Geothermal Archives


May 18, 2017

US Geothermal Fizzles

by Debra Fiakas CFA

Geothermal power generator US Geothermal (HTM:  NYSE) came up short in reporting financial results for the first quarter ending 2017  -  at least from the perspective of the four analysts with published sales and earnings expectations for the company.  Operating revenue of $8.4 million slipped slightly from the same period a year ago, but produced slightly lower net income of $1.1 million.  The company’s share was $260,000 or a penny per share.  Not good enough say the analyst’s who were collectively looking for two pennies per share in earnings!

Missing earnings expectations has become a bad habit for US Geothermal, having failed to clear the consensus hurdle three quarters in a row.  The previous missed had resulted in modest trimming of expectations.  Investors should be prepared for another round of nipping and tucking in revenue, profit margin and earnings predictions.  The steady drumbeat of lower numbers, and the muted commentary that comes along with it, is usually a drag on share price.

Investors have to question whether a period of price weakness is a good time to pick up shares of a quality company at bargain prices…or a time to run for the hills.  It is May after all, when it is ‘time to sell’.

From a revenue standpoint, US Geothermal benefited from increased output at its Raft River facility after installation of a new production pump at one of the Raft River wells.  That installation was completed in late March 2017, suggesting that the real impact will not be observed until report of the June 2017 financial results.  Unfortunately, the company also faced a setback in the quarter.  The Neal Hot Springs Unit 1 was out of production for five weeks in late January and early February 2017, after vaporizer tubes froze.  The company reported a negative impact on power generation valued at $830,000 due to the equipment failure at Neal Hot Springs.

Total generation was 89,613 megawatt hours in the quarter compared to 93,787 megawatt hours in the same quarter last year.  With Raft River up 100% during the quarter and San Emidio follow up in second place with 98.6% availability for the quarter, it was really Neal Hot Springs with just 82.5% availability that was the cause of the slippage in power production in the quarter. Fortunately, business interruption insurance will cover about 38% of the lost revenue. Property insurance will provide another $2.0 million to repair and replace the damaged equipment.

Management seemed unfazed by turn of events at Neal Hot Springs, reiterating previous guidance for revenue and earnings in 2017.  Revenue is expected in a range of $30 million to $34 million, providing net income in a range of $4 million to $8 million.  US Geothermal’s cut of net income would be $1 million to $4 million.  Thus it would seem that Neal Hot Springs is fully back to normal and with the increased production at Raft River, management is apparently expecting another decent year.  The increased output from Raft River in the first quarter was valued at $200,000 for about one week of power generation.  Simple math provides an incremental addition of $1.2 million for a full quarter, more than enough to make up for the shortfall from Neal Hot Springs in the first quarter.

Importantly, management’s guidance is based on existing production facilities.  There are expansion projects in the works, but potential power from these projects is not included.  Altogether the development pipeline encompasses 115 megawatts of incremental power production capacity.
  • Progress has been made at the Geysers in California where the company is at the point of sourcing turbine generators and is negotiating a power purchase agreement with a single buyer.  The company is targeting end of 2018 for bringing the project on-line.
  •  The company has received permits to deepen three wells in its San Emidio II reservoir in Nevada that could elevate power production at that location from the current 10 megawatts to over 40 megawatts.    Drilling will commence this year when spring weather conditions allow.
  • Additionally, at San Emidio an application for new development of three power plants, twenty wells and a power transmission line has already been submitted to the U.S. Bureau of Land Management.  The company has targeted 25 megawatts to 45 megawatts as the ultimate resource size for this latter expansion project.
  • A geothermal power production project in El Ceibillo in Guatemala is awaiting a request for proposals from the government, to which US Geothermal is planning a competitive bid.  The process is expected to unfold yet in 2017.
Successful commissioning of all these projects would more than triple the size of US Geothermal’s power production capacity, which is around 45 megawatts today.  It will not be accomplished at the hand of current chief executive officer Dennis Gilles.  In late April 2017, the board of directors issued a cryptic press release indicated they would not be extending the employment agreement with Gilles.  A search committee will be looking for a successor to take over after Gilles’ current contract expires in July 2017.  Gilles may still have an influence over operations through an advisory agreement.  If the board could not accept an extension to his employment agreement, what foundation could be built into an advisory role that would be more palatable?

The market has had an opportunity to fully digest the news of Gilles department as CEO.  However, slippage in the first quarter production reminds investors of the many moving parts and sources of business risk inherent in geothermal power production.  Knowledgeable leadership is a key hedge against those risks.  The specter of a shuffle in the boardroom is likely to resurface as a source of worry in the coming weeks.  Thus the price weakness that might ensue following a 'quarter earnings miss' might be deeper and more protracted than usual because of leadership change.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

February 22, 2017

Alterra Power: Deep Geothermal

by Debra Fiakas CFA

Last week, one of the leaders in a development consortium, Iceland’s largest privately owned energy generator HS Orka hf, announced the completion of a project to prove the merits of deeper geothermal wells.  The project in the Reykjanes Peninsula in southern Iceland reached 4,659 meters depth in January 2017, where temperatures measured 427 degrees Centigrade and fluid pressure was 340 bars.  By all accounts the project was successful, suggesting that deep wells could a cost effective approach to geothermal energy.

The drilling program was mentioned in early December 2015 a recent post “Hot Rocks, Warm Stock,” which touched on the option of investing in a larger company, Statoil (STL: SW or STO:  NYSE), for a stake in geothermal technologies for renewable energy.   Unfortunately, a position in Statoil brings with it the noise of Statoil’s fossil fuel interests.  Fortunately, for the more environmentally-conscious investor, there is an alternative.

HS Orka is majority owned by Alterra Power (AXY:  TO or MGMXF: OTC) a Canada-based geothermal power generation company.  Alterra has interests in eight different power facilities totaling 825 megawatts of generation capacity using hydro, wind, geothermal and solar technologies.  The assets are located in Texas and Indiana in the U.S., British Columbia in Canada and, of course, the HS Orka asset in Iceland. Alterra’s development pipeline includes additional geothermal projects in Iceland through HS Orka, in Peru through a local Energy Development Corporation, and in Italy through Graziella Green Power.  Notably HS Orka is also planning new hydro-electric projects, in which Alterra will participate.  No doubt the knowledge gained during the recently completed deep well drilling project will boost HS Orka’s geothermal development as well.

Alterra Power reported $42.9 million in total sales in the first nine months of the year 2016, providing $2.7 million in net income or $0.06 per share.  Since there is considerable noise in reported income from charges and benefits through the shifting values of equity derivatives, the financial fortunes of this company are best viewed from the perspective of cash earnings.  Operations generated $15.5 million in cash in the first nine months of 2016, representing sales-to-cash conversion rate of 33.8%.  This compares favorably to the conversion rate in the previous year of 28.0%, and suggests Alterra can consistently generate cash for future investments.

Internal cash resources have not been enough for Alterra’s ambitious development plans.  The company had $273.6 million in long-term debt on the balance sheet at the end of September 2016.  The debt-to-equity ratio was 1.15, suggesting there is potential for additional leverage if the company needs to move aggressively in its renewable energy markets.

Alterra’s common stock trades on the Toronto exchange under the symbol AXY, but investors can also gain access through the Over-the-Counter Pink Sheets where the stock is quoted as MGMXF.  The shares have traded off in recent weeks providing a compelling entry point for shareholders with the lengthy investor horizon and risk tolerance for smaller companies.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 07, 2016

US Geothermal: Can A Reverse Split Heat Up This Stock?

by Debra Fiakas CFA

US Geothermal (HTM:  NYSE) has been on our radar for some time.  Despite considerable accomplishment in terms of building electricity output from a portfolio of geothermal power installations, investors seem reluctant to embrace the company and its stock.  Earlier this week, US Geothermal management issued its usual quarterly update on its development work, this time detailing progress in expanding capacity and improving well performance on three of its geothermal installations.  Altogether an incremental 90 megawatts are under development, which would triple the current power generation capacity of 45 megawatts.  The company press release was met by investors with a yawn.  Perhaps most are waiting for the earnings press release scheduled for November 10th.

The consensus estimate is for a penny in net profits per share on $7.2 million in total sales for the quarter ending September 2016.  Compared to the same quarter last year, that prediction represents flat earnings on slightly higher revenue.  US Geothermal appears to have done a good job of conditioning its analyst following to the current potential in sales and earnings.  At any rate, the company mostly meets the consensus expectation and rarely exceeds the earnings per share hurdle by more than a penny.

 If investors are not willing to bid the stock above the $1.00 price level, the company is going to force the stock to whole dollars.  The day before the earnings announcement a 1-for-6 reverse split will be executed, leaving the stock price quoted at about $3.90 per share and the shares outstanding near 18.9 million shares.

Whether HTM remains at current levels is another matter.  The stock is valued at 22 times earnings expectations for 2017.   That might seem a bit expensive to some investors who are not impressed by pennies in earnings per share.  For those who have the patience to wait for the company to build out its power generation portfolio, the current stock price could be considered a bargain.  US Geothermal has assets that, if developed, management claims could triple current output.  Granted there will be capital investment requirements to reach this goal.  Debt outstanding is currently $110.6 million and the debt-to-equity ratio is currently 85:1.   Yet the company has hardly reached its limits in terms of raising either debt or equity capital.  Current cash balances of $18.3 million imply net debt of $92.3 million, and there is more cash where that came from.    In the twelve months ending June 2016, the company converted 41% of its revenue to operating cash flow, a performance metric that should cheer both creditors and equity investors. 

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 08, 2015

Ormat Eyeing Storage M&A for Geothermal Projects

Jennifer Delony

Reno, Nev.-based Ormat Technologies (ORA) is seeking mergers and acquisitions that will help the company enhance its geothermal projects with energy storage technologies, Ormat CEO Isaac Angel said on Nov. 4.

“On the storage solutions side, we are progressing well,” Angle said during a 3Q15 earnings webcast. “I’m very optimistic that we will be able to add a lot of MW … and profitability to our existing power plants.”

Angle said that he also is optimistic that the company will secure a deal soon that will initiate Ormat’s energy storage strategy.

“We’re almost there,” he said.

According to Angel, Ormat also plans to expand its strategy to include project opportunities that have solar energy as part of a “blended solution.”

“This is a long process,” he said. “And it will take at least another year to come up with more and more enhanced power plants.”

Addressing ongoing project construction during the webcast, Angel said that Ormat expects an earlier completion of its 24 MW project in Olkaria, Kenya, as a result of improvements in construction lead time.

The company originally expected to complete the project in the second half of 2016, but now expects the completion date to fall in 1Q16.

In addition, Angel said that infrastructure work on Ormat’s 14 MW portion of the 330 MW geothermal project under construction in Sarulla, Indonesia, has been “substantially completed.”

“The drilling of production and injection wells are also in progress for the project, however, the project company is experiencing delays in drilling,” he said, adding that Ormat expects the first phase of operation to begin by the end of next year. The remaining phases of operation are scheduled to begin in 2018.

Angel said during the webcast that, despite strong competition from low solar power prices in the U.S., some utilities still are seeking geothermal solutions at “reasonable prices.”

“It would be naïve to say that solar prices are not having an impact on geothermal prices, but on the other hand, the new [renewable portfolio standard in California] is giving us some back wind,” Angel said. “We are negotiating more than several [power purchase agreements], and I am happy with their prices as they stand today.”

On Nov. 3, Ormat reported total revenues for 3Q15 of $162.9 million, compared to $140.2 million for 3Q14. The company reported electricity revenues for 3Q15 of $97.2 million, compared to $102.5 million in 3Q14. In addition, Ormat increased and narrowed its revenue guidance range for the year to between $570 million and $585 million.

Jennifer Delony is associate editor for She worked previously as an analyst for PennWell's TransmissionHub. Jennifer started her career as a B2B news editor in the local and long-distance telecommunications industries in the '90s. She began covering renewable energy issues at the local level in 2005 and covered U.S. and Canadian utility-scale wind energy as editor of North American Windpower magazine from 2006-2009. She also provides analysis for the oil and natural gas sectors as editor of Oilman magazine.

This article was first published on, and is republished with permission.

March 29, 2015

US Geothermal: Wringing Profits From Hot Rocks

by Debra Fiakas CFA

Last week I spent the better part of a day listening to presentations of energy companies at the Wall Street Analyst Forum in New York.  Although I had heard the management of  US Geothermal (HTM: NYSE) tell the company’s story before, I was impressed to hear about the progress the company has made in squeezing profits from electricity produced with turbines run by underground steam.  Management called it gratifying!

The company reported $31 million in sales in the year 2014, delivering $14.9 million in net income to the bottom line.  That is something to celebrate!

Sales in 2014 grew 13.1% year-over-year compared to $27.4 million.  Production profits also increases to 48.5% of sales, up just a pinch from the year before when profits were 48.3%.  Unfortunately operating expenses rose during the year leaving profits at that level at $4.6 million or 14.8% of sales.  What really drove net income in 2014 was a $12.0 million tax benefit as the company amortized tax assets built up in previous years when the company experienced losses.

As is almost always the case with young companies, even ones that have achieved profitability, it makes sense to look carefully as the company’s ability to generate cash.  As confusing as US Geothermal’s profits and loss profile might be, its report of operating cash flow is illuminating.  In 2014, the company’s operations generated $12.8 million in cash, which tops 2013 cash generation of $10.6 million.

