Time For Another Look At Geothermals?

Many an investor has given up on the energy play. As oil has buckled, alternative energy stocks have been hit.

The reason the fossil fuels are so attractive, isn't their appeal but because their usage can be day or night and does not rely on the weather for generation. It stands to reason that investment will suffer somewhat with respect to clean technologies, but oil at $100 a barrel or even $60 will make it conceivable for increased development.

I do believe that solar and wind look good, but other technologies have flown under the cross-hairs of politicians and that can be good for those that have less popular views. Geothermal has had little by way of media. The belief with this technology is that it is only feasible in areas that have plentiful underground heat. It is also believed that the technology is too expensive. These two facts are becoming myths as technologies have gotten better.

Ormat Technologies (ORA) looks to be ahead of the game as they are just starting to realize their potential. Locked down through misguided beliefs and the lack of Apple's (AAPL) "sex appeal", it has opportunity written all over it.

An article in Forbes recently, suggested these opportunities are becoming a reality. The two largest limitations to the use of this technology is geology itself. The heat below the Earth's surface is either too far down to get to, or it lacks the hydration necessary to bring the heat to the surface.

But limitations may cease to exist in upcoming years. Many locations are too deep, but new technologies are offering the ability to drill deeper and through more rigid layers. These technologies are being used by current companies drilling for oil and natural gas, and could be used to tap heat sometime soon.

Before the advent of these new technologies, a hole was drilled near a geyser and a valve and turbine were placed on the hot water. Since the heat is so near the surface very little else needed to be done. New technologies drill deeper into the ground so water is pushed into the well and forced out of other surrounding wells.

ORA and United Technologies (UTX) have developed low temperature turbines that can generate power from temperatures as low as 200 degrees Fahrenheit, which is half that of older turbines. In 2007, MIT did a study that stated geothermal heat could produce electricity for 15 cents per kilowatt hour. They estimated the price could drop to 5 cents. This new estimate makes it very competitive.

Geothermal investment was up 83% last year and looks to continue to grow. ORA currently estimates that it will add a tenth of a gigawatt of capacity this year and should continue to average that in upcoming years. They currently have .4 gigawatts of capacity, so you can see the type of growth they are experiencing.

Current geothermal energy solutions are being honed and refined every year. The main idea is to make it cost effective. ORA's plant, Galena 2 in Nevada, offers clean and reliable energy, but most importantly, it's sustainable. Their recovered energy generation plant in North and South Dakota named OREG 1, provides cost efficiency because it is unmanned.

ORA has customers in 71 countries and counting. They currently have 20 geothermal plants, 6 recovered energy generation plants, and over 60 remote power units.

Power generation generates approximately 73% of revenues and 81% of operating income. They currently have 374 MW of power generation. 116 MW are currently under construction. Developmental stages have up to 148 MW.Recovered energy plants currently have 22 MW but another 24 MW are in construction and developmental stages.

Power is very stable as they operate under long term contracts. Their products division has 75 patents with respect to electrical generation. Current potential geothermal resources are vast. Many of these are near volcanoes, geysers and fault lines. This is why much of the current 2850 MW of installed capacity is on the West Coast.

Currently, Asia is the only continent with more, at 3291 MW. Their potential capacity in the next twenty years could reach 42000 MW, while North America's potential is 30000 MW. North America could have up to 100000 MW of potential if enhanced geothermal systems are used.

With traditional geothermal systems, the world's potential is 148000 MW in the next two decades. Installed systems total 9500 as of the end of last year. Most important is the fact that they are the only methods that are as cheap as fossil fuel electricity. Recovered energy generation is cheaper than coal and geothermal is the same price under current means of production. This is with geothermal being as environmentally friendly as solar.

Growth with respect to geothermal will be driven by higher energy prices, the possibility of global warming, and the fact that the majority of energy comes from unfriendly countries. ORA has planned for growth in their power segment. This has a CAGR of 17% from 2006 to 2009 estimated. In 2003 ORA had a total of 242 MW in production, and they plan to have increased this to 626 MW by 2009. From 2003 to 2006 their revenue grew 34% CAGR. Adjusted EPS grew 14% CAGR over the same period. Adjusted EBITDA growth was 41% from 2003 to 2006. This is also one of the few pure geothermal plays that is public.

Disclosure: None

Comments

[buyitcheap:]

HTM is another play but uber-small cap.

2008 Sep 10 07:35 AM

[john s. gordon:]

when planning a geothermal venture, costs of waste brine disposal must be considered, also odor problems & toxic gases dissolved under pressure in the brine, most brines are corrosive to metal parts in the power generation system. it ain't ;ile a nice clean hydroelectric generating system
> jack

2008 Sep 10 08:37 AM

[Steven Ward:]

It is now accepted knowledge that geo thermal power plants for reasons still unknown cause minor earthquakes. In fact, France stopped a geo thermal drill due to earthquakes in Basil Switzerland across the border. Drilling stopped and so did the earthquakes. But as they say, Californians are used to earthquakes.

2008 Sep 10 08:58 AM

[Chris B:]

Interesting article. I've always thought it was a paradox that we could drill into several miles of rock under a mile or two of ocean for oil, but that replenishable geothermal energy is always considered too expensive.

Truth is, we have more energy than we could ever use sitting under our feet anywhere on the planet. I'm looking at this stock, RZ, UTX, LXU, and others, but need to do more research first.

2008 Sep 10 09:44 AM

[cfo4nova:]

If you are seeking an interesting early stage play, Western Geopower Inc has a plant in development in the California wine country at The Geysers--Healdsburg that is slated to come on line in April 2010. They have contracts signed for 20 years with Pacific Gas and Electric for $500,000,000... which is at $98/MW. They have couple holes drilled that have the high temp and pressure needed for this project. Engineers are pleased with results.

This is a speculative play since the plant is still being built and they are burning cash. For those with the stomach for it, this is likely to be a ten to twenty bagger. WGPWF on the pink sheets trading at $0.23. Just a thought for those wanting to make a groung floor play in this sector.

I am long WGPWF

2008 Sep 10 10:37 AM

[john s. gordon:]

steve - disposal of waste brine by deep well injection (under pressure) can stimulate earthquakes, they had this problem @ rocky flats colo a while back.
> jack

2008 Sep 10 11:53 AM

[danno:]

Waste Brine is actually now becoming a valuable asset as firm are now using it as a cheap source of lithium (much cheaper than mining it). I don't consider the waste to be a long-term problem - and in fact, perhaps a long-term bi-product with economic value.

2008 Sep 10 12:23 PM

[ohm:]

Great article Michael and as Danno pointed out the by-products may be more valuable than the product. As far as corrosive water/steam thats what heat exchangers are for.

2008 Sep 11 09:54 AM