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Avinash Gandhi

Isaac Middendorf

Shannon McVey

Whether it stems from the burning of fossil fuels or the decay of radioactive rocks, heat is what drives most modern base-load electricity generation. Most of the ways we humans have of generating enough heat to power our factories, offices, and homes have unintended side-effects: pollution, greenhouse gases, nuclear wastes, not to mention the tremendous cost of exploring and extracting fuel sources from the earth. All these effects occur because we generate the heat ourselves, tossing millions of tons of coal into furnaces; if we were able to find an external, natural, continuous heat source, however, we might be able to evade such problems.

Our planet offers us a solution from deep beneath its crust. The same heat that melts rock into the magma that spews out of volcanoes can be harnessed to spin turbines and generate clean, continuous electricity with few, if any, side-effects. What's more, once the generators that tap this energy are built, there is no more need for costly exploration and mining to obtain fuel, as is necessary with current base-load sources.

Traditional geothermal energy requires "geothermal resources" - underground reserves of water that are hotter than 300º F. Not every part of the planet has such reserves; usually, they can be found in regions where there is volcanic activity, or where two tectonic plates meet. This is why places like Indonesia and the Philippines, which are situated on the Pacific "Ring of Fire", or California, with its myriad fault lines and hot springs, are such strong markets for geothermal technology.

In 2008 the Geothermal Energy Association estimated that 3,000 MW of geothermal electricity was connected to the U.S. grid and 4,000 new geothermal power plants were under development.^[1]

Who Wins from Increased Geothermal Demand

• Ormat Technologies, ChevronTexaco, and Calpine Corporation all own geothermal energy plants. Ormat is the only pure-play geothermal company among these, though Chevron is the largest geothermal energy dealer in the world, with 1,273 MW of installed capacity in Indonesia and the Philippines.^[2][3]
• Nabors Industries (NBR) is a drilling company that drills the deep wells required for geothermal energy.
• Electric utilities get cheaper power from geothermal, especially if plant construction is subsidized. Furthermore, geothermal plants allow utilities companies to meet environmental regulations much more easily. Some companies that already benefit from geothermal adoption include Southern California Edison, Hawaiian Electric Industries (HE) , and Sierra Pacific Resources (SRP).

Who Loses from Increased Geothermal Demand

• Coal companies like Peabody Energy, Massey Energy Company, Arch Coal, and Consol Energy, oil companies like Exxon Mobil, Royal Dutch Shell, and BP, and natural gas companies like EnCana and Chesapeake Energy will see lost potential revenues as an increasing number of base-load power in developing nations like China, Indonesia, and the Philippines use geothermal power.
• Oil and gas pipeline companies like Enbridge, Kinder Morgan, and Transcananda Pipelines (TRP) will lose pipeline demand, as regional power sources (i.e. geothermal) replace those that must be transported over long and costly distances.
• Nuclear energy vendors like Exelon, Entergy, and PG&E will see demand for their power source, which was previously the cleanest base-load option despite the problem of nuclear waste, decline because of the cost and emissions savings of geothermal.
• Wind energy companies like Suzlon, Gamesa, Vestas Wind Systems (VWSYF), and GE Wind will be hurt in regions with strong geothermal resources, as geothermal power is much more reliable than wind power as a base-load energy source (and is nearly as cheap).

Economics of Geothermal

As the price of oil, coal and natural gas continues to rise, power sources without the need for commodity fuels look more and more attractive. Geothermal uses hot water from the earth, which is free and is reinjected into the ground to be sustainable, and maintenance costs only run $0.01 - $0.03 per kWh^[4]. With coal, the traditional source of base-load power in the U.S., costing $0.02 - $0.03 per kWh^[5] and rising, the ongoing cost of geothermal energy is increasingly appealing.

Generating costs of various renewable sources

Startup costs are one of two issues that hold geothermal energy back in the marketplace: your average geothermal plant costs $2500 per kilowatt installed^[6], versus $1200 - $1600 per kilowatt installed for a natural gas plant^[7]. Geothermal is similar to such capital-intensive alternative energies as nuclear energy, which can average up to $3000 per kilowatt installed, and solar power, which averages $8,000 per kilowatt installed^[8]. Despite the fact that geothermal exceeds a traditional natural gas or coal plant's installation costs by $1000 per kilowatt hour, it is one of the cheaper forms of renewable energy.