It is exciting seeing cash in the bank and even more gratifying when management finds something productive to do with it.  US Geothermal has a history of buying up thermal assets.  The company acquired new leases for its Vale project, but the real excitement has been in two other acquisitions.
In 2014, the company bought the WGP Geysers project from Ram Power (RAMPF: OTCBB)for what appears to be a very attractive price of $6.4 million.  WGP Geysers is a developed site with four wells in the larger Geysers project in California.  A recent engineering report suggests the project can generate 30 megawatts annually.   The company has received approval to build a 38.5 megawatt power plant.

Then in December 2014, US Geothermal issued stock to acquire Earth Power Resources, which included geothermal assets in Nevada that could give rise to three power projects.  A third party has estimated there is sufficient heat in place to generate 71 to 186 megawatts of power.  The company began drilling the first production well in December 2014.

The company is projecting nearly 200 megawatts of power by 2020 from the current 45 megawatts.  Management has told analysts who follow the company that it can generate $100 million in EBITDA (earnings before interest, depreciation and amortization).  Against such a prognosis, HTM shares appear grossly undervalued.  Unfortunately, investors are unconvinced.  A review of recent trading patterns found in a point and figure chart suggests a very bearish sentiment prevails in trading of HTM shares.  An investor taking a bull case position in the stock may have some time to wait for appreciation of the shares.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 12, 2014

Ormat: A Bargain Green Stock?

by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed several stocks trading below industry average multiples of forecasted earnings.
Tracking the geothermal power generators has frequently taken us to the door of Ormat Technologies, Inc. (ORA:  NYSE).  Ormat has two revenue segments:  power generation through geothermal generators and energy recovery and equipment sales to utility and industrial customers installing geothermal power plants.  The company owns and operates plants with 626 megawatts generating power and has supplied equipment around the world for another 1,200 megawatts.  The development pipeline is populated by thirty-five potential geothermal locations in the U.S., Southeast Asia, South America and New Zealand.

Last week during the company’s third quarter 2014 earnings conference call management spent quite a bit of time talking about two of its newest projects.  The company was recently awarded a $22.3 million contract to install its proprietary air-cooled energy converter at a natural gas compression station in Utah.  The station is part of the Kern River gas transmission system.  This will be the second recovered energy power generation facility on the pipeline.  The recovered energy plants reduces the use of energy content of the natural gas by about 30%.

Ormat also recently signed an agreement to design, construct and operation a 35 megawatt geothermal power project in Kenya.  Once completed Ormat will also arrange for financing and expects take advantage of guarantees from the African Development Bank.  Kenya Power and Lighting Company has agreed to buy all the power from the project.  This will be Ormat’s fifth power project in Kenya.

Investors have to pony up about twenty times projected earnings per share to take a long position in ORA.  That is a bit richer than the average PE multiple for the S&P 500, which is 16.7 times forward earnings for the group, but right on par with the forward earnings ratio for the Russell 2000 Index.  The geothermal segment of the power generation industry is trading at approximately 21.2 times trailing earnings.

On the surface the comparison of earnings multiples does not make ORA look like much of a bargain.  However, Ormat is set apart from the group.  ORA is among the most stable of the power generation stocks. True enough, utility companies are known for their stability in both earnings and stock performance.  However, it is rare to observe fast rates of growth and low beta measures of risk.  ORA offers both  -   a beta of 0.80 and forecasted earnings growth of 22%.  Thus ORA could trade at a multiple of 22.0 times earnings.  On a risk adjusted basis, ORA’s PE/Growth or PEG ratio is a compelling 0.73.

Furthermore, Ormat recovers some power of its own from its revenue in the form of operating cash flow.  In the most recently reported twelve months the company converted 43% of sales to operating cash flow.  Cash flows help support capital investments and a small dividend of $0.20 per share.  The forward dividend yield at the current price level is 0.7%.  Taking the dividend into consideration, provides a risk adjusted PE/Growth Plus Yield of 0.70

From a technical standpoint, ORA is neither overbought or oversold.  There is no strong trend higher or lower other than the short-term vacillations in the stock price.  Nonetheless, money appeared to have been flowing into the stock in the run up to the third quarter 2014 earnings announcement. Investors who want to take a long position in ORA might wait for the signs of upward momentum before committing capital or simply use the dividend payments as compensation for the time commitment.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 01, 2014

Geothermal Should Ride The Duck Curve

Meg Cichon

As the geothermal industry limps along year after year, a utility insider strongly suggests that it changes its tactics.

For years the geothermal industry has relentlessly boasted that it is a baseload resource, meaning it provides stable power similar to a coal or natural gas plant, except without all of those pesky carbon emissions. While upfront costs to develop a plant are higher than other renewable sources, geothermal leaders say that this baseload aspect makes it a more attractive resource in the long run since the grid needs more stable power as increasing amounts of intermittent renewables enter the landscape.

Though this may sound like bankable reasoning, Dave Olsen of the California Independent System Operator Corporation (CAISO) said geothermal needs to change its strategy to make any sort of progress in the energy market. During the opening session of the 2014 Geothermal Resources Council (GRC) Annual Meeting & Geothermal Energy Association (GEA) Geothermal Energy Expo in Portland, Oregon, Olsen warned the crowded room that they might not like what he had to say.

“Geothermal can add significant value to the portfolios of most utility companies in the western U.S., but you guys are not getting it done,” said Olsen. “You are not going to win a levelized cost competition with wind and solar. When you can’t win with the rules as they are, then you have to change the game.”

Stop Spinning the Same Record

In order to be a successful competitor in the energy market, Olsen said the geothermal industry must stop selling itself as a baseload power because baseloads are actually becoming a problem. (Note: See the GRC 2014 conference signage above, which highlights geothermal's baseload advantage.) Using California as an example, Olsen said that the closure of big resources like the San Onofre Nuclear Generation Station (SONGS) is actually making the grid much more stable and allows for the use of more solar and wind.

“Baseload has gone from being valuable to being problematic as we add more wind and solar,” said Olsen. “When we shut down other fossil plants we will avoid curtailing thousands of megawatts of wind and solar.”

California faces severe midday energy over-generation, as evidenced by the famous “duck curve” chart below. In 2013 alone, California was forced to curtail more than 19 GWh of pre-purchased renewable energy in order to run its inflexible baseload sources, and this number will likely rise in the coming years. Adding more of these resources will only make this situation worse, said Olsen.

duck curve

This "duck curve" shows the increased overgeneration risk and peak ramping needs (potentially 13 GW within three hours) that occur as more solar is added to the grid. Credit: CAISO

“This is the reality in California today — even if we modernize the grid and add storage we are going to have too much solar midday,” he said. “In the next 10 years this is going to be situation everywhere. Geothermal needs to get ahead and not contribute to this problem.”

Flexible Is the New Baseload

To address this problem, the grid actually needs more ancillary services — flexible power that can be ramped up and down as needed. While utilities look to decarbonize their systems and abide by EPA rules, geothermal needs to step up and market itself as the solution. Developers must design projects to operate flexibly with a wider range of services — a good example of this is Ormat’s (NYSE:ORA) Puna geothermal project in Hawaii. Local utility Hawaii Electric Light Company (NYSE:HE) uses the plant for auxiliary power and is able to increase or decrease services when necessary.

The geothermal industry must educate decision makers so that they recognize this benefit, which will takes years of work, said Olsen. To make real progress, geothermal players need to work hand-in-hand with other renewable technologies.

“The good news is that wind and solar are in similar situations. Other renewable technologies are your allies, not your enemies — you are all vying for a diverse, complimentary energy portfolio. You have much more to gain by marketing and lobbying with them,” said Olsen. “If you don't believe me, count the geothermal megawatts that have come online in last 20 years and compare.”

Spoiler alert: It's much less than wind or solar.

Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on, and is republished with permission.

June 06, 2014

US Geothermal: Egregiously Undervalued?

by Debra Fiakas CFA

Last week US Geothermal (HTM:  AMEX), a power generator from geothermal projects in California, Oregon, Nevada and Idaho, made an appearance at the Marcum Microcap Conference in New York City.  The company stood out among most of the companies appearing in Marcum’s so-called ‘energy track’ as one of the few with solid revenue and profits.  US Geothermal reported a net profit of $1.9 million on $28.8 million in total sales in the twelve months ending March 2014.  The net profit is commendable, but what I find more interesting is the conversion of 30% of sales to operating cash flow of $11.4 million.

San Emidio
US Geothermal's San Emidio power plant in Nevada
The ability to generate cash flow is vital for a growing company like US Geothermal.  Over the last three years the company has spent an average of $16.5 million annually on capital investments.  The company has also been acquisitive.  Most recently the company bought the Ram Geysers project in Sonoma County, California for $6.4 million in cash.  Ram Geysers has five completed wells available for immediate production near 30 megawatts of total steam assuming 25% of the geothermal liquid is re-injected back into the reservoir.

US Geothermal management thinks they got quite a bargain in the Ram Geyser’s deal.  The Ram Power subsidiaries had already invested over $90 million in the project, implying that US Geothermal paid seven cents on the dollar for the capital investment value.  Once the company’s development plans have been carried out it seems likely the Ram Geyser’s will make a strong contribution to return on assets

At the end of March 2014, US Geothermal reported a total of $204.5 million in tangible assets or $1.97 per share of which $0.38 is in the forms of cash and financial assets.  It is instructive to compare tangible assets per share to the company’s share price of $0.65.  Trading at 33% of tangible asset value suggests investors have little confidence in the long-term potential of these geothermal assets.  Alternatively, investors might be simply concerned about the required investment for the projects the company currently has under development in Guatemala and Nevada.  The company current estimates a capital cost near $195 million.
The current price for HTM could also represent an egregiously undervalued situation if US Geothermal’s assets prove out.  So I will continue to follow the company’s progress and view the stock at the current price level as an option on full operation of all assets.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in t

March 12, 2014

How Geothermal Heat Pumps Can Soar Like Solar

Tom Konrad CFA

Geothermal Heat Pumps (GHP) are a niche market.  They shouldn’t be.

Disclosure: Long WFIFF, short LXU puts (a net long position.)

A Better Mousetrap?

Ralph Waldo Emerson never said “Build a better mousetrap, and the world will beat a path to your door.”  The mousetrap that likely inspired the misquote was invented seven years after his death.  Unfortunately, many people take it literally.  GHPs have all the hallmarks of a better mousetrap: They do the job of heating and cooling a building more efficiently than any other option.  Despite the larger up-front cost, they are a mature technology and usually the most economic option for buildings that can accommodate them.

Not only can GHPs cut energy costs for heating and cooling by up to 80%, they can also provide other benefits such as essentially free hot water when in cooling mode, lower reliance on fossil fuels, and the elimination of above ground outdoor equipment.  These advantages have earned GHPs a small but dedicated cult of true believers, but not broad market acceptance.

The world has not yet beaten a path to the GHP door.  Instead, GHPs have a slim and only modestly growing market share.  A study by  Frost and Sullivan projects  the market for GHPs in North American commercial buildings to grow at a 7.8% annual rate from 2012, 4.7% faster than the North American climate control market as a whole. An industry representative pointed me to a Navigant study which projects the world installed base to grow from 13.3 million tons to 36.2 million tons in 2020, see chart below.

Navigant installed capacity.png

Unfortunately, growth in installed base is not comparable to industry sales. For a young industry with a low installed base, sales are approximately the increase in the installed base.  I eyeballed the chart to get annual estimates of  world sales from the chart, and found that Navigant is projecting less than 5% sales growth in 2013 to 2015, followed by rapid growth (20-30%) in the 2016 to 2018 time frame.  Navigant’s discussion makes clear that the later rapid growth rates require a revival of the economy and easier access to capital.

In the short term, Navigant’s study seems less optimistic than Frost & Sullivan’s, while it is more optimistic in the medium to long term. Using either projection, the near term less than 5% annual market share growth is clearly not the type of market transformation many would expect from a “better mousetrap.”  Does the rapid market growth Navigant expects after 2015 have to depend so greatly on easy access to capital?  Are other factors holding the GHP market back?

Siege Mentality

I struck a few raw nerves when I asked if air source heat pumps are a threat to geothermal heat pump suppliers last month, despite the fact that I answered my own question with a “No.”

Except in moderate climates, super-insulated homes, or situations where the installation of a geothermal heat pump (GHP) would be particularly difficult, GHPs have the better economics.  This is despite recent advances in air source heat pump (ASHP) technology, which led me to ask the question in the first place.  ASHPs don’t provide hot water, while many GHP systems can.  Also, as the recent heavy snows in the Northeast demonstrated, there are some advantages to having a heat exchanger which is not exposed to the elements (see pic).

ASHPs Snow.jpg
One advantage of a geothermal heat pump’s ground loop compared to the air source heat exchangers shown is that you don’t have to dig them out after a snowstorm. This pic also shows an installation problem which is allowed under manufacturer specs, but may lead to less than optimal performance if both pumps are operating simultaneously: one heat exchanger blows air directly at the other. This problem is analogous to poor ground loop design for GHPs.

Given all these advantages, why the raw nerves? I suspect it’s because geothermal heat pump sales continue to disappoint and proponents are looking for someone to blame.

