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Geothermal Industry Continues To Struggle for Acceptance

Last March, Renewable Energy World covered the 2011 version of the Annual U.S. Geothermal Power Production and Development Report that was released by the Geothermal Energy Association (GEA). The tone was decidedly optimistic, with high expectations swirling around a forecasted wave of investment from private as well as government sources. Now, six months later, we revisit the report to see how the industry fared.

On the plus side, the industry “remains on track to add 700 megawatts (MW) of capacity by 2013,” said GEA Executive Director Karl Gawell. He noted that the industry has 27 projects in Phases III (drilling) and IV (construction).

Even though in many cases, projects move forward in secret in order to keep ‘spoilers’ from tying up surrounding properties, Gawell pointed to a recent Environmental Protection Agency’s announcement of receipt of final Environmental Impact Statements (EIS) on a series of projects as proof that the industry is indeed moving forward.  These EIS approvals are for projects that will be built at Salt Wells, Nevada. The plans are for five geothermal power plants ranging from 30 to 60 MW each that will be driven by 71 wells. Ormat Technologies, Inc. will develop one plant in this project with Gradient Resources handling the other four.

Ormat, as a public company, is more open about its ongoing work. It alone has 124 to 129 MW under construction in the U.S, not including the Salt Wells, and two more projects of up to 45 MW under development elsewhere.

The March progress report also anticipated “renewed capital investment.” Gawell said that the GEA had “started to see money loosening the 1st of the year, but this has since contracted” with the lack of economic growth. However, he added that projects already going forward do have the necessary funding lined up.

The lack of private capital echoed throughout our investigation. A number of respondents, including Gawell, noted the large incubation periods for geothermal projects – five to seven years – that means the first steps for a project come with the highest risk. Thus, the geothermal company itself must often fund the exploration work that is needed to prove a geothermal resource. 

Warren Dewhurst, Founder of the Dewhurst Group, a pure-play geophysical services company catering exclusively to the geothermal industry, explained that these critical first steps are not being taken. “The money is not flowing for exploration and needs encouragement,” he explained. He added that EPA funds are targeting Enhanced Geothermal Systems (EGS) and other research and development, and the DOE’s loan guarantees are going to power plant construction and operation, leaving exploration high and dry.

From Dewhurst’s perspective, there has not been an uptick in exploration work in the U.S. He said his company has one job pending in Colorado, but most of the exploration activity is in South America, Indonesia and Africa.

Bill Rickard of Geothermal Resource Group, Inc. said his company, which does geothermal energy exploration, on site drilling management and development planning, has seen additional engineering (drilling) work but had also not seen an increase in exploration.

Rickard explained that banks are demanding “budgets be increased by 25% to take higher risks into account.” Perhaps this is the price the industry must pay for having painted overly rosy pictures in years past.

One company that isn’t having difficulties finding funds is Gradient Resources. This past April, Montgomery Street Financial (MSF) announced that it had arranged a $13 million secured loan for the geothermal firm to continue development of its three geothermal projects: Patua, Salt Wells and Fallon, all in Nevada. Since 2007, MSF has raised over $225 million of debt and equity for Gradient Resources. 

When asked why his company has been so successful in funding Gradient, MSF’s CEO Richard Rogers said Gradient has three things going for it: 1) they have the richest property (resource) position; 2) they have a very qualified management team; and 3) they have committed private equity sources in hand.

Hannon Armstrong’s Senior VP of Project Finance Brian J. Harenza echoed this, saying geothermal companies “need to be in good geothermal areas, have verified their resource, contracted to sell the power to a credit-worthy off-taker, and have a construction plan that is financeable,” saying in effect that the money will flow once the resource risk has been eliminated. The company is funding the Hudson Ranch project in the Salton Sea area, which fits all the criteria

Addressing the industry’s continuing difficulties finding backing, he said, “25 years ago it took 2 ½ years to get a project done. Now it takes 5 to 7 years. There is no fast track.” This is an issue that was raised by everyone we spoke to, and may have the beginnings of a solution on the way in the form of two bills pending in Washington. One would cut the permitting process for geothermal exploration on federal land when the developer already owns a lease and the second would allow federal oil and gas leasees to produce geothermal power.

Then there is what will no doubt be ongoing budget wrangling on Capitol Hill. Gawell said, “No one feels safe. The current tax credits may be on the table [to be cut] in the fall.” Washington D.C. law firm Van Ness Feldman, which counsels geothermal companies among others, actually sent a letter encouraging “all of our clients and friends to identify now both the current federal programs as well as the current tax provisions that benefit their businesses, quantify the importance of these provisions to your businesses and contact us about developing a strategy to protect these provisions or find alternatives to these provisions.”

MSF’s Rogers said the tax credits barely provide any help as it is. “Japan,” he notes “passed a feed-in tariff shortly after the tsunami to encourage geothermal.” He feels the U.S. should do the same.

Despite what may sound like negativity, Rogers and other respondents (who didn’t want to be quoted) wanted to be clear that they are not “down on the industry.”  He and the others I interviewed continue to see great potential in the geothermal energy and bemoan the lack of support from policymakers and geothermal’s lack of visibility in front of the general public.

As Gawell said, “regardless of the debt limit deal, energy and environmental issues remain.” All 50 states broke heat records in July, which points both to possible environmental connections and to the continued growing need for energy in the U.S.

The country’s geothermal industry remains poised to help.

 

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