Boise, Idaho,-based U.S. Geothermal (NYSEMKT:HTM) is a producer of geothermal energy. In addition to a large steam project in Guatemala, it has five projects, all in the U.S. The company recently signed a partnership with the large Canadian firm, Enbridge Inc. (NYSE:ENB), to develop its largest project to date, Neal Hot Springs.
Geothermal energy is a completely renewable energy source; in the simplest terms, water heated from deep within the ground is brought to the earth’s surface, where steam from the superheated water drives turbines to generate electricity.
It has advantages over other sources of renewable energy, all of which require significantly larger footprints. Unlike solar and wind power, which are subject to constant flux, geothermal electricity generation operates without interruption. And although hydropower is capable of generating a constant flow of energy, it requires building large dams that are highly disruptive to the local ecosystem.
These reasons alone make geothermal energy a strong contender as the best alternative energy choice. But to top it off, it is a cheap and abundant source of energy found throughout the western U.S. Financial services firm Credit Suisse issued a report suggesting geothermal is the lowest cost producer of energy, followed by wind, natural gas and coal.
As of 2009, there is 3,086 MW of installed geothermal capacity in the U.S., far greater than any other country, yet still represents less than 1% of America’s power needs. But usage is growing. According to a report by the Geothermal Energy Association, production potential increased 35% between 2008 and 2009. Recently passed laws requiring certain utilities to use non-carbon sources of energy should help maintain this momentum.
In fact, utilities themselves are some of the country’s largest producers of geothermal energy. There are very few “pure-play” companies. One reason for this is the high upfront cost to begin production. As with the oil and gas industries, exploration and drilling can be high-risk, high-cost activities. In a climate of tight financing, small companies find it difficult to sufficiently fund such projects.
Geothermal energy producers are also disadvantaged by the necessity to locate on the site of their energy source, sometimes making energy transport problematic. And until recently, government had lavished tax breaks on the solar and wind power industries, all but ignoring geothermal.
U.S. Geothermal Inc. acquired the Raft River project, site of a former U.S. Department of Energy geothermal installation, in 2002. This was a relatively low-risk play considering it was known to contain high temperature geothermal reservoirs. Early estimates placed capacity at about 110 megawatts of power on the 8.2 square mile site. It went into commercial operation in 2008, selling electricity to Idaho Public Utility. Raft River is on record as the Pacific Northwest’s first commercial size “binary cycle” plant, where water raised from the reservoir is used to boil a second liquid that powers the generators.
The company continued to raise funds and acquire projects. Next came the San Emido power plant in Nevada, which it purchased in April 2008. It is a smaller plant, producing only 3.6 MW of power (Raft River generates about 11 MW), but has the potential to produce 44 MW. A new 8.6 MW power plant is under construction.
A month later, U.S. Geothermal began drilling on its third project, Neal Hot Springs, in Oregon. Early tests had been encouraging, indicating it could be a potentially prolific reservoir. Plans were hatched to develop the site with four production wells generating 22 MW of power. When these projects come online, the company will have 45 MW of net power generating capacity.
Both the San Emido and Neal Hot Springs projects are now fully funded.
Even with only these three sites, U.S. Geothermal will significantly increase its output as it expands production in the ensuing years. By 2015, it aims to have 143 MW of generating power from these three locations. On the flip side, this will require a tremendous capital investment of close to three-quarters of a billion dollars. But remember, once built, maintenance costs are low, and power plants have a life of up to 50 years.
Beyond Raft River, San Emido and Neal Hot Springs, U.S. Geothermal holds leases to three additional geothermal properties. Over time, these too, may bear fruit. The company has been successful so far in negotiating financing, although sometimes at a steep price. Such was the case with its 10 MW Raft River plant, financed through a joint venture with Goldman Sachs: For the first 10 years of operation, tax and earnings benefits will largely accrue to Goldman. Continued financing will be required to fully develop its properties. Government loans, credits and other awards have been and remain of considerable importance.
For now, the company is operating at a loss. The small amount of power produced at San Emido generates 76% of total revenue - insufficient to cover operating expenses. This could change when additional generating capacity is added. The resulting increase in revenue should be considerably greater than any increased operating costs.
U.S. Geothermal is nearing a tipping point. Once enough power goes on line, it will turn from a loss-maker to a cash-generating machine, which should transform its visibility on the market as a solid renewable energy play with good growth prospects and earnings visibility.