ASHPs in Net-Zero Buildings

Another target of geothermal advocates’ ire is Marc Rosenbaum (who teaches the online Net Zero Energy Homes course in the Northeast Sustainable Energy Association’s Building Energy Masters Series.)  He also raised hackles when he recommended minisplit air source heat pumps (ASHPs) for most single family net zero homes (I quoted Rosenbaum extensively in the previous article.)

He relates the story of the Putney School’s 16,000-square-foot Net-Zero Field House.  The team designing this building modeled its heating costs using a GHP, and also using ASHPs with additional solar photovoltaics  sufficient to provide the extra electricity needed to run the ASHPs.  They found that it was cheaper to expand the solar system to power the ASHPs than it would have been to pay the extra installation costs of a GHP.   Furthermore, the price of solar has fallen significantly since the Putney Field House was built; the price of the ground loop for a GHP has not.

Nevertheless, Rosenbaum’s preference for ASHPs in highly insulated buildings does nothing to explain GHPs’ low market share growth rate.  Net Zero buildings are the exception, not the rule, and have a far lower market share than geothermal heat pumps.  When the heating load is very low, the operating cost advantage from the greater efficiency of GHPs is not enough to repay the additional installation costs.  That is not the case in 99.9% of new and existing buildings today.

GHPs Almost Everywhere Else 

My own home, a farmhouse built in 1930, is much less efficient and requires a lot more heat than a Net Zero home, despite my own significant improvements.  I don’t have enough suitable roof space for photovoltaics to make up for the extra energy ASHPs would require, even if that could be done economically.  I opted for four ductless minisplit ASHPs rather than a GHP system, but it was because the minisplits allowed me to do the install without adding air ducts.  Adding air ducts to my 85 year old home would have significantly increased the cost and disruption of installing a GHP system.

ClimateMaster, a division of LSB Industries (NYSE:LXU), makes a ductless split system called the Tranquility Console Series which probably would have been suitable for my needs, but I did not know about it until I received comments on an earlier version of this article telling me about it, nor did any of the geothermal installers I spoke to.  Unfortunately, the efficiency ratings are low for GHPs with a COP of 3.3 in the ground loop configuration. This is not much better than the Mitsubishi air source units I had installed, which operate at a COP of around 2 from around -10° to 20°F outdoor temperatures, and exceed 3.3 COP when the ambient temperature is 35°F or more.  The added efficiency at low temperatures would probably not have been sufficient to pay for the ground loop, but I would have been interested to get a quote.  Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) offers the Envision Series Consoles with slightly higher heating efficiency (up to 3.5 COP) for certain models.

Mr Slim COP.png

Since GHPs are economic in most situations, other factors must be holding them back.

The relative complexity of a geothermal system is one likely suspect.  As Rosenbaum says about ASHP minisplits,

“[O]ne thing I really like about the minisplits is how they are packaged systems from a single supplier, and are highly engineered as a system and therefore very reliable. GSHP systems are, at least where I have practiced, essentially custom engineered and installed, usually by several entities who have a shared responsibility to make sure the systems perform.”

Given the large up-front cost of a GHP system, the risk of a poor installation is likely to deter nonprofessionals from using GHPs even more than it deters experienced professionals like Rosenbaum.

The Curse of Complexity 

The cure for installation risk would be a way to validate the performance of GHPs in the field, and track problems back to their source.  When contractors lose the ability to blame others for their mistakes, they quickly stop making those mistakes or they go

out of business.  Without such monitoring, it’s nearly impossible to track increased electricity use back to the source.

I recently spoke to Matt Davis, the co-founder of Ground Energy Support and a professor of hydrology at the University of New Hampshire.  Ground Energy Support provides GHP monitoring to GHP owners and contractors, as well as data and analysis to support the development of the industry.

Ground Energy Support recently published a 14 page Homeowner Guide to Geothermal Heat Pump Systems.  While I found the guide easy to understand, it makes clear that GHPs are not for everyone.  The start of the guide directly helps homeowners decide if they and homes are suitable for a GHP, while its length indirectly makes the point that GHPs are not always “plug and play.”  The six pages dedicated to finding and selecting a suitable GHP installer indirectly makes clear that the process is not for anyone with only casual interest in GHPs and their savings they bring.

If GHPs are to become commonplace, the process of financing and purchasing a reliable GHP system have to be simplified to the point where it becomes a matter of calling a name in the phone book.  The success of SolarCity Corporation (NASD:SCTY) in providing solar to homeowners who are more interested in the green in their checking account than the green of their electricity shows the potential.  That success is based on SolarCity’s ability to provide financing, installation, maintenance, and performance verification services internally.  All the homeowner needs to do is pay the monthly bill for electricity production.  The value proposition is simple: a hassle-free installation and savings from day one.

The SolarCity of Geothermal

Geothermal heat pumps also have the economic potential to deliver that same value proposition: hassle free installations, and reliable savings from day one.  But if the industry is to achieve this potential, several things have to come together:

  • A single company responsible for the entire installation, from engineering to installation to maintenance.
  • Reliable monitoring of heat production from the ground loop.
  • A financing tied to the geothermal installation itself, to allow a lease-like structure which allows homeowners to see the benefits from day one.

We already have the corporate and financial structures to bring the solar lease model to GHPs.  In fact, it takes little stretch of the imagination to see a solar lease company acquiring or partnering with GHP installers and offering a geothermal lease along with the solar lease to its customers.  In cold climates not known for their sunny winters such as the Northeast US, the underlying economics of GHPs are far superior to those of solar photovoltaics.  These economics should enable very attractive GHP leases, as soon as the other pieces are in place.

First, the homeowner and the geothermal lease company would have to have a reliable, objective way to monitor the performance of the GHP system.

Geothermal Monitoring

Ground Energy Support is tackling this problem with its GXTracker, which monitors the heat output of the ground loop and monitors or models the electricity consumption of the pump itself.  Heat production monitoring lets everyone know if a system is operating as designed, and helps diagnose the problem when it is not.

Of the 30 GHP systems Ground Energy Support has been monitoring for the last two and a half years, 60% have had some operational, maintenance or mechanical issue.  Most of these were minor maintenance issues or improper settings which caused only minor drops in performance, but which would have gotten worse if undetected. But 17% of the systems had significant design or installation problems.  A third of these were oversized systems which can lead to higher energy costs but were likely the result of homeowner preferences.  Another third were easily fixable and not the fault of the installer: a failed heat pump (covered under warranty), and an air duct which was left open to an unfinished garage.  The rest (high pumping penalty caused by too large a pump or too small pipes, and an undersized ground loop) could have been avoided if the homeowner had been able to vet the installers’ track records – another potential benefit of ubiquitous monitoring.

One other way proper monitoring of GHPs might help the industry is enabling the implementation of incentives for renewable heat production from geothermal ground loops, analogous to the incentives for photovoltaics.  The Massachusetts legislature currently working on a bill to allow heating and cooling with renewable fuels to benefit from the same incentives the state give to renewable electricity.  The bill states that the heat must be “verified through an on-site utility grade meter” or similar means.


Advocates of geothermal heat pumps should spend less time discussing the well established attractive economics of GHPs in theory, and more time delivering those economics.  The key to this is making the buying process simple for the customer while providing verification and taking responsibility if those economics fail the be acheived .  While GHPs are not the best fit for every home, in many climates the majority of such homes will benefit more from a GHP system than a new conventional heating and cooling system.

The solar lease is an excellent model for taking a renewable energy system and making it attractive to the general public.  The GHP industry can follow down this path, but first it has to adopt reliable monitoring as a standard feature.  This will hold installers to account for their design and implementation, while giving customers confidence that they will get what they pay for.

Adopting monitoring could start with customers wanting to know that their systems are operating as designed.  It could also begin with states like Massachusetts giving incentives for verifiable renewable heat production, or an installer deciding to break open the market by offering a geothermal lease.  UPDATE: It looks like at least one installer, Orca Energy, is alreadyoffering a geothermal lease to developers of new homes in a partnership with GHP manufacturer Bosch Thermotechnology.  New homes are a natural starting point for residential geothermal leases because of the lower installation costs and greater ease of design.

It seems to me that the group that has both the most to gain and the most power to affect change is GHP manufacturers.  If they were to include monitoring as a standard feature, they might be able to catalyze this market themselves.

To Davis’ knowledge, only Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF. Disclosure: I own this stock.) and  Modine Manufacturing Company (NYSE:MOD) currently offer any sort of energy monitoring.  Modine’s is part of their optional Orb controller.  Waterfurnace seems farthest along in this regard.  Sensors are standard on Waterfurnace’s most advanced (and efficient) models, the 7 Series.  According to the company, the thermostat retains 13 months of energy usage data.  I’m inquiring to determine if that includes heat production.

I suspect the extra costs of making such monitoring standard would be more than compensated by greater customer satisfaction and increasing sales.

Is this the start of a move by manufacturers towards better monitoring, or will change come from the bottom up?  If geothermal heat pump sales are going to soar, change will have to come from somewhere.

This article was first published on the author's blog, Green Stocks on February 28th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

December 10, 2013

Holiday Shopping Deal On Ram Power Shares

Tom Konrad CFA
Ram Power’s San Jacinto-Tizate plant

Holders of Ram Power Corp. (TSX:RPG, OTC:RAMPF) on November 26 (the “record date”) will be receiving valuable coupons as the result of the company’s rights offering, announced November 18th. Just in time for the holidays, these coupons, or “rights” can be used to buy additional shares of Ram Power for 8¢ Canadian per share any time before  5pm on December 23rd. (Disclosure: I am long Ram Power stock.)

Holiday shoppers looking for more traditional gifts will be able to raise a little cash by selling the rights on the Toronto Stock Exchange, where they are listed as RPG.RT.  Since they began trading on November 25th, they’ve traded between ½¢ and 1¢.  Shareholders will have received one right for every  share of Ram they owned; each 4.5 rights allows the purchase of one share of Ram at 8¢. 

Why The Bargain

The reason for the extreme couponing at Ram Power is the company needs cash.  While its main project, San Jacinto-Tizate in Nicaragua, is currently operating at reduced capacity while its contractors are working on a remediation project expected to bring its production up to somewhere between 59MW and 63MW of net electricity output.  The remediation is expected to be complete in mid December, with results from testing in mid January, after which Ram will be eligible to receive distributions from the project.

The low 59MW production estimate will easily be enough to keep Ram from having to default on its project loans (they need at least 55MW,) but as long as the net output is below 65MW,  $2.95 million of Ram’s Project equity must remain in a maintenance reserve account, and maintenance contributions will be increased by $0.2 million per quarter for every MW of capacity below 65 MW (net.)  Ram will be eligible to receive distributions if there are available funds from power sales after the reserve increases and the original Project distribution requirements are met.

Without any other operating projects, Ram did not have the cash to meet an upcoming corporate debt payment at the end of December.  Unfortunately the offering was delayed until a few days after Ram’s third quarter earnings announcement.  When a company needs money quickly, they usually have to raise it on very unfavorable terms to existing shareholders, and that prospect led the stock to sell off between the quarterly earnings report and the rights announcement.

As it was, a rights offering of this sort is about as shareholder-friendly a way as possible to raise needed cash.  Instead of outside investors buying the stock at a discount and immediately dumping it on the market, existing shareholders are given the opportunity.  As I mentioned before, if they are not willing or able to come up with the additional cash, they can still monetize the opportunity by selling their rights in Toronto.

A Guaranteed Successful Offering

Two provisions of the rights offering ensure that the company will be able to raise the full C$5.3 million targeted by the deal  First, holders of rights will be able to exercise an “additional subscription” privilege on a pro-rata basis to buy shares which would have been available under any rights which are not exercised.  Ram has also arranged for standby purchase agreements with Dundee Securities, Newberry Holdings International Ltd. and Exploration Capital Partners to purchase any shares which are available but not issued subject to the rights offering.  The fact that these large, sophisticated investors, including Ram’s investment bank and an affiliate of one of its largest investors are willing to backstop the deal is one more piece of evidence that it’s a good deal for investors to participate.

Company for Sale
Ram Power Logo

Because it looks unlikely that the remediation program at San Jacinto-Tizate will increase capacity enough to allow Ram to resume distributions and fund its ongoing overhead and corporate debt payments going forward, Ram has is also “Exploring strategic options,” which is management speak for “the company is for sale, all or in part.”  In addition to making the December interest payment, the funds from the offering should be sufficient for Ram to complete its remediation project and find a bidder for the whole company, or just San Jacinto-Tizate and its other projects.

With about C$50 million of Earnings before interest, tax, and depreciation (EBITDA) increasing with inflation, Ram would be worth about C$600 million if trading at the same (12x) multiple as mature power power producers on the TSX.  That number includes no value to its development projects.   Ram will of course not receive a 12x multiple, but a 7x to 9x multiple, such as discussed in the recent earnings call does not seem out of line.  Adjusted for  liabilities and the dilution from the rights offering, a 7x multiple would result in a value for Ram at 24¢ a share.  The 9x multiple would result in a value of 51¢ a share.  Note that Ram’s high debt makes this number very sensitive to the selling price, and a sale at 6x EBITDA would leave only 10¢ per share for equity holders.

A buyer would probably be able to achieve some cost savings by no longer running Ram as a stand-alone business. Reducing management and listing costs could amount to as much as $3.5 million annually, or another penny a share at the 7x EBITDA multiple.