The second problem with geothermal as a major source of power is that it is limited in scope. Currently, most geothermal technologies require the use of underground water, which cannot be found everywhere. Though some "direct-use" technologies exist which allow the earth's heat to generate electricity, thereby expanding the regional functionality of geothermal almost limitlessly, these technologies have not been fully adopted yet because of cost limitations. Furthermore, the previously stated installation costs don't take into account the preliminary cost of geologic exploration and drilling for underground resources - costs which vary based on the current market for oilfield services. In an environment with high oil prices, increased demand for drilling pushes dayrates up for drilling companies like Nabors Industries (NBR), increasing the overall cost of installation. As long as the technology for geothermal energy requires liquid geothermal resources, it will require costly exploration and be limited to geologically active regions like the Pacific "Ring of Fire" and the Western United States. Geothermal energy production capacity is estimated to reach around 100GW by 2050.^[9] For comparison, wind generation capacity surpassed 100GW in 2008.

Drivers of Geothermal

The 2008 Financial Crisis and Resulting Recession are Ruining Credit Markets and Reducing Demand for Energy

Companies in every industry are feeling the effects of the 2008 Financial Crisis as budgets shrink and it becomes more difficult to obtain loans and investments. These conditions are especially dangerous to capital-heavy industries, like geothermal, that are expanding rapidly and require large sums of money to do so. Tighter lending practices will not only make it harder for geothermal companies to expand at such high rates but also threaten to decrease demand, as their customers struggle to obtain funding for the expensive projects.

Furthermore, between June 2008 and December 2008, the price of oil fell by two-thirds, or more than $100, to less than $50.^[10] Since the price of oil is used to gauge the price of fossil fuel energy (mostly coal and natural gas in the U.S.), the decline was an indicator that base-load energy prices were falling. As the prices of traditional forms of base-load energy decline, the opportunity cost of transitioning to geothermal increases, reducing demand.

Renewable Energy Demand

Shifts in energy demand are a major driver for the geothermal market; increasing demand for alternatives to oil, coal, natural gas, and other fossil fuels have the potential to cause a paradigm shift for the renewable energy industry as a whole, and geothermal has strong potential to ride the wave. Two major drivers of this shift, climate change and peak oil, are becoming increasingly important in the eye of the public.

Climate Change

With Al Gore and the IPCC winning the Nobel Peace Prize in 2007 for their work spreading awareness about climate change, more people than ever are aware of global warming and its potential effects, and fear of the repercussions of a carbon-based energy scheme is driving consumer demand for alternatives like geothermal, which releases little to no greenhouse gas.

Peak Oil and Energy Independence

Oil prices are at record highs and it is becoming more and more difficult to find reserves; at the same time, emerging markets are driving increased energy demand, driving up the price of traditionally cheap and abundant fuels like coal. Many suspect that we have reached or will soon reach peak oil, a condition that will drive energy prices through the roof. Furthermore, a large part of the world oil supply can be found in politically turbulent countries that are rife with terrorism; with OPEC dominating the world oil supply (and, therefore, prices), many countries desire energy alternatives in order to break dependence on geopolitically unstable nations.

Rising oil prices are a double-edged sword for geothermal energy. Since higher oil prices lead to increased drilling demand by oil and gas companies, dayrates for land drilling companies go through the roof, causing initial costs for geothermal energy to greatly increase as well. These increasing costs partially offset the increased demand for geothermal caused by more expensive fuels.

Government Incentives

Thus far, governments have been major drivers of the geothermal industry. There has been much legislation recently passed that supports the development of geothermal resources:

