JUNE 2011

Geothermal energy is picking up steam

All the energy the world will ever need lies right beneath our feet. It’s available all over the planet, even in the coldest climates. And the best part is that it’s clean, safe and will be available in unlimited supply so long as the Earth’s core remains hot.

Why then, are we still strapped for clean energy solutions? The answer lies in the economics of harnessing geothermal energies.

As global energy demand increases, fuel prices rise and efforts to curb greenhouse gas emissions intensify, an increasing number of countries are looking to tap geothermal resources to drive low carbon development. A clean, base-load source of power, geothermal offers consistent electricity production nearly 24 hours per day with little to no emissions – a huge advantage over the intermittency of solar and wind generation and emissions associated with other renewables such as biomass.

Many technologies are available to harvest geothermal energy. Heat can be drawn from hot water or steam reservoirs located deep in the earth and accessed by drilling, or from geothermal reservoirs located near the surface, or from near-surface that maintains a relatively constant temperature of 50 to 60 degrees Fahrenheit. Heat pumps are a widely deployed example of the latter where heat is pulled out of the ground to help heat or cool a building.

Geothermal power was first tapped in 1904 at the Larderello dry steam field in Italy. Later, the first modern geothermal power plants were built there. They were destroyed in World War II and later rebuilt. That field is still producing.

The first geothermal power plants in the United States were built in 1962 at The Geysers dry steam field in northern California. It is still the largest producing geothermal field in the world with over 20 plants. Wastewater from nearby cities is also injected into the field to provide environmentally sound disposal and increase steam to the power plants.

In 1974, the first commercial size binary-cycle geothermal power plant was built as a demonstration project by the United States Department of Energy (DOE) at Raft River, Idaho. In a binary-cycle plant, heat from geothermal water is used to vaporize a working fluid, which like steam powers a turbine-generator.

The Geothermal Energy Association (GEA) believes the industry is poised for growth and continued regional expansion in the western states where underground steam resources are most plentiful. In its annual report released March 30, GEA executive director Karl Gawell said, “The geothermal industry has an exciting year ahead, as there are numerous projects switching from development phases to full-fledged geothermal power plants. And a second wave of development is on its way. This report reveals that many projects are entering the drilling and production phase, which is where the majority of geothermal job creation is.

“Despite the slow economy, geothermal resources are being used for power production in an expanding portion of the United States. The growth we’ve seen since 2005 continues in 2011. Four years ago there were four states with geothermal power production and now there are nine. In the near future there should be at least 15. And that’s substantial growth,” Gawell added.

The GEA annual report showed that in 2011 the geothermal industry is producing power in nine states and developing 146 projects in 15 states, with the total number of projects under development increasing 12 percent. New technologies are permitting lower temperature resources to be exploited for electric generation. The majority of the industry remains concentrated in the western states.

There are two main systems currently utilized for electric power generation. The first, and rarest, are vapor-dominated systems that yield high-temperature steam greater than 455 degrees Fahrenheit. The geysers in California are an example of this type of system where steam is typically found at depths of 3,250 to 13,000 feet. The second type is dominated by hot water and operates in temperature ranges from 212 to 700 degrees Fahrenheit.

Geothermal energy is classified as a renewable source of electricity and considered to be a clean, environmentally friendly, sustainable method of electrical power generation.

According to a March report from Pike Research – a market research firm that analyzes clean tech markets – escalating investment in global geothermal power could result in a 134 percent increase in total geothermal capacity between 2010 and 2020, from 10.7 gigawatts to 25.1 gigawatts, under a high-growth forecast scenario. Under a more conservative forecast scenario, the firm estimated that geothermal power capacity would increase 34 percent to 14.3 gigawatts by 2020.

“Worldwide potential for geothermal energy is immense,” said Peter Asmus, a senior analyst at Pike Research. “But geothermal remains an underutilized resource and represents only a small fraction of the global renewable energy portfolio.”

The current installed capacity of geothermal is 10.7 gigawatts and is spread across 26 countries with a combined output of approximately 67 terawatt hours of electricity.

Currently, the United States is the world leader in geothermal with 3.1 gigawatts of installed capacity, but that only represents 0.4 percent of all domestic renewable electric generation. A miniscule amount considering that all renewable generation, including hydroelectric, only represents 10.5 percent of all American electric generation. Moreover, during the past 10 years, the growth of American geothermal has remained relatively flat with only an average annual growth rate of 1.2 percent.

This is perplexing, considering that the DOE estimates that geothermal currently produces electricity at between 5 and 10 cents per kilowatt hour. If geothermal is so clean and cheap, why is it not growing in the United States as fast as other renewable energy sources, or as quickly as it is in other countries?

