Geothermal Energy Outlook 2011: Strong Growth Ahead

by Marin Katusa, Chief Energy Strategist, Casey Research

The Canadian Geothermal Energy Association (CanGEA) is a pretty active group. It regularly hosts networking and news events for its members, who range from scientists to industry reps. One meeting that grabbed our eye took us to Toronto in October, ready to sniff around the Geothermal Investment Forum.

CanGEA members worldwide operate approximately 20% of global geothermal capacity and have a reported 3,377 MW in reserves and resources. So when these fellows convene, the formal presentations and hallway exchanges offer some significant insight and even a competitive edge for investing in this sector.

To begin, geothermal is still the forgotten renewable and, compared with fossil fuels, has a long road to becoming a household word in the markets. The industry faces a series of challenges to be taken as a serious and viable alternative to the energy king, fossil fuels. Here’s a summary of strengths and weaknesses that came up at the forum:

Where Does the Money Go?

One of geothermal's biggest hurdles is obtaining further subsidies in an environment where all the generating technologies are competing for the same dollars. Many don’t know that the fossil fuels as well as renewables are subsidized by governments in the form of grants and loans, fiscal incentives such as tax credits, and other support in addition to infrastructure.

As you’ll see below, the per-unit basis for fossil-fuel subsidies is low:

However, when taking into account the fact that there was so much more fossil-fuel generation, the picture is dramatically changed. In total governments worldwide conveyed an estimated US$700 billion in subsidies toward fossil-fuel consumption in 2008, according to the U.S. Energy Information Administration (EIA). Meanwhile, the same governments allocated only about US$100 billion toward the energy sources they get the most press for supporting, the renewables.

The White House has proposed reducing tax breaks for the oil, gas, and coal industries by approximately US$40 billion in the 2011 budget, which would be a nearly 50% decrease from levels in 2002-2008. If that figure passes – not a given, especially with Republicans in control of the House – US$40 billion is still twice that for renewables.

Government policy and subsidies is essential for private investment in the geothermal sector. Greater recognition would be a huge catalyst for this industry.

Another Must for Investment: Reporting Standards

One of CanGEA’s main achievements is creating a Canadian geothermal code for reporting public information. Similar to the mining and oil/gas sectors, this self-regulation standardizes mechanisms and presentation of data. The idea is not only to make it easier for investors to evaluate projects and companies but to foster confidence to invest in the sector at all.

The standards provide a minimum set of requirements for the public reporting of exploration results, geothermal resources, and geothermal reserves. The result of a committee set up two years ago, compliance with the code is voluntary until 2011. At that point it’ll become a requirement for CanGEA membership.

The code pertains to both public and private geothermal assets. Key principles are:

1. Transparency: to provide sufficient information that is clear and unambiguous.
2. Materiality: to present all relevant information that investors would reasonably require and expect to be made available to make a reasonable investment decision.
3. Competence: to ensure the reporting is done by a qualified person based on experience and knowledge. “Qualified” means at least five years’ relevant experience, professional registration with an association with a governing code of ethics, and CanGEA membership.

It will also establish value for companies whose assets are underdeveloped – what one’s got “in the ground” – similar to the NI 43-101 (mining) and NI 51-101 (oil and gas) classification rules.

So far, it works something like this:

- graphic courtesy of CanGEA.

Inferred resources is when a temperature gradient well program has been completed, the earliest hands-on stage to determine a site’s thermal characteristics. Next come slim-hole wells, which help determine the economic viability of a project and define indicated resources. A company’s measured resources require actual production wells to have been started or completed as well as a demonstration that the company can deliver on them.

Then there’s the reserves side, which considers factors such as accessibility and economic feasibility of the resources. Accordingly, probable reserves is when deliverability has been demonstrated, and proved reserves is when production wells have started or been completed and deliverability has been demonstrated.

Companies would follow this structure for a variety of documents: quarterly and annual reports, reports required by the Canadian securities exchanges and or by the law, company website information, information releases, and environmental statements, technical papers, and so on.