Because it looks unlikely that the remediation program at San Jacinto-Tizate will increase capacity enough to allow Ram to resume distributions and fund its ongoing overhead and corporate debt payments going forward, Ram has is also “Exploring strategic options,” which is management speak for “the company is for sale, all or in part.”  In addition to making the December interest payment, the funds from the offering should be sufficient for Ram to complete its remediation project and find a bidder for the whole company, or just San Jacinto-Tizate and its other projects.

With about C$50 million of Earnings before interest, tax, and depreciation (EBITDA) increasing with inflation, Ram would be worth about C$600 million if trading at the same (12x) multiple as mature power power producers on the TSX.  That number includes no value to its development projects.   Ram will of course not receive a 12x multiple, but a 7x to 9x multiple, such as discussed in the recent earnings call does not seem out of line.  Adjusted for  liabilities and the dilution from the rights offering, a 7x multiple would result in a value for Ram at 24¢ a share.  The 9x multiple would result in a value of 51¢ a share.  Note that Ram’s high debt makes this number very sensitive to the selling price, and a sale at 6x EBITDA would leave only 10¢ per share for equity holders.

A buyer would probably be able to achieve some cost savings by no longer running Ram as a stand-alone business. Reducing management and listing costs could amount to as much as $3.5 million annually, or another penny a share at the 7x EBITDA multiple.

In addition to the advantage of simply buying the shares at 8¢, there are also significant benefits from the optionality inherent in the rights.  For example, a Canadian shareholder not planning to participate in the offering can still take advantage of this opportunity to maintain his or her position.   Rather than selling the rights, he or she could sell 1/4.5 (or 2/9) of his or her shares (as long as they sell for more than 8¢), and then buy them back by participating in the offering in three weeks.  This reduces the risk of loss in the event the stock declines, while maintaining the full benefit of any increase in the share price.


The Ram Power rights offering is the most shareholder-friendly way possible for this company to raise needed cash.  Since Ram has also put itself up for sale, and is worth between 25¢ and 50¢ per share, investors who are able should participate in the rights offering and the additional subscription privilege, unless the stock falls below 8¢ before December 23rd.  If it does fall that far, they should buy the stock instead.

This article was first published on on November 30th.

Disclosure: Long RPG.

Lead Image: Ram Power’s San Jacinto-Tizate plant

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 30, 2013

US Geothermal: A Knack For Hot Rocks

by Debra Fiakas CFA

San+Emidio[1].pngU.S. Geothermal (HTM:  AMEX) is scheduled to report third quarter 2013 financial results on November 15th, taking every day allowed to a public company to reveal the fruits and labors of a quarter.  There will be plenty to talk about in the conference call with analysts and investors.  USG closed a loan financing to support the first phase of its San Emidio geothermal power project in Nevada.  The loan valued at $30.7 million bears a fixed interest burden of 6.75% will replace a $25 million construction loan for the project and supply working capital for operation of San Emidio, shown right. 

There should be a few dollars left over from the October loan deal to use as seed capital to begin the second phase of the San Emidio project.  In early 2012, the company commissioned a 3.5 megawatt power plant, but intends to replace that with a more efficient 9 megawatt plant.  The company has already started drilling new production and injection wells and will upgrade transmission capacity as well.  Phase II is to start producing power by 2015.

Investors in alternative energy companies like USG are accustomed to hearing about plans for the future and power capacity at some time point ahead.  However, USG has more to offer investors that a lot of promises.  Sales in the twelve months ending June 2013 totaled $21.9 million and $2.0 million in operating cash flow.  That is a cash conversion rate of 9.1% for those who are keeping track.

The feat of positive cash generation is an important one.  USG has a history of red ink, burning plenty of cash to bring its three geothermal power plants online.  Besides San Emidio the company operates a plant at Raft River in southeastern Idaho and another at Neal Hot Springs in Oregon.  The company has two more leases in the San Emidio Desert in Nevada and owns a geothermal concession near Guatamala City in the Republic of Guatamala.  Expect more investments and the potential for operations to burn cash again in the future.

There are no consensus estimates published for U.S. Geothermal, but there are high hopes for the quarter report.  Message boards are filled with continuous chatter about the company’s progress.  Unfortunately, that has not translated to a higher valuation for HTM.  The stock has traded sideways for the last three months, after setting a 52-week high price of $0.61 in August and then falling off the June quarter results were published.  The March 2013 and December 2012 quarters had both been profitable and the net loss in the June 2013 quarter was unsettling.  I am always more concerned about operating cash flow in a growing company like Geothermal.  Cash flow from operations was likewise lower sequentially, but still positive.

Profits or losses.  Cash use or generation.  As far as valuation is concerned it might not matter.  At less than two bits per share the stock is priced very like at option on the company’s geothermal assets and management’s ability to turn hot rocks into a power source.  With a third geothermal plant now completed and operating and long-term financing in place, it seems clear management has got the knack for it. 

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 28, 2013

Ormat: Cash Generation Justifies Earnings Multiple

Ormat Heat exchanger at GKW Landau. Geothermal water evaporates the carrier medium. Preheater and the evaporator. The steam line above connects to the turbine.
Photo by Claus Ableiter via Wikimedia Commons

by Debra Fiakas CFA

Shares of geothermal power producer Ormat Technologies (ORA:  NYSE) are trading at 29.2 times the 2014 consensus estimate of $0.93 per share.  That multiple looks fair compared to growth expected at Ormat in the next year, but more dear against the company’s long-term growth prospects.  The stock has been flying off recent project developments. 

In early September this year, the company completed construction and commissioning of a 100 megawatt geothermal plant in New Zealand, making it the world’s largest geothermal power plant of its kind.  Straight off the job in New Zealand Ormat entered into a joint agreement with eBay (EBAY:  Nasdaq) for the development of a five megawatt recovered energy generation plant to supply power to eBay’s data center in Salt Lake City.  Just two weeks ago Ormat also signed a second agreement to develop a 60 megawatt geothermal project in Indonesia.

Ormat delivered $539 million in total revenue in the past twelve months. Unfortunately, the net result was a deep loss of $205.6 million or $4.47 per share.  Ormat recorded an impairment charge of $263.4 million related to its North Brawley power plant located in Imperial County, California.  The impairment charge was taken after the company made a decision to operate the power plant below maximum capacity.

Beyond the impairment charge Ormat has been a consistently profitable company.  Cash flow from operations totaled $323.6 million in the last three fiscal years, representing conversion of 24.4% of sales to cash.  In my view, impressive cash generation helps justify the forward earnings multiple.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

July 17, 2013

Is Fracking for Enhanced Geothermal Systems the Same as Fracking for Natural Gas?

Meg Cichon

Advocates for both natural gas and geothermal are up in arms over whether fracking for enhanced geothermal systems should be scrutinized with the same parameters as natural gas.

Ormat sucessfully used EGS technology to increase the capacity of its Desert Peak 2 plant in Nevada by 1.2MW. Photo Source: Ormat

The U.S. geothermal industry recently scored a big win when its first enhanced geothermal system (EGS) project went online in April. ORMAT (NYSE:ORA) was able to stimulate a previously unproductive well at its Desert Peak project with EGS technology — injecting fluid into a well to reopen cracks and create a resource reservoir — and found an additional 1.2 megawatts (MW) of capacity. Renewable energy experts applauded the project, dubbing it a "game-changer" and a "shining moment" for the industry.

Though the project represents a breakthrough for EGS technology and the geothermal industry in general, EGS has come under fire, with opponents accusing it as being just as dangerous as oil or natural gas hydraulic stimulation, commonly known as fracking. While traditional geothermal energy is viewed as clean renewable energy, could EGS technology, with its similar "fracking methodology," coupled with its rocky past, come under the same intensive scrutiny as natural gas fracking?

EGS and Earthquakes

Perhaps the most notorious EGS project is one that was never completed in Basel, Switzerland — constructed on a known seismic fault and suspended in 2006 when it generated earthquakes that reportedly caused millions of euros in damage to local infrastructure. The project was cancelled in 2009 after several reports said that if continued, it would cause more earthquakes and would lead to more damage each year.

"It's easy to generate a lot of fear. You can scare people about things without providing much solid information," said David Stowe, communications director at AltaRock. "The Basel story is dredged up over and over again — but we have learned from it, and it is pretty easy to put safeguards in place that will severely minimize risk."

Since its cancelation, many have pointed to the Basel project as a reason to avoid EGS altogether. However, the U.S. Department of Energy (DOE) remained undeterred, and developed geothermal-induced seismicity protocol and further stringent safety measures with Lawrence Berkley National Labs to prevent major seismic events - the only protocol in place for any sub-surface energy industry, according to Doug Hollet, director of the DOE geothermal energy program.

The DOE has been working on several EGS projects, including AltaRock's innovative Newberry project in Bend, Oregon. To ensure that the Newberry project does not cause significant seismic events, AltaRock has implemented rigorous protocols and created an advanced microseismic network system of about 20 seismometers that surrounds the project both on the surface and in wells 1,000 feet below the earth. The seismometers pick up the sounds that fractures make when they grow, triangulate and then displays the location of the fracture zone on a computer screen — AltaRock has its own modeling software for this, said Stowe.

"We have engineers outside monitoring pumps, two or three geologists on the command trail monitoring computer screens, and additional monitoring equipment," explained Stowe. "It's an intricate operation."

In natural gas, seismic activity is not the major concern when it comes to the fracking process. According to Stowe, the reinjection of the spent working fluid causes the most problems. "It creates a huge bulge when you re-inject all this water; pressure builds and the earth moves to compensate for that, which can cause a seismic event," said Stowe — adding, however, that this isn't a common occurrence.

According to Andrew Place, interim director and president of the Center for Sustainable Shale Development, seismicity is more of a concern for EGS due to the ongoing nature of the technology, whereas natural gas enters a site, fracks for the resource and moves on. "[For natural gas] the strong concern is for disposal wells, and if you don't site them carefully and drill in a close proximity to an existing fault that is highly stressed, you could set off a substantial seismic event," he said. This can be avoided with pre-drill modeling to ensure the avoidance of fracture networks and monitoring for seismic events — similar to the precautions already being taken at the Newberry project site.

Fracking vs Slipping

According to Hollett, the fundamental difference between natural gas fracking and EGS fracking is the injection process. The oil and gas industry injects water and a proppant (a mix of sand and chemicals), at a very high pressure of around 9,000 psi or more, which breaks though the rock and holds the cracks open; otherwise they would close when the fluid stops flowing.

EGS, however, uses water, and sometimes acid, to shear the rock and cause a "slip." "You're trying to make two rock faces slide past each other slightly, which creates a little bit more space between them," said Lauren Boyd, EGS program manager at the DOE. This is where fractures or weaknesses in the rock likely existed already and were plugged by mineral deposits over time. Boyd compared the process to putting an ice cube in a glass of hot liquid: "cracks will form where there are existing deformities in the ice, which is similar to what happens in the subsurface with closed fractures," she said.

As for long-term effects, "we are talking about very small fractures very deep in the earth — there is really little or negligible long-term impact there," said Hollett.

Contamination Concerns

Since many believe EGS technology to be similar to natural gas fracking, the same concerns about leakage, spills and resulting groundwater and soil contamination exist for both technologies. After all, according to Popular Mechanics, in the past two years alone, natural gas fracking has caused numerous surface spills including several projects that have contaminated groundwater.

AltaRock plans to combat these problems at the Newberry project by using a multizone stimulation process. Water is injected into a single well at a pressure of about 2,000 psi to stimulate cracks in the rock, which eventually spider out to create a "zone." Once a zone is complete, pressure is dropped to 1,000 psi and a diverter made of biodegradable plastic (similar to plastic developed that allows water bottles to biodegrade in landfills) is injected into the well to "gum up" the cracks, according to Stowe. Pressure is then increased to 2,000 psi to start a new fracture zone, and then a new batch of diverter is made to plug up holes at hotter temperatures. The process repeats until all zones are created, and water flow is then stopped to allow the well to heat up. It takes about one week for the diverter to break down into water and CO2, which is eventually used to generate power once the plant is built, said Stowe.

According to several experts, many of the issues related to natural gas fracking can be prevented with the same type of proper protocol and procedures in use at the Newberry project. For example, in 2011 Chesapeake Energy (CHK) reportedly lost control of a well in Pennsylvania. The well cracked, spilled and contaminated a nearby stream - this could have been prevented by using stronger cement and casings to ensure an impermeable seal.

The natural gas industry is slowly realizing that it needs to reduce these issues to gain public confidence, said Stowe, so it is working with state regulators to create some of the same regulations that exist for geothermal. Texas became the first state to require companies to reveal what is in its fracking solutions. And more recently, Illinois passed some of the "toughest fracking regulations" in the U.S., and will require companies to reveal chemicals used and test groundwater before and after fracking. "The best way to get around issues is to adequately fund state agencies, employ smart people with decades of experience, gain support from the surrounding regulatory framework and a commitment from the Environmental Protection Agency," said Place.

Though there are far fewer EGS projects compared to the thousands in natural gas, Hollett is confident that if the geothermal sector follows best practices, drills wells properly and works with regulatory agencies, it will mitigate the potential for any adverse environmental impacts.

