving to become a major player in the geothermal sector. The company has been using the proceeds from its C$100 million IPO last July not only to double the capacity of its one operational geothermal project, an 8MW scheme at Soda Lake in Nevada, but also to expand its portfolio of projects and increase its stake in Iceland’s geothermal industry.

Magma has several exploration projects in Nevada, along with projects in Oregon, Utah, Argentina, Chile, Nicaragua and Peru. One of its most advanced projects is its Mariposa property in the Chilean Andes where, according to estimates, there is a geothermal resource capable of providing up to 320MW of electrical generation capacity.

Meanwhile, Magma recently raised its stake in its Icelandic geothermal subsidiary, HS Orka, to more than 98%. HS Orka currently produces 175MW of geothermal power and 150MW of thermal power for district heating, and has plans to increase power production to 405MW by 2015.

The deal increased Magma’s geothermal power production to 186MW, its geothermal reserves to 193MW and indicated and inferred geothermal resources to more than 1.1GW.

Sierra Geothermal, also based in Vancouver, holds geothermal rights and options over 17 properties in Nevada, California and British Columbia with a combined energy generation potential of more than 500MW. Last autumn, the firm was awarded $10 million under the American Reinvestment and Recovery Act so that it could develop two projects in Nevada, which contain a combined resource of up to 190MW.

Recently, Ram Power – a Nevada-based company with projects in California, Nevada and Nicaragua that raised $179 million last summer ahead of joining the TSX – announced it would be buying Sierra for C$28 million.

Like Magma, Ram sees consolidation as essential if it is to establish itself as a major geothermal energy player. “This transaction comes as a continuation of our strategy to create a renewable energy company of scale,” says Hezy Ram, the firm’s chief executive officer.

Raser Technologies has eight geothermal energy projects in development, having secured one of the largest portfolios of geothermal resources in the US (approximately 240,000 acres across four states). In 2008, the company completed the construction of the 10MW Thermo plant in Beaver County, Utah. Thermo was the first geothermal plant to be constructed using a modular design that significantly reduces the time taken for completion.
In Indonesia, Raser has been awarded 100,000 acres of geothermal resources to build a plant of up to 300MW capacity on West Java – the country’s most populous island.

Meanwhile, a number of companies, including Geodynamics (the firm behind the Cooper Basin project), KUTh Energy, Panax Geothermal and Geothermal Resources Limited, have floated on the Australian Stock Exchange in recent years.

All of this activity indicates that geothermal energy looks set to become one of the world’s major sources of sustainable, clean energy in this century.