The Green Investor's  Instablog

By Andreas Schreyer, Editor, The Green Investor

In the first half of this article, “Geothermal is getting red hot – Part I”, I discussed the key characteristics, advantages and disadvantages of geothermal energy. Part II continues with the key trends and new technologies, as well as a review of the list of publicly traded geothermal companies.

The future for geothermal energyBecause of the crucial advantages of geothermal energy we reviewed last week, namely a mature and proven technology with a very high capacity factor (meaning that geothermal can supply utilities with baseload power around the clock) and low levelized cost of energy, makes geothermal one of our high growth renewable energy sectors for the next decade. Recent advances in geothermal technology, such as the binary power plant, have made possible the economic production of electricity from geothermal resources lower than 302°F.

The most promising technology developments are the so-called Enhanced (or Engineered) Geothermal Systems (EGS) which generally refer to natural resources which have to be fully engineered and require artificial stimulation. This really means the creation of a man-made geothermal reservoir in hot dry rocks at depths of 13,000 to 16,500 ft by fracturing the rock with explosives or high pressure water injections. The hot water is then pumped back out of the reservoir and fed to the power plant.

There is a lot of new research in progress spurred in large part by funding from the Department of Energy (DOE) and a recent surge of private investment in early stage exploration/research companies. There are many technical challenges with these new technologies, not the least of which are the potential earth quakes they trigger. A case in point was an EGS project in Basel, Switzerland in which the “hydro fracturing” process was directly linked to a 3.4 magnitude quake under the city, causing the immediate termination of the project. Aftershocks lasted for another 9 months…

Still, if the fracturing process can be controlled (and performed safely, away from large urban centers), the hope is that EGS technologies could help extend the production life of existing fields and make geothermal projects feasible in locations previously out of reach and tap an estimated additional 200,000 MW in the U.S. alone. The $350 million earmarked for geothermal research grants under the American Recovery and Reinvestment Act (ARRA) is about to provide one more boost for the geothermal electricity generation sector.

How to take advantage of the geothermal opportunity
As the U.S. is expected to continue to lead geothermal development activities, there are a number of exciting ways to participate in this promising market. With the sector heating up, there are many participants jockeying for position, from drillers to oil and gas companies, turbine manufacturers, utilities and Independent Power Producers (IPPs) both pure-play and diversified, and finally pure-play geothermal developers.

At the small, private end of the scale are the hot pure-play geothermal developers, most of them tiny startups, with little or no revenue, but sky-high ambitions for their EGS research projects. There are a couple of dozen just in Australia. Here in the U.S., you can re-live the fever of the Silicon Valley technology boom of the 1990s, with venture capital firms and other private investment funds fighting to get in on the next big thing. There must be dozens of them, most of them offshoots of academic research, but perhaps the most over-hyped of the bunch is AltaRock Energy which has been getting all the headlines, including for raising $26 million in a second round of private investment from companies like Google and legendary venture capital firm Kleiner Perkins Caufield & Byers. Late last year they also received an EGS research grant of $6.25 million from the Department of Energy. But last week, they made headlines for all the wrong reasons: they announced their drilling project at the Geysers in California had run into problems and was suspended indefinitely.

It is probably just as well that as individual investors we cannot invest in these potential stars of the future, because most of them will not be around in a few years.

Let’s take a look at the publicly traded companies. In Part I, we reviewed companies at the extremes of the investing spectrum: an early stage company that just completed its initial public offering, Magma Energy Corp. (MGMXF.PK) and our preferred pure-play geothermal stock Ormat Technologies, Inc (ORA). We will not discuss these here except for including them in our list of publicly traded geothermal companies in Table 1 below.

Table 1: Publicly traded geothermal companies

The list is ranked alphabetically. There are no large caps on the list. The only mid cap companies are Calpine Corp. (CPN) and Ormat. We include Calpine (CPN) because they are often mentioned for the many geothermal power plants they operate. They are a utility, and they have about 725 MW of geothermal electricity generation capacity, but since this represents about 3% of their total capacity we are not particularly interested.

Besides Calpine and Ormat, the rest of the list is made up mostly of smaller pure-play geothermal companies, several of them traded on the over-the-counter market or Pink Sheets, and very illiquid. Even those traded on larger exchanges, such as Raser Technologies (RZ), have been hurt by the economic downturn. They are experiencing cash flow issues, are forced into dilutive stock offerings or other desperate measures and most on the list are in trouble. In the current financing environment and new project funding as tight as it is, the established, proven low-risk geothermal developer will win deals more often than not.

Raser just got another round of bad news from the DOE which turned them down for a loan guarantee. GTO Resources (GTORF.PK), a mostly unknown Canadian geothermal company, which previously had a market cap of about $68 million, just announced the completion of a $179 million equity financing deal.

The only one we can really get excited about here at TheGreenInvestor.com is about to graduate from being an exploration and development stage company to a revenue generating electricity producer. Its multiples are about to change.

Disclosure: No positions