Place agrees, and points out that both technologies have potential risks, neither of which are served well by avoiding them. Though there are different risk pathways, he said, risks are risks, and the industries not only needs strong regulations, but strong practices and responsible development — it "goes hand-in-hand" for both technologies.

"At Newberry [regulations are] rigorous - that's how it should be, and that's okay. Fracking should be completely safe, and if it isn't then someone is doing a sloppy job," said Stowe. "I'm hopeful that the natural gas industry will [work to create regulations and protocols], because in my opinion fracking is here to stay — I don't see it going anywhere any time soon."

Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on, and is republished with permission.

April 17, 2013

Ormat's Enhanced Geothermal Project Now On Line

Meg Cichon
Ormat's 21.8 megawatt Desert Peak 2 plant in Nevada. Photo Source: Ormat

A major challenge for the geothermal industry is reducing the risk of its exploration and drilling phase – there is a 40-60 percent chance that each $5-7 million well is ultimately deemed unproductive. But that statistic may soon change. In what many in the industry are calling a game-changer, the nation's first enhanced geothermal system (EGS) to supply electricity to the grid came online last week. ORMAT's [NYSE:ORA] Desert Peak 2 project is producing an additional 1.2 megawatts (MW) of power to its existing nearby power plant.

ORMAT started the project back in 2002 and has spent the past decade researching with U.S. Department of Energy (DOE) how to make an in-field EGS project work. When hot rocks below the surface cannot be permeated with conventional geothermal technology, EGS technology is used to pump highly pressurized fluid into existing fractures of the hot rock in order to create a flowing reservoir.

At Desert Peak, ORMAT had previously drilled a well that only allowed an injection rate of about four gallons per minute, which was then deemed unproductive and abandoned.  After performing years of research that included creating seismicity protocol, the EGS procedure was a success, and the well now has an injection rate of up to 1,600 gallons per minute — it was essentially connected to the existing reservoir at the site.

“The really exciting part is that this technology is, in short, a game-changer,” said Paul Thomsen, director of policy and business development at ORMAT. “Folks in the industry can now go back to existing wells that were unproductive if they had permeability problems, implement this technology at a relatively low cost, and potentially breathe life into unproductive wells — this can essentially increase the longevity of an existing project or increase power output.”

Acknowledging that this project is a huge leap for geothermal technology, Karl Gawell, executive director of the Geothermal Energy Association (GEA), reminded industry advocates that the technology has a long way to go at a recent press conference. “I don’t want to overstate where EGS is — there have been some successes and a green light is on the program right now to move forward,” he said, “but we’re decades away from the MIT ideal of EGS projects.”

Thomsen admits that ORMAT took a “conservative” approach to utilizing EGS technology. Instead of trying to create a new geothermal reservoir in an area with unknown potential, it started by proving the technological aspects of EGS in-field at an existing facility. Thomsen is confident that the technology can be used to further develop standalone EGS systems.

Doug Hollett, program manager of the U.S. DOE Geothermal Technologies Program, reiterated the importance of this project during a telephone conference. He explained that Desert Peak 2, and other EGS projects in the works, are establishing a pathway to low-risk and low-cost EGS. “Rather than EGS being a large number that sits out there in the future, we’ve got a pathway were developing that allows us to perform EGS in-field, which allows us to get to larger targets,” said Hollett.

“This is a shining moment for the geothermal technologies program. We don’t see any barriers to implementing this technology to date,” said Thomsen. “There are no existing unknowns — we’re going into wells and breathing new life into them.”

  Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on, and is republished with permission.

March 04, 2013

Dispatchable Geothermal Plant May Shape Future Deals

Meg Cichon

A fully dispatchable geothermal plant in Hawaii may influence power contracts in states like California that have a significant amount of energy but dwindling capacity with intermittent renewables.


The geothermal industry has been struggling with the same barriers to development for years. It's a frustrating situation: while geothermal is a reliable, steady baseload form of renewable energy, its development expenses overshadow its obvious long-term benefits. Meanwhile, other intermittent renewable sources such as wind and solar are able to take advantage – and control – of state renewable portfolio standard (RPS) policies and other incentives due to their lower costs of deployment.

‘Clearly we have a situation where geothermal is not given its due, it is not properly valued, and is being put on parity with wind and solar when we know they are intermittent technologies,’ explained Halley Dickey, director of business development at TAS Energy during a session at the recent REWNA Conference and Expo in Orlando, Florida. 

Considering these challenges, companies are burning the midnight oil to come up with innovative ways that make geothermal a smart, valuable investment for customers, and experts at ORMAT (NYSE:ORA) believe they may have come up with a winning solution. According to Paul Thomsen, director of policy and business development at ORMAT, it has strong implications for the industry as a whole in 2013 and beyond. 

The ORMAT project is set in Hawaii, where it recently built an 8-MW expansion on its 30-MW Puna geothermal power plant. In order to get the utility, Hawaii Electric Light Company (NYSE:HE), aka HELCO, to agree to purchase power from the expansion, ORMAT made the entire plant fully dispatchable, meaning that it is controlled by HELCO, who can ramp service up or down to serve the auxiliary energy load for the grid.

Hawaii has a unique situation in which it has too much power on its grid, however the state depends on imported oil for 90 percent of its energy needs, which greatly increases costs.  According to Thomsen, Hawaii has invested a lot into its diesel infrastructure, so it faces the dilemma to either stop purchasing diesel and invest in new geothermal equipment, or keep purchasing diesel using existing infrastructure.

‘From a utility perspective, the fuel costs pass through to ratepayers, so there is no impact on them as a company. Shutting down those power plants and purchasing new equipment does have a capital impact on them and they have to figure out as a company if they want to make that large capital investment to help ratepayers 10-20 years down the road,’ explains Thomsen. ‘I think they are starting to make those decisions, but at this point they are about 30 percent over capacity – they knew they wanted this geothermal power, but they had to justify it to the PUC, so that’s why they have us on grid support.’

The power contract for the Puna plant is significantly lower than the island’s wholesale prices, which are between US$0.20-$0.30 per kWh. The expansion allowed for 5 MW of the original 30-MW plant that is still on avoided costs to be reduced to a fixed rate of about $0.11 per kWh – a 50 percent savings. And for the new 8-MW expansion, Thomsen says they offered HELCO a price of $0.09 during peak, and $0.06 off-peak. 

‘We’re providing frequency control and power to the grid when the utility needs it, so they can say “Hey, were having problems; everybody is turning on their air conditioner and we need to ramp up the plant to 38 MW”,’ explained Thomsen. ‘Or they can say “It’s a relatively mild day, we don’t need this power; we want to back you off to 25 MW”.’

Thomsen believes this flexibility will influence power contracts in states like California that have a significant amount of energy but dwindling capacity with intermittent renewables. The California PUC is also considering decommissioning many power plants, and even some nuclear facilities face closure, as well, which could lead to significant renewable adoption.

Elaine Sison-Lebrilla, renewable energy program manager at the Sacramento Municipal Utilities District (SMUD) explained the future need and importance of geothermal on the grid during a geothermal session at the Renewable Energy World North America Conference and Expo.  She acknowledged the fact that the more wind and solar enter the grid, the more issues utilities will likely face in the future, and geothermal will be the renewable source that provides baseload power to support the grid. 

‘We’re going to have to back down from fossils, but we still need baseload, and that to me means biomass and geothermal – not next year or the year after, but in 5-10 years. There are a lot of policy issues in play,’ said Sison-Lebrilla. ‘But we know it’s there, we know that there are impacts on our grid, we know we have to do something in addition to bringing on solar and wind.’

Thomsen says he is seeing an increase in renewable portfolio standards (RPS) for two reasons – their design (through time they get bigger), and states are starting to look at removing compliance mechanisms. Nevada, for example, allows energy efficiency projects in its RPS, and they are seriously considering removing that, which would create more demand for renewables. So instead of buying a gas peaker plant, these states can look at existing geothermal fleets to support other renewable projects with baseload power. Thomsen says ORMAT is working with regulators to value geothermal’s ancillary benefits, and sees geothermal becoming increasingly more valuable in states that have purchased wind and solar but have no capacity.

Says Thomsen, ‘We are very bullish and optimistic on that fact that we are going to see more Power Purchase Agreements (PPAs) and better value because of what the power plant in Hawaii showed regulators and utilities geothermal can do.’

Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on and is reprinted with permission.

January 05, 2013

Last-Minute PTC Revision Sparks New Hope for Geothermal Stocks

Meg Cichon
Geothermal well photo via Bigstock

The renewable energy industry had quite a bit to celebrate this week as 2013 rang in a PTC extension that many had feared would never come to fruition. Though the extension to January 1, 2014 greatly benefits the wind industry, whose PTC was set to expire at the end of 2012, it also included a provision that could be huge for geothermal development. This provision states that projects under construction by January 1, 2014 would quality for the PTC, rather than the previous rule that required projects to be completed and operational.

A 2013 Development Boom

Karl Gawell, executive director of the Geothermal Energy Association (GEA) expects this provision to significantly boost U.S. geothermal development in 2013. He explained that under the previous provision, companies were already starting to back away from new developments for fear of not being able to finish a project and qualify in time. 

This fear stems from the notoriously long project development time geothermal typically faces – an average of seven years. Therefore, geothermal faces a much earlier drop-off for the PTC than other technologies, explained Paul Thomsen, director of policy and business development at ORMAT (NYSE:ORA). Though the geothermal PTC expires at the end of 2013, most developers had lost hope of taking advantage of the incentive years ago.

“The fact of the matter is with geothermal having such a long lead time, we faced that hurdle two or three years ago because as the PTC stands now, we have to have a project constructed, online, and delivering power to the grid by Dec 31st of 2013,” said Thomsen. “In the geothermal development world that is right around the corner, so people stopped drilling projects a year or two ago because they knew they couldn’t risk missing that deadline.”

But with the new provision, Gawell believes the industry will now be scrambling to get more projects qualified in 2013.

“The Geothermal Energy Association estimates that new geothermal power projects in as many as a dozen states could be stimulated to move forward this year as a result of this change,” said Gawell in a release following the decision.  “Congress’ action will spur significant new employment and sustain geothermal industry growth. Consumers and utilities will benefit, as well, because developers will have greater certainty about whether the credit will be available for their project.”

Thomsen explained that the provision is like the geothermal industry’s “fiscal cliff” – if a project can start construction and still be eligible for the tax incentive, the industry won’t fall. Projects that had previously put on the breaks can now move forward and the industry can expand and take advantage of the vast amount of resources in the U.S.

Renewable Portfolio Standard Push

While the PTC provision is a huge win for geothermal, many in the industry remain bullish on other policies and strive to set geothermal on a “level playing field” with other technologies. Thomsen said that industry advocates will continue to work with energy regulators, particularly in many Western States, to properly value geothermal energy with a focus on its inclusion in renewable portfolio standards (RPS).

Many states will soon see an increase in RPS mandates, and some, like Nevada, are starting to consider removing compliance mechanisms such as energy efficiency. These changes would create more demand for renewable energy, which is where geothermal advocates are trying to state their case: while many states have brought on wind and solar to fill the RPS, those in the geothermal industry believe that states will start to have intermittency issues. Geothermal can be brought on as a baseload power to help stabilize the grid.

“Though [other renewables] they may have gotten a leg-up on us in the past couple of years, we’re catching them. It’s like the tortoise and the hare – wind and solar raced off and created tons of projects that all delivered energy, but with no capacity,” said Thomsen. “We have been a little bit slower because we are building a project that has energy and capacity and now utilities and regulators are starting to say ‘holy cow, capacity is much more valuable to us today than energy.’”

Industry advocates will not only be fighting for a level playing field with other renewables in 2013, said Thomsen, but also for the same treatments that oil and gas companies already receive. Fossil fuels have had some of the same subsidies for more than 100 years, and they don’t expire – geothermal could take advantage of some of these provisions. For example, oil and gas can deduct their well field drilling costs from their gross revenue, explained Thomsen. There are other tax incentives that these industries get in the tax code that could benefit geothermal in reducing upfront capital costs -- a major hurdle to development. 

“We are always going to be pushing policies that create a level playing field and give us an equitable tax position so that we can compete with any technology out there,” said Thomsen. “Give us the certainty in tax provision so we can continue to develop these projects in the future.”

Consider Global Expansion 

While the U.S. geothermal industry struggles with incentives and advocating for a fair playing field, many in the industry recommend shifting some business focus overseas in 2013. Companies like TAS Energy and POWER Engineers have recently opened offices in Turkey and Africa, where development is starting to blossom at a rapid rate.  

Though it may be beneficial to roll the dice overseas, Thomsen warns that the grass isn’t always greener on the other side. While there may be action in the developing world, these countries may be just as difficult to do business in as the U.S. – companies will simply face different hurdles. While the U.S. struggles with incentives, countries like Indonesia face bankability difficulties and in Kenya, companies will be bidding for projects against government-backed companies. However, Thomsen says it is never a bad idea to have an international portfolio, but to just be aware of all possible challenges. 

“While we see the international market robust at the moment, we haven’t given up on the U.S. and we think the U.S. market can be just as robust,” says Thomsen. “It’s an ebb and flow as we go through the years.”

Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on, and is reprinted with permission.

