Nevada, United States [RenewableEnergyWorld.com] In October of 2008, Alexander Richter wasn’t sure he would have a job when he returned home to Iceland from a geothermal conference in Nevada. As director of global geothermal development at Glitnir Bank — one of Iceland’s three main banks that was nationalized that month — he was staring into a bleak and uncertain future. And so was the rest of the geothermal industry.
Just one year before, Glitnir announced plans to invest over a billion dollars in the U.S. Geothermal market through 2012. That would would have represented roughly 10 percent of all investment in the country. Richter and his colleagues were excited by the new growth that was occurring in the U.S., a market that had been dormant for more than a decade.
By the following fall, however, Glitnir was swept up in a perfect storm of financial troubles, resulting in a government take-over and forcing the bank to scale back investment plans in the U.S. It was a big blow to the industry, but it was just the beginning. Around the same time, many other financial institutions pulled out of the debt and equity markets, leaving the hot geothermal industry in the cold.
“It was a surreal experience, to say the least,” says Richter. “No one knew what would happen.”
A year later, in 2009, Richter wanders the isles of the same conference in Reno, smiling warmly at passersby and stopping occasionally to greet people in their booths. He seems remarkably happy for a person who’s been stuck in the middle of the worst financial crisis in 80 years.
It turns out that Richter didn’t lose his job. Over the last 12 months, as many of his friends and colleagues were tossed out of the banking world, he and a few other members of the former geothermal team were kept together to manage sustainable energy investments for the bank, now called Islandsbanki. Although the team has substantially scaled back operations, they are still very focused on the U.S. geothermal market.
“Naturally there are limitations to what we can do, but there’s an interest by the [Icelandic] government and our creditors to continue our work,” says Richter. “We’ve always believed strongly in the geothermal sector, and we have continued to stay in the industry in various ways.”
For the Islandsbanki team, that has meant focusing more on advisory-related services rather than directly investing in companies and financing projects. Richter says that the bank plans to announce more debt-finance activity in the coming months. In the meantime, the sustainable energy team at Islandsbanki watches the U.S. geothermal market — the world’s largest — eagerly awaiting the day when it can play a more active role.
“Very clearly we are looking to the U.S. This is a very mature market…you have a pipeline of projects that is impressive,” says Richter.
According to figures from the Geothermal Energy Association and Islandsbanki, the number of projects in development throughout the U.S. increased by 60 percent in 2009, to 144. If those projects go forward, the U.S. could add another 6,400 MW of capacity in the next five years, resulting in almost 10 GW of total capacity. That’s equal to today’s global installed capacity.
If history is any guide, there is a good chance that up to a quarter of those projects will not get completed. Factor in the tight debt and equity markets and that number could fall further still. Islandsbanki projects that more than $25 billion will be needed by 2014 in order to see those projects through.
In order to ensure that the industry stays strong through the ongoing economic downturn, the U.S. government has begun throwing hundreds of millions of dollars into the geothermal space in recent months. The impact of the stimulus funds are still unknown: Many companies may not qualify for certain pieces of the program because of how long it takes to build out projects. But recently announced funds are signaling investors like Islandsbanki that the U.S. is intent on continuing to build the geothermal industry.
“There are some uncertainties about if companies will be able to access some funds. But the stimulus shows us that the government is serious about geothermal. That can only be a good thing for attracting investors,” says Richter.
Geothermal can be a risky space to be in. It takes many years and many millions of dollars — sometimes three fifths of a project’s cost — just to explore a resource and drill a test well. That makes the industry particularly vulnerable to the conservative mindset in the financial markets.
Given that many of the projects underway in the U.S. and around the rest of the world today are relatively new, financing needs for the exploration and project feasibility stages are high. Therefore, many developers are in the tough position of asking venture capital and private equity firms for millions of dollars to determine the viability of a project.
“That’s where the risk is in this business, on the front end. You need investors who understand that risk and are willing to take it — and right now, not many are,” says Frank Monastero, President of Magma Energy, a rapidly-growing Canada-based geothermal developer.
Once a resource is established, geothermal is a remarkably safe business to be in, says Monastero, who is also president of the Geothermal Resources Council. On average, geothermal power plants are online 95% of the time, creating a stable, predictable revenue stream for project owners. That is especially true in the U.S. where state renewable portfolio standards, federal tax credits, loan guarantees and cost-shared drilling programs are making geothermal an attractive investment for those willing to accept the risks in exploration. For those reasons, Magma Energy is focusing a lot of attention on the North American market, which is still seeing healthy growth despite many of the financial problems that companies are facing.
