WHAT GEOTHERMAL WOULD DO WITH MONEY

Financing Challenges for Geothermal Power
Jim Witkin, November 10, 2009 (NY Times)

SUMMARY
Venture capitalists in Silicon Valley are, for good reason, hot for geothermal energy, often called "the earth’s heat."

It is an abundant, emissions-free, renewable and cost-competitive source of baseload (24/7) electricity generation.

But the big banks that finance the geothermal projects the VCs want to drill? Not so hot for it.

The fate of geothermal energy’s short-term future hangs in the balance.

That’s the basic message of United States Geothermal Energy Market Report and Financing geothermal projects in challenging times, both from Islandsbanki, an Icelandic bank that specializes in financing geothermal projects.

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Islandsbanki sees the U.S. geothermal industry in need of $26 billion to complete projects now in development and foresees the bulk of that need coming due in the 2011 through 2013 period.

Iceland gets almost a third of its electricity from geothermal energy, so Islandsbanki knows the subject about as well as anybody can. If Islandsbanki says the potential is there and the financing will come back, it’s probably safe to take that to the bank – which, by all reports, is what the Silicon Valley VCs are trying to do. The banks, however, are only just beginning to get back to the VCs.

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COMMENTARY
The earth’s core is ~5,500 degrees centigrade, about the same as the sun’s surface. Conventional geothermal energy is captured from underground reservoirs when boiling water and/or steam saturating the deep hot rock, 2 or more kilometers deep, is released by drilling and piped up to a geothermal power plant, where it drives turbines to generate electricity.

17 of the world’s nations generate electricity with geothermal energy and another 19 are developing projects. The world’s installed geothermal energy capacity is 10,500 megawatts, with 18% growth since 2005. The top five geothermal producers are the U.S., the Philippines, Indonesia, Mexico and Italy.

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Estimates of the world’s capacity must necessarily be highly imprecise because newer but still immature enhanced technologies could produce heretofore unheard of levels of production but using proven, conventional geothermal technologies, the Pacific Rim “ring of fire” nations of Asia, North and Latin America – which today have a 10,500 megawatt capacity – could produce 170,000 megawatts.

The U.S. gets about 0.4% of its electricity from geothermal energy but that share is getting bigger. In the last year (June 2008 to June 2009), U.S. electricity generation fell by 165 terawatt-hours while geothermal generation rose by 44 terawatt-hours.

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From August 2008 to August 2009, installed/online U.S. geothermal capacity grew 7%, from 2,958 megawatts to 3,153 megawatts. California has 82% of that capacity (2,605 megawatts) and Nevada has 14% (450 megawatts).

8 states have producing geothermal projects (California, Nevada, Utah, Hawaii, Idaho, Alaska, New Mexico, Wyoming). The last 3, with less than 1 megawatt each, are just getting started. Producing projects increased 36% in the last year, from 97 to 132.

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Projects now in development will add 6,400 megawatts to U.S. capacity, a 60% increase that will top the 2007-to-2008 increase of 54%. The biggest action is in Nevada, which has 60 projects (3,300 megawatts) underway, twice what California (1,900 megawatts) is now developing. Oregon has 13 projects. Arizona, Colorado and Florida are also about to be added to the list of geothermal producing states.

Here’s the kicker: Projects now in development will require $26 billion in financing, two-thirds of that between 2012 and 2014. If they don’t get $5.8 billion in 2012, they will not be able to go forward.

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Geothermal projects, which generally take 5-to-7 years from proposal to production, have 5 phases of development:
Year 1: Exploration (permitting, legal work, etc.); Financing comes from venture capital provided by developers, independent power producers, resource speculators and venture capitalists.
Year 2: Pre-feasibility (geophysical, geochemical, geologic surveys and measurements and temperature gradient drilling); Financing comes from development equity.
Year 3: Feasibility (focused exploration and data collection); Financing comes from drilling equity provided by private equity, public markets and financial partners.
Year 4 & 5: Design and Construction and Start of Operation (drilling, confirmation, final testing and design); Financing in year 4 comes from project equity provided by private equity and strategic partners. In year 5 tax equity financing comes from financial partners and large independent power producers.

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Job opportunities in the geothermal industry fall into 3 major categories and a set of support services: (1) Technical services are provided by drillers; (2) Construction services are provided by contractors; (3) Equipment suppliers serve both the drillers and the contractors; and (4) Support is provided by consultants.

A Western Governors Association (WGA) 2006 study and a U.S. Geological Survey (USGS) 2008 study estimated U.S. geothermal potential, as did studies from MIT and the National Renewable Energy Laboratory (NREL).

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The WGA study put the potential through 2015 at 5,600 megawatts and the potential through 2025 at 13,000 megawatts.