January 03, 2013

Improved Wind Energy Tax Credit Extension Passes with Fiscal Cliff Deal

Renewable Energy World Editors
Offshore Wind Farm photo via Bigstock.

On January 1, 2013, Congress passed legislation that included the long-sought extension of wind energy tax credits in a bill to avert the "fiscal cliff" that now moves to President Obama for his expected signature.

The extension of the production tax credit (PTC) and Investment Tax Credit (ITC) is expected to save up to 37,000 jobs and create far more over time, and to revive business at nearly 500 manufacturing facilities across the country. Wind energy PTC, and ITC for community and offshore projects, will allow continued growth of the energy source that installed the most new electrical generating capacity in America last year, according to the American Wind Energy Association (AWEA).

The version included in the deal would cover all wind projects that start construction in 2013. Companies that manufacture wind turbines and install them sought that definition to allow for the 18-24 months it takes to develop a new wind farm.

Leaders of the Senate Finance Committee included that version in a "tax extenders" package they assembled in August, which made it into the overall fiscal cliff deal that passed the Senate early Tuesday morning and the House Tuesday night. President Obama is expected to sign the bill into law swiftly.

The Energy Information Administration said that wind set a new record in 2012 by installing 44 percent of all new electrical generating capacity in America, leading the electric sector compared with 30 percent for natural gas, and lesser amounts for coal and other sources. 

However, America's wind energy workers have been living under threat of the PTC's expiration for over a year and layoffs had already begun, as companies idled factories because of a lack of orders for 2013. Uncertain federal policies have caused a "boom-bust" cycle in U.S. wind energy development for over a decade.

Half the American jobs in wind energy – 37,000 out of 75,000 – and hundreds of U.S. factories in the supply chain would have been at stake had the PTC been allowed to expire, according to a study by Navigant Consulting.

"On behalf of all the people working in wind energy manufacturing facilities, their families, and all the communities that benefit, we thank President Obama and all the Members of the House and Senate who had the foresight to extend this successful policy, so wind projects can continue to be developed in 2013 and 2014," said Denise Bode, CEO of AWEA for the past four years who recently announced that she is stepping down.

"Now we can continue to provide America with more clean, affordable, homegrown energy, and keep growing a new manufacturing sector that's now making nearly 70 percent of our wind turbines in the U.S.A.," said Rob Gramlich, who took over as AWEA's interim CEO yesterday.

About the authors: Renewable Energy World's network editors help deliver the most comprehensive news coverage of the renewable energy industries. Based in the U.S. and the UK, the team is comprised of editors from Pennwell Corporation's myriad of publications that cover renewable energy.This article was first published on and is reprinted with permission.

November 26, 2012

Geothermal Stocks Warming Up

Tom Konrad CFA

the geysers
Geothermal Plant at The Geysers.  Photo Source: Calpine (CPN)

After a couple years of chilly investor sentiment, geothermal stocks are starting to warm up.  The sector has been so beaten down that the small exploration and production players seem to have lost what little following they had, and so recent good news has gone mostly unnoticed.

Last week, industry leader Ormat Technologies Inc. (NYSE:ORA) set the stage by beating analyst expectations for both earnings and revenue per share in the third quarter, and announcing a deal to buy a project in Honduras.  This led to an upgrade by Barclays.

As the only geothermal stock with the size and liquidity needed by large US investors, Ormat has long been too expensive (forward P/E of 23, even after a decline from over $30 in early to less than $17 today) for a relatively low margin utility business, so I prefer the much cheaper small geothermal developers, US Geothermal (NYSE:HTM, TSX:GTH), Ram Power (TSX:RPG, OTC:RAMPF), and Alterra Power (TSX:AXY, OTC:MGMXF.)

It’s hard to generalize from one geothermal company to another.  Each geothermal project is unique, not only because of the local electricity markets and legal structures, but also because of the idiosyncrasies of each project’s geology and chemistry.  Nevertheless, the smaller developers seem to be following Ormat’s lead.

On Thursday, US Geothermal (NYSE:HTM, TSX:GTH) received the $10.7 million cash grant for its San Emidio project, allowing the company to pay down a $7.5 million bridge loan.  A year ago, I would not have considered this significant news, since I assumed the US Treasury would pay all such grants in full.  That was before the Treasury cut the award for Western Wind Energy‘s (OTC:WNDEF, TSX-V:WND) grant by $12 million (3% of the request) after delaying it for almost two months.  After that experience, a cash grant delivered  seems a lot more significant than it once did.  About $1 million of the grant application is still under review by the Treasury.  This portion of the grant is related to some exploratory wells.  Management is uncertain if this portion of the grant will be accepted, but it does not seem to be something that they are counting on.

UPDATE: Since this article was first published on November 16th, US Geothermal announced that it had achieved full commercial operations at its Neal Hot Springs facility in Oregon, and that the plant was operating above expectations.  The stock is up 31% at $0.42 since then.

US Geothermal also reported third quarter earnings on Thursday, and the message was one of steady progress.  Last year, Nevada Geothermal Power (TSX-V:NGP, OTC:NGLPF) and Ram Power were both tripped up by unpleasant surprises at their biggest projects.  US Geothermal, in contrast, has been executing smoothly, and now has two operating projects.  This will make the company less vulnerable to the vagaries of geothermal development at future projects.   Part of that seems to be US Geothermal’s project selection.  San Emidio, for instance, was an existing project with a known reservoir, which they upgraded by drilling some new wells and replacing an aging power plant.  Because it was an operating project, US Geothermal knows a lot more about the idiosyncrasies of the reservoir than they would if it had been a greenfield project, and it was just those sorts of idiosyncrasies at Nevada Geothermal’s Blue Mountain project which ended in the company losing all its equity in the project because there is not enough revenue to repay the loan.

Ram Power (TSX:RPG, OTC:RAMPF) has also been making progress.  Last year, problems developing their Jan Jacinto project caused large cost overruns.  But the project now seems to be back on track with a new contractor.  The company was able to negotiate a 17% increase in the power sales agreement which will make up for some of the extra costs, amounting to an annual $10 million in additional revenues per year when the project is complete.  Despite this, the stock is being held back because steam production at San Jacinto is less than expected, a problem which they hope to remediated using the drilling reserves included in the original project financing.  While there is always a significant risk that such remediation attempts will not succeed (as happened at Nevada Geothermal), the risk seems to be adequately compensated is a stock trading at less than a quarter of its book value.

Alterra Power (TSX:AXY, OTC:MGMXF) is more diversified, and hence safer than Ram and US Geothermal, with six operating geothermal, wind and run-of-river hydro power plants.  Alterra currently hovers near profitability, with quarterly results fluctuating due to the seasonal production of its wind and hydro projects.  Alterra also has a strong balance sheet (unlike Ram) allowing it to fund development and acquisition of additional projects (like a solar project acquired from First Solar (NASD:FSLR)) without returning to the equity markets.

Alterra recently signed an agreement with the Philippines based Energy Development Corporation (EDC) to fund the development six of Alterra’s geothermal projects in Chile and Peru, subject to EDC being satisfied with the results of due diligence field work on the projects.  The stock did not see much of a boost from the announcement, most likely because EDC has not yet committed to the projects.  Yet given Alterra’s current value pricing this seems as good a time as any to buy on the expectation that EDC will chose to go ahead with development at at least one of the projects.


Geothermal developer stocks have remained at beaten-down levels for over a year now, despite the companies making significant progress on their projects.  While geothermal development is a much riskier business than more predictable development of other types of renewables, all of these developers are trading at a fraction of book value, which more than compensates for the risks involved, especially when held as part of a diversified portfolio.

A dip in a hot spring might be just the thing to the chill gripping the worlds stock markets in late 2012.

Disclosure: Long HTM, RPG, AXY, WND

This article was first published on the author's blog, Green Stocks on November 16th

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 10, 2012

Report: Solar and Geothermal Projects Have Over 10% Returns, But Finance Remains Difficult

Ryan Hubbell

Despite healthy expected returns, finance-related challenges remain the largest barriers to renewable energy development, according to NREL's Renewable Energy Finance Tracking Initiative (REFTI).

Two recently released reports on solar and geothermal technologies show greater than 10% expected returns for both developers and tax equity investors. Yet roughly half of both geothermal and solar respondents (350 in total) reported financial issues (project economics, PPAs, creditworthiness, and raising capital) as the largest barriers to development. In light of this, only 11%-13% of respondents reported abandoning their projects.

project expected returns by

Figure 1. Expected returns on developer equity for all solar technologies and project sizes Q4 2009 – 2H 2011


Installed Costs
($/W net output)

LCOE ($/kWh)




Solar CSP



Small-Scale PV
(< 1 MW)



Large-Scale PV
(≥ 1 MW)



shows aggregate PPA term (years), PPA escalation rate and
first-year PPA price for geothermal, solar CSP,
large-scale PV and wind, Q4 2009 &ndash; 2H 2011

Figure 2. Average PPA term, escalation rate, and first-year price (measured in ¢/kWh and size of bubble) by technology, Q4 2009–2H 2011

Graph shows construction insurance, interest
during construction, debt set-up, engineering and legal
fees as a percent of total project costs for wind, small-
and large-scale PV, geothermal and biomass-electric, 2H

Figure 3. Project soft costs as a percent of total project costs by type and technology

Source: 2H 2011 REFTI data

Geothermal projects reported the highest returns among all technologies (Figure 1) with both developer and tax equity returns estimated to exceed 15% [1]. Returns were rather comparable between small- and large-scale solar, with concentrated solar power (CSP) reporting the lowest expected tax equity returns. Although some research suggests tax equity investors' returns can be much higher than developers', the rather tight spreads reported by REFTI participants indicate this may not necessarily be the case. Higher developer participation could also be influencing expected returns.

On the cost side, CSP reported lower estimated installed costs and LCOE than PV (Table 1), which could be due to a number of factors, including the timing of panel purchases, estimated nature of total CSP project costs, and storage capabilities. Prior to the second half of 2011, installed PV costs were declining faster than module prices [2], indicating balance-of-system costs were declining as well. This trend reversed in 2H 2011, however. Small PV, for example, reported a 60% increase from the prior period ($0.039 to $0.063/W). Conversely, LCOE reportedly dropped for both PV categories, but large PV is trending down and small PV is trending up over the entire timeframe. Geothermal reported the lowest LCOE, averaging $0.067/kWh from late 2009 through 2011.

In line with LCOE cost data, first-year power purchase agreement (PPA) prices for large-scale PV were also highest among the four utility-scale project sizes and technologies shown in Figure 2 (small PV excluded due to retail/wholesale price differences). Geothermal reported the longest PPA terms and second-highest year one PPA price at $0.098/kW. This is likely due, in large part, to its high capacity factor and dispatchability compared to wind and solar.

Additional insight into balance-of-system (or "soft") costs was gained from the most recent REFTI questionnaire, which asked participants to report various soft costs based on their percentage of total project costs. As illustrated in Figure 3, geothermal reported the largest total percentage of soft costs at 15%. Both PV scales reported lower soft costs with wind recording the lowest—at 4.5%. Combined, engineering and interest costs during construction accounted for the largest portion, ranging between 45% and 67%.

See these links for the reports:

Renewable Energy Finance Tracking Initiative (REFTI) Solar Trend Analysis

Renewable Energy Finance Tracking Initiative (REFTI): Snapshot of Recent Geothermal Financing Terms, Fourth Quarter 2009 – Second Half 2011

This article was first published on NREL's Renewable Energy Project Finance blog, and is reprinted with permission.


[1] Until 2H 2011, "N/A" was not an answer choice, creating a response that could slightly alter the weighted average calculations. For example, if respondents answered 0 – 6% when in fact there was no tax equity being utilized, a 3% value would be used in calculating the weighted average. Effects should be minimal, as approximately only 13% of PV respondents reported 0%-6% over the REFTI timeframe and it's likely only a fraction of those actually had no tax equity.

[2] Module prices as reported by SEIA / GTM's U.S. Solar Market Insights Reports, 2010 – 2011

September 30, 2012

Geothermal Transmission 101

Paul Schwabe

Among renewable resources, one of the most valuable attributes of geothermal electricity is the baseload characteristic of the energy resource. That is, geothermal electricity generators are able to deliver a stable level of power production over time. Yet for better or worse, this baseload characteristic—along with other notable factors such as size constraints and varying market segments—reveals that interconnecting a geothermal plant to a transmission or distribution system poses unique challenges compared to other renewable energy technologies [1].

A recent report by NREL, "Geothermal Power and Interconnection: The Economics of Getting to the Market," delves into the specialized world of geothermal transmission. Among other things, this report finds that from a transmission perspective, not all types of geothermal energy technologies are treated equally. Conventional hydrothermal technologies likely fit differently into the transmission framework than do emerging geothermal technologies such as enhanced geothermal systems (EGS), co-produced geothermal with oil and gas facilities and geopressured geothermal.

Table 1 shows three geothermal technologies and the corresponding market segment they serve. It also describes how particular attributes of each technology present challenges to connecting to the grid and how they may be considered in long term system planning.

For example, due to their large project size and their proven commercial viability, hydrothermal geothermal technologies offer a wide range of transmission options; the electricity produced by the plants can serve either local grid networks or be exported to other networks (referred to as balancing authorities, "BA," in Table 1). The report's author suggests that until they are proven, emerging technologies such as EGS are best utilized serving their home network, but if successful, electricity from these new technologies could eventually be transmitted to other networks as well. Meanwhile, co-produced and geopressured geothermal are likely restricted to distributed generation applications due to remote project locations, large electrical demand of the oil or gas facilities, and relatively small generation capacities (i.e., less than 5 MW).

