First published in the Quoted Cleantech Newsletter July 2010. Copyright Cleantech Investor Ltd 2010

by Jon Mainwaring

Nevada-based Ormat Technologies builds and operates environmentally-friendly geothermal power plants in the US, Central America and Africa.

Geothermal energy is derived from the heat produced by the Earth’s molten core. This heat is brought near to the Earth’s surface through the intrusion of molten magma and by the deep circulation of groundwater. The result is that reservoirs of hot water under pressure are formed.

Sometimes the pressure is so great that geothermal energy rises to the surface in natural streams of hot steam or water (geysers). However, geothermal energy can also be exploited by drilling wells into the reservoirs so as to bring steam to the surface in order to drive turbines in power plants.

Most important for cleantech investors is that geothermal energy installations around the world are growing at a rate of 4.8% annually, according to recent data from the US Geothermal Energy Association.

NYSE-listed Ormat is a vertically-integrated business that not only builds, owns and operates geothermal plants, but also supplies those plants with power generating equipment of its own design. Thanks to 45 years of experience in geothermal power projects, the company has built up the knowledge required to develop a key piece of equipment called the Ormat Energy Converter (OEC), which it not only uses itself but also sells on to geothermal projects run by other companies.

The OEC – which consists of a vaporiser/preheater, a turbogenerator, an air-cooled (or water-cooled) condenser, a feed pump and controls – is designed to work with a wide variety of heat sources. It allows geothermal energy project developers to efficiently use the full range of naturally occurring geothermal resources found throughout the world – from low temperature geothermal water to high pressure steam. The device has been supplied to geothermal power plants in more than 70 countries.

Ormat’s competitors in the geothermal power plant equipment market include Alstom, GE, Mitsubishi and Siemens. But the fact that Ormat develops and operates its own geothermal schemes gives the company significant advantages over its rivals. For example, it is able to use the plants it operates as a showcase for the geothermal power equipment that it manufactures.

Ormat is one of the world’s largest developers of geothermal projects. To date, the company 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. The firm’s geothermal projects include:

•    The Steamboat Complex. Located in Nevada, Steamboat comprises seven power plants with a combined generating capacity of 84MW.
•    Momotombo. Ormat operates a 30MW geothermal plant located at Momotombo, Nicaragua.
•    Amatitlan. Ormat’s Amatitlan plant, based in Guatemala, has been in commercial operation since 2007, and currently generates approximately 17MW. The firm is drilling additional wells to increase capacity to 20MW.

As well as developing traditional geothermal energy projects, where the correct combination of water and heat exists below the earth’s surface, Ormat is also involved in the next generation of geothermal energy technology: enhanced geothermal systems (EGS).

An EGS geothermal plant does not require naturally occurring water to be present alongside ‘hot rocks’. Instead, water is introduced into artificially created fissures that are located deep underground in areas of very high temperatures. This process is complex, however, and the science is at an early stage, with only a handful of EGS trial projects in existence around the world currently.

Ormat has been awarded funds from the US Department of Energy to demonstrate the viability of EGS, and the firm has two EGS projects under development in Nevada.

Away from geothermal power applications, Ormat also sells its OEC generators to businesses that want to capture unused waste heat from industrial processes and convert it into electricity, which can then be sold on to power purchasers or used on site. Called ‘recovered energy power generation’ (REG), this technology is recognised as a preferred solution for energy efficiency. Ormat can even configure its OEC devices to provide an uninterruptible power supply to meet the customer’s power demand during blackouts and grid outages.

Last year, Ormat’s revenues increased by 20.4% to $415.2 million. This growth was driven largely by exceptional product sales, which were $159.3 million compared with $92.6 million in 2008. (The rest of the company’s turnover was made up of electricity sales from its geothermal power plants.) Ormat’s backlog orders in its product segment amounted to $90 million at the end of February this year.

Ormat’s net income during 2009 increased by 57.9% to $68.9 million.

However, so far this year the firm has experienced a decline in both revenues and profits. First quarter turnover decreased to $82.7 million, from $99.3 million in Q1 2009, while Q1 net income fell to $1.8 million (Q1 2009: $14.5 million).

It was perhaps somewhat inevitable that Ormat would see fewer sales in its product segment after that division produced an exceptional performance last year. But there has also been a decrease in the electricity segment’s gross margins due to lower revenues from the Puna and North Brawley plants, as well as high operating costs at North Brawley. Ormat is working to bring both Puna (a 30MW plant in Hawaii that has been operating at only 17MW due to a decline in steam supply) and North Brawley (a Californian plant that currently operates at 17MW but is designed to deliver 50MW) up to full capacity in the near future.

Market: NYSE
Symbol:  ORA
Price:  $28.01
Market Cap: $1.3bn
12 month high/low: $44.13/$26.13