The USGS study looked at both conventional and enhanced potentials. It found 9,057 megawatts of potential from identified conventional resources, 30,033 megawatts from unidentified conventional resources and 517,800 megawatts of potential from enhanced geothermal system (EGS) resources.

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Enhanced geothermal system (EGS) technology also uses the heat of the deep hot rocks but pipes cold water down to them and brings steam back up to drive turbines. Because it does not require already-wet reservoirs, it is potentially much more abundant. By recapturing the steam, it does not have to be water intensive. But because the hot rocks it needs to access are typically much deeper, there are concerns about deep drilling causing seismic instability.

The MIT study found 100,000 megawatts of combined conventional and EGS potential through 2050.

The NREL study found 71,600 megawatts of conventional potential and 126,300 megawatts of total (including EGS) potential.

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The same factors that other New Energies depended on in the pre-Recession period to drive growth also supported geothermal expansion, primarily production and investment tax credits that attracted “tax equity investors.”

After September 2008, investors with profits dropping had little use for tax credits. Geothermal floundered but is in the process of using American Recovery and Reinvestment Act (ARRA) benefits, Treasury grants and loan guarantees to recapture its momentum. State Renewable Electricity Standards (RESs) are also driving utility investment.

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Pending energy and climate legislation that establishes a national RES, puts a price on greenhouse gas emissions (GhGs) and moves further benefits away from the Old Energies to emissions-free power generation will likely further drive investment in conventional and EGS geothermal production.

The bank concludes its report with a list of Opportunities and a list of Challenges ahead for the geothermal industry.

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Opportunities:
1-The stimulus fund has opened up investment in projects and in R&D
2-Political support has increased
3-Market consolidation is building momentum
4-Resource estimates are attracting attention to the big potential
5-Oil and gas sector players, familiar with drilling technology, are getting interested
6-Plans for new transmission will boost access

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Challenges:
1-Financing will continue to be tight
2-Small players may not get financing
3-Reduced electricity demand may siphon momentum from new exploration
4-Current questions about seismic effects of EGS will slow all geothermal projects
5-Stimulus funding may be too short-term to meet 2011-thru-2013 needs
6-Oil and gas sector players could drive out other producers or could prove inconstant investors
7-Increasing numbers of projects could lead to personnel shortages
8-Drilling may have risks the U.S. geothermal industry does not have the tools to mitigate

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The long-term potential for geothermal energy remains outstanding but, despite the best description the bank can give them, short-term prospects are clearly unclear.

Worth noting: The direct use of geothermal energy for heating in various settings (space heating, district heating, cooling, greenhouse heating, fish farming, agricultural drying, industrial processes, snow melting, bathing and swimming) is also increasing and the use of geothermal heat pumps is a growing small business opportunity.

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QUOTES
- Arni Magnusson, Executive Director, Islandsbanki geothermal energy team: “The availability of financing continues to be challenging and will a strong impact on how quickly current projects will be developed. In the near term, financing costs will remain at high levels, impacting owners’ anticipated returns. The industry will also be challenged by very selective investors, who are currently favoring wind and solar projects. But there are also investors, that financed geothermal projects in the past (e.g. pension funds), who could come back into the sector. They are looking for stable, predictable and long-term investment opportunities, which geothermal could offer…Despite the challenges that the industry faces today, the outlook is positive and the geothermal industry should grow further in the years to come.”

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- From the report: “Beyond cost and other factors, the capacity factor – the ratio of actual power output over a period of time to its output if operated at full capacity around the clock – is probably one of the most convincing arguments for geothermal energy. Geothermal energy can be utilitized almost around the clock with average capacity factors of around 90-95%…Geothermal is also cost competitive both in terms of the installation cost and the cost of electricity generation. Taking into account the long life span of a geothermal plant, its up-time, base-load capacity and predictability, it provides a levelized cost of electricity that is very cost competitive against not only renewable, but also traditional energy sources.”

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- From the report: “Islandsbanki estimates the overall investment needed just for current projects at US $26 billion. The largest investment is clearly needed for the drilling campaign and the actual construction of power plants. As a large number of projects are in the early stages of development, the major investments needed to drive today’s projects forward will be required in 2012 and 2013, both of which years represent around half of total investment needs for current projects. About US $2 billion is needed for the latter part of 2009 and for 2010. The largest investment needs for drilling are likely to be in 2011, with US $3.4 billion needed for projects at this stage of development. By 2012 the industry will need large construction financing, which will see a large increase again in 2013, maintained at the same level in 2014…Looking at the development pipeline, the industry needs a total of US $11 billion in equity investments and about US $15 billion in construction financing until 2015.”