Table showing the attributes, challenges and
long term system planning characteristics for conventional
hydrothermal geothermal, co-production geothermal, and
emerging technologies. Table describes each of these
categories for distributed generation, local network
generation, power sales to another balancing authority
using existing lines and power sales to another balancing
authority using new lines.

Table 1. Geothermal Generation Groupings and Transmission Requirements. Source: [1]

The author also finds that there are several emerging markets in the Western United States where there is expected to be a near-term need for new baseload generation. These markets are largely where coal plants are expected to be taken offline in the next 5-10 years.  It is estimated that there will be more than 3,000 MW of new baseload opportunities that will emerge from diminished coal usage across the Western United States [1].  While some of these resources will be replaced with other forms of fossil fuel electricity generation such as natural gas, there is likely enough of a need to also elicit interest from geothermal developers.

The report also shows what the author succinctly describes as "The Uphill Economics of New Transmission." Generally, the cost of new transmission is determined by how much electricity the new line caries. Due to economies of scale, a MW of carrying capability on a large transmission line is cheaper than a MW of carrying capability on a smaller line.  Figure 1 shows the cost of transmission per megawatt served over various transmission line sizes.

Bar chart showing the Dollar per MW capacity of
new electricity transmission. The cost per MW is shown for
both 100 mile and 600 mile lines and at different voltage
levels. The cost per MW generally decrease and the line
capacities&rsquo; increase.

Figure 1. Total Line and Substation Costs per Megawatt of Transmission Capability.  Source: [1]

Given that most U.S. geothermal plants are less than 80 megawatts in capacity, they are relatively small energy generators compared to other baseload electricity sources such as coal or natural gas power plants.  Without economies of scale, new transmission for commercially available hydrothermal geothermal is a significant challenge, and in practice, drives even proven hydrothermal geothermal development into areas with existing, but underutilized transmission in place [1].

As each of these geothermal technologies offers the benefit of a stable electricity generation profile, there is likely to be a demand for the energy they produce. However, the role geothermal energy will play in long term transmission planning remains to be seen.

Paul Schwabe is an Energy Analyst with the National Renewable Energy Laboratory’s project finance team and has significant expertise in wind and geothermal projects. He has over 10 years of experience in the energy industry, including electricity market analysis, natural gas forecasting, and financial modeling.
This article was first published on the Renewable Energy Project Finance blog.

September 12, 2012

Closing the Geothermal Loop

by Debra Fiakas CFA

the geysers
Calpine Plant at The Geysers.  Photo Source: Calpine

In the article “Is Ormat Technologies Misunderstood?”, I outlined a few performance measurement issues, but left out of the story Ormat’s position in the relative position in the geothermal industry.  Naturally I received comments from readers about why I made no comparison of Ormat to Calpine Corporation (CPN:  NYSE), the largest U.S. generator of electrical power using geothermal sources.  On a go-forward basis Calpine shares are valued about the same as Ormat Technologies, Inc. (ORA:  NYSE), at least on the basis of projected earnings per share.  However, besides simply being a larger company with greater longevity in the power generation market, Calpine offers a significantly higher dividend yield and benefits from a sturdier balance sheet.  There are other differences.

Other Differences

Calpine relies on open-loop system that pumps superheated steam out of deep geological formations.  After using the steam to drive turbines that turn electricity generators, the water is sent to cooling towers and is either reused or evaporates.   With existing technology, Calpine recycles approximately 25 percent of the water back into the steam reservoir with the remainder lost to evaporation.  Herein lies Calpine’s problem.

As superheated steam is removed from deep underground the formations lose pressure.  At The Geysers in California were Calpine operates 15 power plants, peak production capacity was 2,000 megawatts in the 1970s.  Calpine is only producing about 850 megawatts today because pressures have reportedly declined.  Indeed, Calpine has made arrangements with nearby local governments to treat and infuse waste water into the formations as a means to restore underground steam pressure.

Calpine describes this practice on its corporate website as if it was just a community service that no one else would undertake.  In reality it is vital to the longevity of The Geysers.
“The company helped develop the Lake County-Southeast Geysers Effluent Pipeline project, which was the first wastewater-to-electricity project in the world. This 29-mile underground pipeline delivers eight million gallons of reclaimed water to The Geysers every day. Since it began operating in September 1997, more than twenty billion gallons of treated wastewater from Lake County have been recycled into the steam reservoir, increasing the long-term productivity of the resource…. In addition, the company helped launch the Santa Rosa Geysers Recharge Project that transports 11 million gallons of reclaimed water per day from Santa Rosa to The Geysers through a 41-mile underground pipeline.”
Calpine makes little mention in its various public filings of the potential demise of The Geysers as a consequence of the open-loop system it uses in the project.  It also does not mention that the agreements with local governments for waste water are subject to renewal.  Local governments are keenly pursuing various technologies and projects to turn waste streams  -   both solid and liquid -  into cash streams.  As a consequence Calpine may have competition for these critical water sources in the future.  The agreement with Lake County expires in 2022 and the Santa Rose arrangement runs through 2038.  Calpine quietly deals with the dwindling water pressure issue by backing off on power generation.  The company has adjusted turbines sizes to the reduced flow levels.

By contrast Ormat relies on a closed loop system that returns water underground after the superheated steam is used.  Ormat calls it the Ormat Energy Converter that is based on proprietary tweaks to organic rankine cycle technology.  Ormat claims its air-cooled condenser technology enables re-injection of almost 100% of all extracted geothermal fluids.  As a consequence Ormat does not have to worry about sourcing external water resources to ensure reservoir life.  There are a couple of other benefits:  no rotten egg smell from the steam brought up to the surface and exposed in an open system and no potentially toxic chemical additives required to treat re-injected water.  Ormat’s systems also have a lower profile against the existing terrain and vegetation.
Enhanced Geothermal Systems

To be fair Calpine is not resting on its open-loop system  -  although investor would never know it by reading Calpine’s public filings.  Even though the quarter and annual reports are silent on the topic, Calpine is actually hard at work on an enhanced geothermal system.  EGS as it is called is expected to sidestep the thornier issues associated with conventional open-loop systems.     

First it has to be acknowledged that geothermal energy compares very favorably to other energy sources in terms of the trade-off between power­ generated and environmental cost.  It does not create CO2 toxic emissions as with coal or natural gas powered utilities.  It does not compete with food crops like ethanol.  It offers consistent 24/7 electricity generation that requires no back-up power source or storage infrastructure like solar or wind.

The U.S. Geological Survey did a bit of math and determined that U.S. geological formations (mostly in the Western section of the country) could yield 16 gigawatts of potential power from easily accessible geothermal formations.  Fine tune certain technologies and the U.S. could wring 725 gigawatts of power out of the Lower Forty-eight.  To put that in perspective the U.S. uses approximately 4,200 gigawatts of electricity each year.  The number could go several times higher if engineers can figure out how to capitalize on the geothermal potential in hot, dry rock that is found abundantly all over the U.S.  MIT estimates that, using EGS, just 2% of the heat below surface in the continental U.S. at depths of 3 to 10 kilometers could supply 2500 times the nation’s current energy needs.

The math has Calpine driving hard to perfect EGS.  Unlike conventional geothermal like that used by Calpine at The Geysers, EGS does not require an existing underground reservoir of steam or water.  Instead fracturing technologies are used to inject cold water under low pressure to expand existing fractures in a hot rock formation.  Another well is drilled at the end of the system to extract the steam that is created.  The water can be cooled and re-used.

A big plus is that EGS requires substantially less water.  However, it engenders a whole new issue.  The fracturing technologies are the same as those that have environmentalists campaigning against the oil and gas industry.  The EGS fracturing process could lead to small earthquakes.  However, the low pressures of the water help reduce the likelihood of substantial quakes.  The water is also free of chemicals.

Calpine has a demonstration site in the works in The Geysers.  It formed a partnership with the U.S. Department of Energy in 2008 to build a $12 million EGS demonstration project.  Calpine started community hearings in August 2011 to bring local residents in to the conversation.

Help may be on the way from Ormat Technologies.  Along with Hi-Q Geophysical, Inc., Ormat is developing surface and borehole seismic methodologies using compression and shear waves for characterizing fractures in EGS.  In 2008, Ormat Nevada started working with GeothermEx and other research groups to stimulate multiple wells at Brady Field in Nevada to evaluate a fracturing system.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  ORA and CPN is included in the Geothermal Group of Crystal Equity Research’s Electric Earth Index.

September 10, 2012

Is Ormat Technologies Misunderstood?

by Debra Fiakas CFA

Olkaria III Geothermal Power Plant, Kenya
Shares of geothermal power developer and utility Ormat Technologies (ORA:  NYSE) are trading at 24.7 times the consensus estimate for 2013.  That seems pricey on the surface, but the stock is down from a 52-week high of $22.24.  The stock gaps up and down with regularity, suggesting ORA is a battle ground for bulls and bears.  The fact that the 50-day moving average price continues to descend toward the longer-term 200-day average, hints that maybe the bears are now holding sway.

This is one of my favorite companies in the Geothermal Group of our Mothers of Invention Index for energy innovators.  Ormat operates geothermal utilities in the U.S. and around the world.  Electricity sales represent about three-quarters of the Ormat’s sales.  The company also provides engineering and procurement services for third-party energy developers and sells power plant equipment using its proprietary technologies.

Ormat has been profitable for a while, so I was a surprised to see a negative trailing earnings number in a popular financial database.  Taking a closer look, I found that Ormat operations are as strong as ever.  Gross profit margin in the first half of 2012 was at a record 30.5%.  Operating margin also hit a record 19.7%, making it clear management is not squandering the extra profits on unnecessary administrative spending.

Investors need to look carefully at the tax line on Ormat’s profit and loss statement.  It is messy.  In 2010, the company reported a benefit and last year the tax provision was a whopping $48.5 million.  The thing is the tax bill as shown on the income statement is just “reported” taxes.  Investors have to read the fine print in management’s comments and footnotes to figure out the real tax bill.  Alternatively, you can just turn the page to the cash flow statement where the CFO makes all sorts of additions back to net income to come clean on real-time cash expenses.  Turns out $38.1 million out of the $48.5 million tax bill reported in the year 2011 was not paid in cash at all and just sequestered away on the balance sheet for a future date.

Just in case that made sense to you, let me add a bit of complexity to the story.  Last year in 2010, Ormat reported a tax benefit of $1.1 million.  However, it really paid $10.1 million in taxes using the company’s hard earned cash.  Investors can expect more of this sort of uneven reporting of the tax obligation.  It is just part and parcel of Ormat’s business model that leads to deferred tax assets and liabilities.

Given the noisiness in Ormat’s reported net income, it is best to watch cash flow from operations (CFO).  CFO weeds out the ups and downs associated with the accounting treatment for taxes, and delivers a better read than reported net income on what Ormat is delivering to shareholders.  Ormat has converted 28.0% of sales or $417 million into operating cash since the beginning of 2009.  Ormat needs every penny for its capital spending program.  Capital expenditures over the same time period totaled $953.8 million.  The gap has been filled in by debt, most of which is associated with constructing and equipping Ormat’s geothermal plants.

The debt-to-equity ratio at the end of June 2012 was about 1.00, which is on par with the average debt load in the electric utility industry.  Since then Ormat floated another $310 million in debt to finance the Olkaria III power plant complex in Kenya.  The first two phases of the project have been profitable operations since 2000 and 2009, respectively.  The success of the first two projects should mitigate concerns investors have about the increased leverage.  There are risks inherent in geothermal energy production mostly surrounding the unpredictability of Mother Nature, but the Olkaria area has been tested.

Fortunately for people like you and me who are willing to sacrifice a bit of time to read management’s notes, there are plenty of financial reporters and investors who may have only looked rising debt or the red ink in 2011 and decided Ormat is a losing, risky operation.  The stock has traded up and down in the months since the year 2011 results were reported, but has yet to make a recovery to the late 2010 and early 2011 period when the stock was near $30 per share.  Given the shrinkage in valuations across all sectors it is too much to expect a return to ORA’s glory days in 2008 when the price topped $40 per share.

A study of Ormat’s price chart could provide insight into a good entry point for a position in a strong company with solid cash earnings.  ORA offers a dividend yield of 0.90% as a bit of icing on the cake. 

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  ORA is included in the Geothermal Group of Crystal Equity Research’s Electric Earth Index.

August 06, 2012

Geothermal in South America: Major Prospects for Development

Meg Cichon

Geothermal well photo via Bigstock
With climate threats and increased energy demand, South American countries are set to develop their vast geothermal potential. Will developers be able to acquire investment and favorable policy?

If any part of the world should be concerned about the effects of climate change, it is South America. Despite contributing some of the lowest emissions globally, many of the countries in the region are

As South America’s population is expected to rise 72% by 2035, the impact of climate change grows more significant each day. Governments are reacting with renewable energy development — and geothermal power has several major prospects.

