Ormat Technologies: How The Company Could Benefit From California Regulation

Aug. 30, 2021 5:13 AM ETOrmat Technologies, Inc. (ORA)1 Comment
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Summary

  • California’s regulator issued a ruling that could increase geothermal generation in the state by at least 1GW by 2026.
  • If it wins the same amount of new business in California as its existing global geothermal market share, Ormat Technologies could increase its geothermal capacity by around 70MW.
  • Geothermal has a niche as a dependable renewable energy generator.
4 steel chimneys with smoke from geothermal energy
Rhoberazzi/E+ via Getty Images

California’s CPUC required electric load service entities to procure 11.5 GW of new clean electricity by 2026. Of the 11.5 GW, 1GW will likely be geothermal given the California regulator's insistence that at least 1,000 MW of generation capacity has no on-site emissions or is eligible under the requirements of the renewable portfolio standard program, has at least an 80% capacity factor, and not be use-limited or weather-dependent. Storage projects also don’t qualify for that 1GW.

Although the new California rules are not a mandate for geothermal, the power source is best suited for the requirements.

Given Ormat Technologies, Inc. (NYSE:ORA) is the world’s second largest geothermal company, it could potentially benefit directly or indirectly.

What the California News Means to Ormat Technologies

Given the amount of geothermal that likely needs to be added by 2026, Ormat Technologies will likely benefit directly or indirectly from the new California regulation.

Ormat Technologies currently has around 954 MW of geothermal production capacity out of the globe’s total of global installed geothermal capacity of 13.5 GW, giving it a global market share of around 7%.

If Ormat Technologies wins its current market share worth of contracts in California, the new requirements could add 70 MW worth of business for Ormat Technologies.

Given Ormat Technologies' market share in geothermal in the United States is greater than it is globally, the company could potentially win even more MW worth of business from the new California regulations if it maintains its U.S. market share.

In terms of its U.S. market share, the United States has a geothermal installed capacity of around 3.6GW and Ormat Technologies has generation capacity of 730 MW in the United States, of which a substantial percentage is likely geothermal. 94% of Ormat Technologies' global operation electricity generation is from geothermal and 63% of the company's electricity segment revenues were from the United States in 2020.

In the future, new potential demand from California could also mean M&A opportunities for Ormat Technologies as well that could potentially add value.

Furthermore, the California regulation could indicate future regulation that supports geothermal.

Given California is one of the most progressive states in terms of adopting renewable energy to reduce emissions, the state is at the forefront of renewable requirements. If California makes requirements that suit geothermal very well, other states could potentially do so in the future too, particularly in America’s West where most of the country’s geothermal resources are located.

There could be more demand from California in the future as well. California has a lot of geothermal potential and California has a goal of generating 100% carbon free electricity by 2045.

According to an LA Times article in 2020, some California regulators contemplated doubling the state's geothermal capacity by 2030. In 2020, California had 40 operating geothermal power plants with installed capacity of 2,712 megawatts.

How Geothermal Compares to Other Renewables

In many cases, wind and solar have lower levelized cost of energies than geothermal.

The levelized cost of energy doesn’t reflect geothermal’s total value, however.

Geothermal is a renewable resource that can be fully counted on when needed. This makes it different from wind turbines and solar panels which may not necessarily provide the power that’s needed if there isn’t enough wind or sunlight. Although solar can be cheaper than geothermal, solar sometimes cannot generate power the grid needs during peak times, for instance.

To meet demand during peak times, many grids use natural gas peaker plants which can have higher levelized cost of energy than geothermal.

As a result, geothermal has a niche in the renewable future if regulators elsewhere follow California’s regulators. If geothermal companies can find ways to make the levelized cost of energy of geothermal even more competitive, there could be even more demand as well. Once they start work on geothermal projects, geothermal companies can also make long-term contracts with utilities to reduce uncertainty.

Risks

Given the costs of other renewables and energy storage are declining, geothermal will need to lower its levelized cost of energy to be competitive for many new projects. If governments mandate or support geothermal, there is also additional potential demand regardless of the cost of wind, solar, and storage. For the 1GW of new opportunity, for example, California’s regulators wrote that storage projects don’t qualify.

Ormat Technologies will need to meet or grow its market share in geothermal. If it loses market share or if it doesn’t meet the market’s expectations in terms of market share or profits, the stock could face headwinds.

Insider Monkey Holdings

For the filing period ended June 30, 2021, Ian Simm's Impax Asset Management was the largest holder among the funds we track with a holding of 2,197,267 shares. At the end of June, the fund's holdings in Ormat Technologies were worth more than $152 million and accounted for 0.67% of Impax Asset Management's 13F equity portfolio.

Impax Asset Management’s holdings in Ormat Technologies for the June filing period were also 9% higher than the fund’s holdings in the stock in the March filing period.

Potential

Given the analyst EPS estimate of $1.41 for 2021 and $1.99 for 2022, Ormat Technologies has a high valuation for a utility.

Given its stock price of $69.82 as of August 27, 2021, Ormat Technologies would trade at a forward P/E valuation of 49.5 for 2021 and 35.09 for 2022.

Given its potential for MW generation growth in geothermal in the future, however, Ormat Technologies has more growth potential than most other utilities and the stock still has upside in the long term.

Ormat Technologies is also branching into solar and energy storage, two areas that will likely be substantial growth markets in the next decade.

If management can successfully generate value from solar and energy storage as well, Ormat Technologies would also be more diversified.

This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is written by our analyst Jay Smith. Insider Monkey doesn't recommend any positions in ORA in its premium newsletters.

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