Steve Hirsch, vice president of project development at Geothermal Development Associates (GDA) – based in Reno, Nevada – offered an explanation: “To a great extent it’s due to the high exploration risk, long return-on-investment time period and resulting lack of investment capital. But that may be changing as a result of the tragic situation in Japan.”

Hirsch was referring to the Fukushima nuclear crisis. That disaster triggered a strong response among Americans according to a major survey conducted by the Civil Society Institute one month after the earthquake cracked the reactors. Before Fukushima, nuclear energy had been gaining public support in the States, but the survey found that now a majority of Americans would freeze new nuclear power construction, stop additional federal loan guarantees for reactors, shift away from nuclear power to wind and solar power and eliminate the indemnification of the nuclear power industry from most post-disaster clean up costs.

Geothermal energy is a viable alternative to nuclear power, does not produce radioactive waste and, unlike wind and solar, it can produce energy around the clock.

GDA designs and builds complete geothermal power plants in the United Sates. It manufactures some of the components and orders the remaining equipment from approximately 35 other companies. “We do the design engineering, order/manufacture the components, carry out workshop tests, ship the components out in containers and then go on site to supervise the installation and commission the plant. Investment in a geothermal project carries significant exploration risk at the outset. It takes longer than oil or gas projects for investors to see profits. Most of our international projects have been for equipment supply.
“Our business is going well, but we are encountering unfair competition from companies in other countries whose governments provide subsidized export credit. The Chinese, for instance, will provide subsidized credit to the buyer. Instead of the interest rate being 9 or 10 percent; the Chinese export-import bank may offer 2 or 3 percent. Other countries, such as the French, mix export credit with foreign aid grants which results in a lower overall interest rate to the foreign buyer. It’s hard for us to compete on overseas projects when our competitors are able to offer subsidized credit,” said Hirsch.

In the United States geothermal development is also heating up. Saf Dhillon, who handles investor relations for U.S. Geothermal, Inc., a company that is currently developing projects in Idaho, Nevada and Oregon, said, “Traditionally Wall Street and political support has been behind wind and solar, seen as the only renewable options. Geothermal has always taken the backseat in terms of funding and subsidy support. As the markets have educated investors they have come to realize that over the long term these geothermal assets are obviously much more profitable, but they have also realized that they are very capital intensive up front.”

U.S. Geothermal’s business strategy has been to concentrate on proven resources in the ground rather than risk the high costs for exploration and test wells. In 2001, the U.S. Geothermal acquired Raft River in Idaho, the pilot project that DOE spent $40 million to develop in the early 1980s in reaction to the 1979 oil crisis caused by the Iranian revolution. History has shown that when oil prices drop, investment interest in renewable energy wanes.

“Our first project to get up and running was Raft River, about five square-miles with a number of production and reinjection wells. We had a plant constructed for us by Ormat Technologies, a 13 megawatt net plant that is now producing about 10 megawatts. It is the first plant financed and set up as a Tax Equity Partnership with Goldman Sachs utilizing Production Tax Credits (PTC). The current Administration has a combination of Investments Tax Credits along with the Department of Energy’s Loan Guarantee Program. Geothermal is profitable without government incentives, but they make the return on investment that much more attractive,” said Dhillon.

U.S. Geothermal now owns five geothermal assets in the United States and acquired another last year in Guatemala. “Our focus, however, is in the United States. We have two fully financed projects currently under development. San Emidio in Nevada is vendor-financed and eligible to receive a 30 percent tax credit 60 days after startup. Neal Hot Springs in eastern Oregon is the first geothermal project to qualify under the DOE Loan Guarantee Program and is also in line to receive the 30 percent tax credit.”

San Emidio is a 25 year old plant that was producing 3.5 megawatts. Using existing wells, a new plant is being built for a 9 megawatt output that will be online by the end of the year.

Neal Hot Springs is a new 23 megawatt facility under construction and expected to cost approximately $130 million. “This is the first geothermal plant to qualify to receive the ITC and the DOE Loan Guarantee Program. DOE will provide and guarantee a low interest loan of approximately $97 million. In addition, 60 days after the plant starts production, we will receive a check for 30 percent of the plants total capital expenditure under the Treasury Grant Program,” Dhillon explained.

Geothermal projects can operate profitably in the States without government subsidies. Internationally, it appears that the federal government needs to support American geothermal technology and manufacturing jobs so American companies can compete on a level playing field. Once new geothermal projects are operational, sales contracts for electric supply to utilities run for 20 to 25 years and revenues are predictable.

Until recently, geothermal was the poor relative to wind and solar, but with continued government support it can be a growth industry for renewable, reliable power production both at home and abroad.