• On March 9, 2009, the U.S. Energy Department announced that it was going to give away about $84 million for geothermal energy research.^[11]
• At the end of May 2009 the Obama administration announced over $467 million dollars from the American Recovery and Reinvestment Act to be used to expand and accelerate the development, deployment, and use of geothermal and solar energy. $350 million will be used for geothermal demonstration projects, enhanced geothermal systems technology research and development, a national geothermal data system and innovative exploration techniques.^[12] Then in June 2009 a $50 million program to encourage the installation of geothermal systems was announced. The program included grants for cost-shared technology for demonstration projects that incorporate a minimum of 50 tons of heating and cooling capacity, also grants to improve the technology of geothermal systems and the creation of a national certification process to increase consumer confidence in geothermal systems.^[13]
• As part of the American Recovery and Reinvestment Act of 2009 renewable energy grants became available to cover the basis of between 10 and 30% for qualified properties and other incentives including up to $200 per kW for qualified microturbine property and 50 MW for Combined Heat and Power (CHP) property.^[14]
• Renewable Portfolio Standards that set varying targets for the amount of energy to be obtained from renewable sources by certain dates have been enacted by 26 states. For example, California (the state with the most major Ormat customers, including Southern California Edison) has targeted reaching 20% renewable energy usage by 2010; Hawaii, the state with Ormat's 2nd largest customer, has targeted 20% by 2020^[15].
• The European Union has stated that its goal is to get 22% of its energy from clean sources by 2010.
• China passed a Renewable Energy Law aiming to raise the total percentage of renewable energy used in the country to 10% by 2020.

For the foreseeable future, government intervention looks likely to increase, with the more Renewable Portfolio Standards and some form of carbon trading system or carbon tax in the U.S. Both should favor geothermal energy. Furthermore, since installation is where most of the cost of geothermal lays, once geothermal plants have been installed (due to government requirements and/or financial support), geothermal companies will continue to be competitive - even when legislative support runs out.

Water is a Limited Resource

As water scarcity becomes a more prevalent issue, geothermal plants, which harness underground reservoirs of clean water, will see pressure in the form of environmental opposition of nationalization of water resources. Many geothermal plants, however, have (more expensive) closed cycle systems that reinject water back into the earth, allowing for water conservation. In the future, this technology, as well as "direct-use" technology that uses the earth's heat directly (instead of hot water), will become more important to develop, in order to keep geothermal competitive.

New Direct-Use Technologies are Emerging

There are some exciting direct use technologies emerging particularly in the Air Conditioning Industry.

A few companies including EarthLinked Technologies, distributed by EnergyCore in Australia and Earth To Air Systems have developed Direct Exchange geothermal heat pumps, which has eliminated the heat exchange step required through water - it is a water-less platform except for any internal water heating and chilling.

This technology has also overcome the installation challenges normally associated with geothermal and in particular cost. DX Technology is patented, was originally developed in the US is now in Australia and Asia. It is relatively new and very exciting.

DX geothermal technology is able to supply space heating and cooling for commercial and residential buildings as well as commercial hot water heating. The capacity and technology therefore exists to apply direct use on a larger scale.

Air conditioning is an area of geothermal that has wide application prospects, and significant environmental benefits - geothermal is the greener, cleaner energy choice.

References

1. ↑ "Geothermal Industry Leader Says Stimulus Bill Should Sustain Industry Growth," Geothermal Association Press Release, Feburuary 14, 2009
2. ↑ Chevron Website-Geothermal, accessed on February 2, 2010
3. ↑ Ormat Technologies Website, accessed on February 2, 2010
4. ↑ U.S. Department of Energy, Energy Efficiency and Renewable Energy: Geothermal FAQ
5. ↑ Response to “Costs of Solar to match coal by 2010?”, Richard Graves, April 11th, 2007
6. ↑ U.S. Department of Energy, Energy Efficiency and Renewable Energy: Geothermal FAQ
7. ↑ http://www.memagazine.org/mepower03/bbuster/bbuster.html
8. ↑ http://www.wind-works.org/Solar/SolarPVCurrentInstalledPricesperkWinCaliforniaElsewhere.html
9. ↑ Idaho National Laboratory The Future of Geothermal Energy
10. ↑ Financial Times: "Crude oil prices tumble $100 in five months"
11. ↑ UPI - U.S. Energy Department funds geothermal
12. ↑ Over $467 Million in Funding Announced for Geothermal and Solar U.S. Department of Energy- Energy Efficiency and Renewable Energy, May 27, 2009
13. ↑ "Rest of DOE stimulus allocated to geothermal heating/ cooling" ThinkGeoenergy.com, June 2, 2009
14. ↑ Database of State Incentives for Renewables and Efficiency- Renewable Energy Grants
15. ↑ Descriptions of State Renewable Portfolio Standards