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Geothermal is Starting to Get Real

|Includes: Ormat Technologies, Inc. (ORA)
Until now, you had to live on the side of a volcano for geothermal energy to work profitably, as in Iceland, where lucky residents can sink a pipe a few hundred feet in their backyard to get a lifetime of free heat. Elsewhere, they had to be kept alive by massive dollops of subsidies in order to produce very high cost electricity for local utilities. But $350 million in new research funded by Obama’s stimulus package is threatening to finally make it economic. The first oil crisis in the seventies spawned firms like Calpine, which exploited massive geyser fields in Northern California marked by hundreds of steam plumes. Unfortunately, low oil prices and technical difficulties, like constantly clogging pipes, starved the industry of new capital, and Calpine went bankrupt.  Now, a breakthrough technology called Enhanced Geothermal Systems (EGS), where water is pumped down through pipes to 16,000 feet and comes back as superheated steam to run a conventional turbine, is promising to drive costs down dramatically. These plants use minimal amounts of land, conserve water with their closed systems, and unlike solar and wind, operate 24/7. Once built, they produce power at 6.9 cents/kw, vs. 3 cents for coal, 12 cents for wind, and 15 cents for solar. The downside is that these plants are expensive to build, face permitting bottlenecks, need new transmission lines , and may cause earthquakes, so they can’t be built near populated areas. The play here is that utilities in many states, like Pacific Gas & Electric (PGE) in California, are legally obligated to obtain high percentages of the power from renewable sources in the near future, whatever the cost. In PGE’s case it is 20% by 2017. The Golden State already leads the world in geothermal output, and this will double from 2,605 MW by 2015.  A larger installed base will bring economies of scale and a further drop in costs. The recent excitement caused Magma Energy’s (OTCPK:MGMXF)  $87 million IPO to be oversubscribed. Better value can be found in Reno, NV based Ormat Technologies (NYSE:ORA), which boasts operations in the US, Israel, the Philippines, Kenya, Nicaragua, and New Zealand. Check out their website by clicking here at www.ormat.com/