Tesla's (TSLA) gigafactory is ready to begin construction and is estimated to be operational sometime in 2017. This massive facility will be around 10 million square feet and will become the largest lithium battery factory in the world. Once running at full capacity, it will produce more lithium batteries annually than all the existing plants in the world did in 2013. In order to fulfill Tesla's vision, a huge quantity of renewable energy will be required to power the gigafactory. This article will highlight Ormat Technologies (NYSE:ORA), a leading geothermal power producer headquartered in Reno, Nevada, that is a leading contender to supply Tesla with the geothermal energy they need.
This is the second part in my series covering little known companies that should benefit from Tesla's gigafactory. The first article covered Polypore (PPO), a leading global technology filtration company that will be supplying Panasonic with lithium-ion battery separators through a five-year contract.
Part II: Ormat Technologies
Source: Tesla
In Elon Musk's announcement on the gigafactory located just outside Reno, Nevada, he stated the facility will be powered 100% by renewable energy. This "net zero" gigafactory will be powered by a combination of solar, wind and geothermal. This is a monumental task considering the vast amount of energy required to power a 10 million square foot battery factory. Navigant Research estimates the gigafactory will consume up to 100MW (peak). If the factory ran at or near peak levels 24 hours a day, it would result in 2,400 MWh per day, or about enough electricity to power 80,000 homes. The roof of the gigafactory will likely be covered in solar panels with an additional solar panel field close by the factory and a wind farm also operating in close proximity. SolarCity (SCTY) will likely be given the solar project and either General Electric (GE) or Siemens (OTCPK:SIEGY) will contribute wind turbines. The interesting factor that is given very little attention is the geothermal component that will be included to power the factory.
Ormat Technologies Gigafactory Connection
Ormat Technologies is headquartered in Reno, Nevada, and is the world leader in the geothermal plant sector. The company designs, develops, builds, owns and operates geothermal and recovered energy-based power plants. Ormat's Steamboat complex has six geothermal power plants in Washoe County, Nevada, (near Reno) with a combined capacity of 78MW. This geothermal power serves as the main base load power source for the citizens of Reno, Nevada. The fact that Reno is one of the few places in the United States where the earth's crust is thin enough to efficiently access geothermal energy and is headquarters to the one of the largest pure play geothermal power producers probably played an important role in Tesla choosing Nevada as its final destination. While solar and wind will play an important role, both aren't considered consistent sources of power. Geothermal is a constant energy source that can serve the gigafactory as its base load for electricity.
Tesla can come in right away and establish access to 78MW of geothermal power. It's unclear if Tesla would tap into the existing Steamboat complex, owned and operated by Ormat, or build its own geothermal plant onsite. Either way Ormat Technologies stands to benefit. The company not only owns and operates geothermal plants, but also builds them to customer specifications. The company is currently supplying materials to the world's largest 330 MW geothermal power plant in Indonesia. Building a smaller 10-20 MW geothermal plant for Tesla would be no problem for the company. Ormat Technologies also builds and operates recovered energy generation power plants that capture unused waste heat from industrial processes and converts it into electricity without any additional fuel consumption and with zero emissions. This technology could allow Tesla to collect excess heat during peak hours and convert it to energy, thereby reducing the energy requirements during peak times.
Ormat Technologies Fundamentals
Market Cap ($B) | P/E | EV/EBITDA | Profit Margin | Debt/Equity | Dividend Yield | |
Ormat Technologies | $ 1.27 | 18.8 | 10.1 | 9.74% | 1.34 | 0.80% |
6 months ended June 30, | |||
($ millions) | 2014 | 2013 | Y/Y % change |
-Electricity | 186.5 | 156 | 19.6% |
-Product | 83.5 | 115.5 | -27.7% |
Total Revenue | 270 | 271.6 | -0.6% |
Gross Margin | 93.4 | 77.1 | 21.1% |
Operating Income | 64.9 | 45.5 | 42.6% |
Net Income | 31.1 | 20.5 | 51.7% |
EPS | 0.67 | 0.44 | 52.3% |
Ormat Technologies receives revenue from electricity and constructing and supplying equipment to geothermal power plants. The company has seen a drop off in product revenue during the first half of 2014, but expects revenues to be much stronger in the second half due to timing issues. The product backlog grew to a record $376 million with the addition of the Sarulla $254 million supply contract finalized during the quarter. Ormat will begin to recognize revenue from the 330MW geothermal Saurlla plant in Indonesia in the second half of 2014, and will continue to recognize revenue from this project over the next 3 years. The company owns a 12.75% stake in the Sarulla project.
During the 2Q14 conference call, management reaffirmed its 2014 total revenue guidance to between $540 million to $560 million with electricity revenues ranging from $370.0 million to $380.0 million and product segment revenues to be between $170.0 million and $180.0 million. At the end of 2Q14, the company had engineered, manufactured and constructed power plants, which it currently owns or has installed to utilities and developers worldwide, totaling over 1,800 MW of gross capacity. Ormat currently operates geothermal and recovered energy systems with a total capacity of 626MW. Ormat clearly has the know-how and capability to assist Tesla reaching its "net zero" goal.
The Sarulla project can't be understated for the company. When built it will be the largest geothermal plant in the world and Ormat will be supplying Ormat Energy Converters to the plant, which adds $254 million to the product backlog. Total product revenue for 2014 is expected to be $170-$180 million. This one contract equals roughly $84 million annually for Ormat. CEO, Dita Bronicki, said,
"We are delighted to finally get to the final stage of development of this landmark project and move to the construction phase. The fact that Ormat will be supplying equipment to what will be the largest geothermal power plant to date is a testament to the superiority of our technology. We are happy to be able to report a record backlog for our product segment, and more importantly, a backlog with a visibility that provides a base level of products sale for the next 3 years."
Conclusion
While Ormat doesn't yet have a contract with Tesla for geothermal energy, the company is perfectly positioned to be the beneficiary of Tesla's gigafactory. With Elon Musk stating geothermal will be used to power the massive factory in Reno, Ormat is the most logical partner with headquarters in Reno and a geothermal footprint of 78MW already serving customers in Reno. The $1.3 billion tax deal signed into law by the governor also includes $8 million in discounted electricity rates for eight years for Tesla. Considering the fact that the plant plans to be 100% renewable, this is a signal that Tesla may choose to tap into the already existing geothermal grid in Reno. This would be welcomed news for Ormat because it would instantly increase electricity revenue. However, long-term I believe the energy requirements from the gigafactory and the need for a sufficient base load would require an investment of geothermal infrastructure by Tesla. The citizens of Reno currently rely on geothermal power from the Ormat's Steamboat complex and Tesla's significant energy requirements could lead to a strain on the system. Either way, Ormat is the leading candidate in this field to benefit from the gigafactory.