CanGEA is proud of the code, and rightfully so. Geothermal exploration is a high-risk activity, and raising confidence and reducing unknowns will improve the industry’s prospects for attracting capital. The only other country to have a geothermal code is Australia, which has a considerably smaller total market capitalization of geothermal companies than Canada.

The code has been submitted to the International Energy Agency (IEA) and the International Geothermal Association for review and endorsement.

The Take-Home Message

What we came away with confirmed our own analysis: that the geothermal sector faces a fair amount of challenges, as well as a variety of them. In the balance, however, the positives far outweigh the negatives.

We even heard some argue that the geothermal sector is where the oil sector was in the 1950s and is poised for a large bull run. We wouldn’t wax that enthusiastic ourselves, but two drivers are indeed true. First, the potential for energy production in the ground is significant, and second, increasing innovation is leading to better exploration techniques and drilling capabilities.

Subsequently, although there are high capital costs right now, we expect solid returns on equity in the long term. Exploration and drilling accounts for approximately 36% of the total capital costs, and as technology improves, this risk will decline.

In short, don’t look to the geothermal sector for get-rich-quick schemes. Consider yourself instead as getting in on the ground floor of some promising growth.

[With oil rising again, the energy sector is set to boom in 2011 – whether it’s oil & exploration companies or the industries, like nuclear and renewables, that benefit from high oil prices. And now you can get complete coverage of the resource exploration sector for one low price: Subscribe to Casey’s Energy Report ... Details here.]

Ed. note: I am a Casey Energy Report subscriber and affiliate.

Geothermal vs Wind Energy: Pros and Cons

Search engine giant Google has made a very large investment in wind energy.  Smart play - or should Google stick to Search and Web Apps?

According to our energy guru Marin Katusa, Google may have been better served if they'd considered Geothermal Energy instead.  That's the energy play that Marin loves for investors - read on to see his comparison of wind energy vs. geothermal...


Why Google Should Subscribe to Casey Research

By Marin Katusa, Chief Investment Strategist, Casey Research Energy Division

What do search engines and wind energy have in common? That’s the question a lot of investors were asking earlier this month, when Google made an almost US$40 million investment into NextEra Energy Resources, a North Dakota wind energy firm. The simple answer: more than you think.

It’s not surprising that the Internet search-engine superstar needs energy. Companies like Google own massive computer frameworks, known as server farms, to store all that digital data floating around in cyberspace. While Google is quite hush-hush about how many computers it owns, estimates put it at about 1,000,000 servers (almost 2% of the world total), and an enormous amount of power is needed to keep them running constantly. And as cyber-information grows – almost 24 hours of video footage is uploaded onto YouTube every minute – more and more computers are required to store and distribute it.

But where does their power come from? Most server farms are located near coal-fired generating plants. Good for efficiency, but that adds up to a pretty big carbon footprint. Naturally, this has environmental groups fuming and lobbying the corporations for clean energy alternatives. Given Google’s avowed sensitivity on this issue, investing in wind turbines in North Dakota makes good public relations sense.

However, it is usually the company’s philanthropic arm, Google.org, that handles such good-citizen initiatives. Thus the unprecedented move to make a first-time direct investment into NextEra Energy suggests that Google is expecting something further.

It seems logical to assume that the company’s motivation also involves saving money by slashing its dependence on coal-fired generators. After all, when your electric bills approach that of a small country, it’s hard not to jump on a company that could potentially produce enough power to light up 55,000 homes.

But if this is, in part, an exercise in cost-cutting, Google made a big mistake: it chose the wrong renewable energy.

Wind Farms vs. Geothermal Power

The main problem with wind farms: they don’t work when it’s not windy.

But that’s not all. Wind energy is plagued by high capital costs, a weak power transmission system, and low output, making its success heavily dependent on government subsidies. Load factors for wind energy – that is, the difference between how much power a generator can produce and how much it actually produces, which determines how much money a utility will make – are also quite low. The large physical footprint – the amount of land required to build wind farms – is another downside, as is the threat they pose to birds and the noise pollution they generate.