“Of course, the financial crisis has been difficult for everybody. But that doesn’t mean that growth has stopped. In fact, we’re seeing unprecedented demand for the power,” says Monastero. “Because of that we still see new entrants coming into the market and new partnerships to help finance projects.”
In the last six months, the industry has seen some consolidation as cash-hungry developers in the early development phases look for help. In August, Western GeoPower and Polaris Geothermal — two companies listed on the Toronto Stock Exchange — merged with Ram Power, another developer formed in 2008. Ram Power subsequently raised $165 million to finance projects in the U.S. and South America.
On the technology side, Pratt and Whitney, a provider of low-temperature geothermal units, acquired a majority stake in turbine-manufacturer Turboden. And Japan-based Fuji Electric has also announced plans to enter the low-temperature binary-cycle geothermal space to challenge Pratt and Whitney and industry-leader Ormat.
“There is still activity. It’s not like things have shut down,” says Monastero. “There are plenty of opportunities out there.”
Magma has only been around for 20 months. In that short period of time, the company has amassed a portfolio of 17 projects around the world, ranging from fully-operating power plants to lease holdings. After raising $39 million in private capital in its first 13 months, Magma went public on the Toronto Stock Exchange this July. The company was planning to raise $50 million, but was offered $110 million. This has allowed Magma to undertake an aggressive growth strategy in the U.S., Iceland and South America.
Being well capitalized, Magma is taking advantage of market opportunities created by other struggling developers. Some of the assets that Magma has acquired are from companies that can’t afford to move forward on projects. The company now owns a 42 percent stake in the Icelandic geothermal company HS Orka and plans to own a controlling stake in the near future. By stepping in and buying up the power producer for pennies on the dollar, Magma has established itself as a major player in one of the top geothermal markets in the world.
“This is a great opportunity for us to expand our development pipeline. We really feel like this will help us grow as an internationally-renowned geothermal company,” says Monastero.
The U.S. still offers the most opportunity for the company, however. About 60 percent of the company’s projects will be in the American market. Interestingly, this Canadian company is developing no projects in Canada. Because of lack of government support on the federal and provincial levels, there are no geothermal power plants in operation today in Canada.
The differences between the U.S. and Canadian markets highlights what is keeping geothermal companies like Magma stable through this financially-difficult period: Government support. The U.S. government has made geothermal more of a priority in the last year, opening up new opportunities in the world’s largest, most diverse geothermal market.
“Geothermal has traditionally taken a back seat…Until about three years ago, the industry was really dead…Now we see a lot of new activity because of this increased support,” says Lisa Shevenell, a hydrologist with the Great Basin Center for Geothermal Energy at the University of Nevada in Reno.
In October, the U.S. Department of Energy announced that it would release up to $338 million in grants from the recent stimulus package in order to help pay for expensive early-stage development. These grants are the largest amount of money the industry has seen from the government in the last 30 years. The funds are expected to be released to around 120 companies, academic institutions and local governments working to build new types of power plants and develop new drilling and exploration technologies. Companies like Magma, Ram Power and the EGS Developer AltaRock have already qualified.
In addition to these funds, companies are able to take an investment tax credit or a cash payment from the treasury in lieu of the production tax credit, which has been more difficult to monetize because of the limited number of companies involved in the tax equity market. However, in order to qualify for the grant program, a project must be completed before the end of 2010. Given that most projects in the U.S. are in early stages of development, the number of projects able to take advantage of the grant program will be limited.
“It’s going to be hard for many of these companies to access stimulus funds from the Treasury’s grant program,” says Shevenell. “The sunset date is too soon for a lot of them to qualify. This has been a problem with the production tax credit in the past.”
While the short life of the grant program may hinder some projects, the announcement of cost-shared grants for exploration and drilling will surely help the large number of companies in the early stages of project development. That is where the projet pipeline is heavily skewed in the U.S., so that is where the need is greatest, says Islandsbanki’s Richter. According to the bank, in the next two years, U.S. drilling and exploration investments will need to reach $5.5 billion.
“The capital needs for the industry right now are very high,” says Richter. “But the availability of capital is limited. The government is playing a big role during this critical time of new growth and we think it will have a positive impact on investment.”
Richter sits back in his chair and gazes at a far wall with a thousand-yard stare, reflecting on where the industry is today. It’s still tough for many companies, including his own bank. But unlike this time last year, he’s not staring into the unknown. Instead, he’s looking at an increasingly-healthy, $25 billion U.S. market that could once again make Islandsbanki a leading financial player in the geothermal industry.
For more in-depth interviews on geothermal, see last month’s Inside Renewable Energy podcast series:
Part 3 — Why Geothermal is Both Hot and Cool