Add this all up and you’ve got the biggest loser when it comes to going green. In reality, the best renewable energy bet Google could make, especially in the United States, is on geothermal. Leaving everything else aside, geothermal beats wind energy on the most important factor: it is not dependent on weather. That means there is no need for backup power generation facilities, something wind farms must have for the days when the turbines won’t turn. Nor are government subsidies absolutely necessary for geothermal energy; they’re more of an added bonus. And geothermal power plants require the least amount of land: they can hum away contentedly even in the middle of farmland or a park.

Geothermal also wins on the numbers, with the highest load factor of all renewable energies and the biggest profit margin. Take a look at the cost breakdown of renewable generating technologies in the U.S. – it’s clear that geothermal is miles ahead:

Generating Technology*	Load Factors	Revenues per plant (US$0.10/kWh electricity)	Costs of Operations** (US$)	Profit From Operations (US$)	Capital Costs 2009  (US$ per KWH)
Geothermal	90%	$39,420,000.00	$8,416,500	$31,003,500	$1,749.00
Hydroelectricity	45%	$19,710,000.00	$696,500	$19,013,500	$2,900.00
Wind - Onshore	25%	$10,950,000.00	$1,549,000	$9,401,000	$1,966.00
Wind - Offshore	40%	$17,520,000.00	$4,346,000	$13,174,000	$3,937.00
Biomass	90%	$39,420,000.00	$30,336,620	$9,083,380	$3,849.00
Photovoltaic	25%	$10,950,000.00	$597,000	$10,353,000	$6,171.00
Solar - Thermal	15%	$6,570,000.00	$2,902,500	$3,667,500	$5,132.00

* Numbers are on a comparable per-plant basis   ** Costs are exclusive of subsidies.

Once Bitten, Twice Shy

Perhaps the reason Google decided to go with wind energy this time is because it gave geothermal a chance in the past. Two years ago, through Google.org, the company became the biggest investor in enhanced geothermal research, beating even the United States government. Unfortunately, that time around, Google picked the wrong company.

Google invested US$6.25 million into AltaRock Energy in August 2008, to help the company make a success of its promising Geysers project in northern California. AltaRock was using the latest technology – Enhanced Geothermal Systems (EGS) – in an attempt to harness some of the energy locked far beneath the earth’s surface. As Google discovered, though, making a sound investment is not as simple as picking a company just because it has a great project location and the finest in tech. A host of pitfalls faces any geothermal developer – including inexperienced crews, insufficient financial backing, and the lack of a good power purchasing agreement.

But most formidable of all are the challenges of very deep drilling. While EGS represents a breakthrough, it’s still new, and it’s tricky to use. To properly exploit its potential, companies need to learn how to drill that deep, and to do so despite the hot corrosive fluids and unfriendly intervening layers of rock that can ruin a well in short order. And as if that weren’t enough, users have to work extra cautiously. Geothermal activity is generally found around seismic fault lines, and fracturing deep rocks using hydraulic pressure has linked EGS to earthquakes.

As AltaRock Energy (and its investors) found out, it’s going to take more than just fat corporate and government checks and tweaks to conventional techniques for EGS projects to work. The Geysers project came to an abrupt halt just over a year after drilling began. Barely a third of the well’s planned 12,000 ft depth had been reached before drillers encountered a layer of fibrous rock that caused the holes to collapse.

Getting on the (Right) Green Bandwagon

Renewable energy is essentially still in its infancy, with plenty of barriers to surmount. At the same time, there’s no mistaking politicians’ growing desire to climb onto the bandwagon. Which means more and more companies are jumping at the chance to join in. But this is still relatively unexplored territory, and the market has some hard lessons yet to teach. Not every company... or idea... is cut out for this.

It would be wrong to say wind energy doesn’t have a future, because it does – a very distant and windy one. One that won’t be materializing anytime soon, at least not until the capital costs of wind development drop and transmission techniques improve.

Geothermal isn’t easy. The Geysers failure demonstrates that. But it’s proven, it’s cost effective, and it runs 24/7... so for now, it’s our favorite renewable energy.

Our research is focused on finding the best geothermal companies out there and, because Google is our favourite search engine, we’ll be happy to share that research with CEO Eric Schmidt and his band of merry men. So come on Google, feel lucky and click here – we’ll give you a free three-month trial with our Energy newsletter, including our #1 geothermal recommendation.

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