Burgeoning Potential

South America has largely relied on hydropower, but its capacity is weakening. Though many regions have further untapped potential, most is located in remote regions with limited access to the grid, according to Meeting the Electricity Supply/Demand Balance in Latin America & the Caribbean, a report released by the Energy Sector Management Assistance Program (ESMAP).

Geothermal presents a major opportunity throughout South America, but exploratory drilling has been limited. According to the ESMAP report, the range of geothermal capacity estimates is quite broad. Though expectations may be uncertain, many regions are hopeful that exploration will reveal something more.

‘Extrapolating from the experience in the US, where there has been a large amount of exploratory drilling, the potential of conventional geothermal resources in Latin America might be as much as 300 TWh per year,’ the report states.

The most viable resources are thought to be located along the Pacific Rim, which ranges from Mexico to Chile. Key spots in the Caribbean islands also carry some potential, according to researchers.

Policy Push

Several South American countries have spearheaded policy incentives to move renewable energy plans forward. Countries of note include Argentina, Chile and Peru, according to the 2012 Geothermal International Market Overview Report released by the Geothermal Energy Association (GEA).

Argentina implemented a feed-in tariff (FiT) plan for geothermal projects, with a 15-year entitlement period after the plant is brought online. The plan also includes a goal to reach 8% of renewable production by 2016.

According to the GEA, ‘Though a 1998 law supported wind and solar generation, geothermal did not become eligible as a renewable energy source until 2007. ... In May 2009, the Genren Program was launched, aiming to purchase and incorporate 1000 MW from renewable energy plants, 30 MW of which is to come from geothermal energy.’

With geothermal potential of up to 16,000 MW, the Chilean government is ready to take advantage of its untapped renewable sources. To drive renewable development, the Chilean National Energy Commission partnered with the US Department of Energy (DOE) to create the Renewable Energy Center in Chile. According to its website, the DOE uses the facility to compile global renewable energy best practices and techniques to then use in the region.

‘The Chilean center will serve as a clearinghouse of information and analytic tools and a leading source of expertise on renewable energy technologies and policies for Chile and, once it is up and running, for the region. It will also help research, develop and promote non-conventional renewable energy projects, and will serve as a source of information for investors and policymakers.’

Chile’s non-conventional renewable energy law enforces all utilities with a total capacity of 200 MW and greater to demonstrate that at least 10% of their energy comes from renewable sources. After 2014, this enforcement will increase by 0.5% annually until 2024, when it finally reaches 10%, according to the GEA report. Chile also enforces its law of geothermal concessions, established in 2000, which regulates exploration and permitting of geothermal projects. In response to this favorable policy, a total of 83 geothermal exploration concession requests are under review as of June 2012 at Chile’s energy ministry, according to Business News Americas.

Peru is thought to have nearly 3000 MW of geothermal potential, none of which has been exploited. The country currently draws most of its energy from natural gas, hydropower and fossil fuels. Recognizing its need for energy development, the Peruvian government has set FiTs and tax incentives for renewables. It has also held auctions for contracts, including a recent 500 MW tender. Its goal is to generate 5% of its electricity from renewables by 2014.

Other South American countries have also recognized the need for clean energy and have implemented favorable policies. According to the International Energy Agency (IEA), Bolivia began its efforts in 1999 with grant incentives for rural renewable projects, and in 2000 passed a rural electrification project. In 2005, Bolivia passed the Rural Electrification Decree that promotes collaboration between private energy companies and government agencies to establish renewable projects.

Where is the Investment?

Though much investment has come from private funding, the Inter-American Development Bank has been a key player in South America. It has a five-year target to invest 25% of its loans toward climate-related projects, and it recently established the Emerging Energy Latin America Fund II.

According to its website, ‘IDB’s participation will consist of a senior A loan of up to US$30 million with a tenor consistent with the life of the fund (expected at 10 years), including a five-year commitment period. The repayment structure and the scope of security will be defined during due-diligence.’

The fund, a successor of the $25.2 million CleanTech Fund, is expected to reach $150 million. According to Andres Ackerman, an IDB project team leader, the fund was created due to major expected energy demand increases in the region — 75% by 2030 — half of which could be generated by renewables.

‘This financing is part of the IDB’s commitment to develop mechanisms to support long-term funding of renewable energy and clean technology projects in the region, which stimulate innovation, job creation and green economic growth,’ said Daniela Carrera-Marquis, head of the financial markets division at the IDB’s structured and corporate finance department (SCF).

Race To Be the First

Though there are no plants currently online in South America, several projects are nearing completion. Argentina could technically claim groundbreaking fame with its demonstration project built in 1988 in the volcanic Copahue region — a site that has been explored for geothermal development since the 1970s. Decommissioned in 1996 due largely to high electricity prices, the 670 kW project used 171°C sources at depths of 800 to 1200 meters.

Near the decommissioned demonstration plant is a new potential frontrunner — the 30 MW Copahue project in development by Earth Heat Resources. According to the company, the project has the potential for massive expansion after the success of the initial 30 MW plan. Now in its second phase of development, the project is expected to be completed this year.

‘This second stage study will encompass many elements of the upcoming program for this year including drilling, civil works, other facilities, engineering and transmission line issues,’ said Earth Heat Resources managing director Torey Marshall. ‘This milestone will confirm the location of wells, location of roads, location of potential plant sites and transmission line locations; an enormous step in our development of the Copahue Project.’

Earth Heat Resources recently signed a power purchase agreement (PPA) with Electrometalurgica Andina SAIC for an initial 30 MW per year. It has also signed a letter of intent with Xtrata Pachon SA to purchase 50 MW per year, with the potential for further expansion. Xtrata sees the potential in geothermal and is eager to get involved with sustainable, renewable projects in Argentina.

‘We are committed to finding the best environmental, social and economic solutions in support of our potential future investments in Argentina, and look forward to working with Earth Heat in the first geothermal plant in the country,’ said Xavier Ochoa, Pachon’s general manager.

Fast on its heels is Enel (ENLAY.PK) Green Power’s Cerro Pabellón geothermal project located in Pampa Apacheta, Chile. With eight geothermal concessions in Chile — the most recent acquisitions include Colorado, San Jose I, and Yeguas Muertas — Enel is eager to tap the nation’s vast potential. The 50 MW project recently received environmental approval and is ready to move forward.

‘The country’s geothermal potential is one third of the installed geothermal capacity worldwide,’ explained Enel Green Power CEO Christian Herrera. ‘Electricity generation through geothermal energy not only helps meet the growing energy demand in the country, helping to reduce dependence on imported fuels, but [it’s] also a concrete contribution to reducing greenhouse gas emissions, contributing to the mitigation of global warming.’

In development but further from completion, renewable energy firm GGE Chile submitted an environmental impact assessment (EIA) for a $330 million geothermal project planned for its San Gregorio concession in southern Chile. Expected to break ground in 2013, the 70 MW Curacautin geothermal project will consist of 10 drilling platforms, 14 production wells and 11 reinjection wells, and is scheduled to come online in 2016, according to Business News Americas.

The nearby Mariposa Geothermal System owned by Alterra Power Corp (AXY.TO, MGMXF.PK)  is located near an active volcanic region in the Chilean Andes Mountains. Exploration for the project began in the early 2000s, when great potential was found in the area. According to the project website, based on the exploration results, the inferred resource estimate is 320 MW available over 30 years. To date, slim holes have been drilled, and 200+°C resources have been found at the top of the wells; additional holes will be drilled to determine further resources. A 50 MW plant is in development and expected to be completed by 2016, and Alterra is searching for partnerships to continue exploration and development at the Mariposa site.

A key factor to this project is the nearby hydropower projects. Developers are hopeful for a collaborative effort to build transmission systems to feed the renewable resources to the Central Power Grid.

Northern Influence

Facing many of the same issues with climate change and population growth, Central America and the Caribbean have embraced their geothermal resources much more than their southern neighbors. According to the GEA report, a majority of the countries in Central America have developed a portion of their geothermal resources.

‘El Salvador and Costa Rica derive 24% (204 MW) and 12% (163 MW) of their electricity production from geothermal energy respectively. Nicaragua (87 MW) and Guatemala (49.5 MW) also generate a portion of their electricity from geothermal energy,’ said the GEA’s report.

The potential for further development of Central America’s geothermal resources remains significant, and the geothermal potential of the region has been estimated between 3000 MW and 13,000 MW at 50 identified geothermal sites.

The SIEPAC (Sistema de Interconexion Electrica para America Central) transmission interconnection has greatly influenced this region’s geothermal development. In an effort to reduce electricity costs, countries are able to develop their geothermal sources and spread the renewable wealth throughout the region at competitive prices.

Electricity costs have influenced geothermal growth on the Caribbean islands. Compared with current fossil fuel production at $0.24/kWh, geothermal costs $0.05/kWh, according to the World Bank.

In sharp contrast, South America has strayed from transmission interconnections. According to the GEA report, there have been recent issues regarding the flow of energy across national borders, which have led to underdeveloped, rarely used and cut transmission lines. This dissension has resulted in increased blackouts and worker strikes. Though this may have held back development, the current climate crisis and the increased need for clean energy have spurred a government response to develop the massive geothermal resources throughout the region.

According to Geothermal Resources in Latin America and the Caribbean, a report released by Sandia National Labs and the US DOE, ‘With [gigawatts] of estimated power potential, geothermal energy can and should supply a portion of the additional capacity required [in Latin America].’

 Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

July 26, 2012

The Efficiency Tango: A Deeper Look at Geothermal Heat Pump Efficiency

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

A couple weeks ago, I compared the efficiency of the two most advanced geothermal heat pumps (GHPs) recently launched by Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and Climatemaster, as division of LSB Industries (NYSE:LXU).  Like most things in life, it turns out that heat pump efficiency is a lot more complicated than just comparing a couple numbers.

Since I concluded that Waterfurnace’s 7  Series heat pumps were slightly more efficient than Climatemaster’s Trilogy 40 pumps, one of Climatemaster’s district managers pointed me to third party efficiency ratings conducted according to standards set by the Air Conditioning, Heating, and Refrigeration Institute (AHRI).  He compared Waterfurnace’s 4 ton unit (the most efficient 7 Series) to Climatemaster’s 2.5 ton unit (the most efficient Trilogy 40), noting that the former had a 41 EER at ground loop conditions, while the latter had a 42.1 EER, according to AHRI.

He concluded that the Trilogy 40 had a slightly higher cooling efficiency than the 7 Series.

The Efficiency Tango

Had I got it wrong?

I checked with the pros.  Scott Lankhorst, President of geothermal and solar thermal installer Synergy Systems in Kingston, NY said it was “an apples to oranges comparison” between 4 ton and 2.5 ton GHPs.

Lloyd Hamilton, a Certified Geoexchange Designer at Verdae, LLC in Rhinebeck, NY, called this normal marketing.  He says that the only reliable way to compare units is to look at the operational performance data for the designed condition.  The AHRI-compliant EER and COP numbers allow comparison of two units so long as they are at the same capacity, but it does not demonstrate actual performance, “like MPG for cars. … COP, SEER, and EER become worthless when comparing different types of equipment” such as air source and ground source heat pumps, because the testing criteria are different.  He calls the act of picking an choosing GHP models and operating conditions to make your company’s GHP look more efficient the “Efficiency Tango.”

Both agree that the contractor can mess up the rated efficiency of a GHP, or even make it perform above specification, with the wrong (or right) system design and installation.

I don’t have the performance data a geoexchange designer would use, but there are a lot more publicly available efficiency numbers than I used in my last article.  I put them together in a pair of bubble charts:

T40 v 7S Cooling.png T40 v 7S Heating.png

There are three 7 Series models and two Trilogy 40 models, each of which was tested at full load and part load, under two types of conditions.  The “ground water” series are when the ground water is pumped up out of the ground for heat exchange; the liquid water helps heat transmission and results in a higher rating.  The “ground loop” series is representative of the much more common installation, when an antifreeze fluid (usually propylene glycol) is pumped through the geothermal loop, which results in relatively lower efficiency (although still much higher than other types of heating and cooling equipment.)  Even in ground loop conditions, different heat exchange fluids will result in different effective inefficiencies.  The partial-load results are the sets of two or three smaller bubbles to the right (and a little below) sets of larger bubbles of the same color.

Looking at the charts holistically, I reach the following conclusions:

  • The 7 Series is generally more efficient than the Trilogy 40 for heating.
  • The Trilogy 40 is generally more efficient than the 7 Series for cooling.
  • These units operate at dramatically (about 50%)  higher efficiency under partial load.  Two-stage heat pumps show only modest (5% to 15%) efficiency gains at partial load.  This is likely to lead to higher overall efficiency of these GHPs in practice than the numbers alone might lead you to believe.
  • The Trilogy 40 typically operates at lower fluid flow rates than the 7 Series, which should produce some energy savings from pumping.

Hence, I revise my earlier conclusion to say that, based solely on efficiency, the Climatemaster Trilogy 40 will have a definite edge over the Waterfurnace 7  Series in cooling climates, while the 7  Series has an efficiency edge in heating-dominated climates.

Efficiency Isn’t Everything

That said, for most installations, factors other than efficiency will probably dominate the decision.  As noted above, Waterfurnace expects exclusivity from its dealers, and I expect Climatemaster and its other major competitors often do the same.  This will make it nearly impossible for a residential customer to compare the two without having to weigh other factors such as their confidence in the installer who, as noted above, can make or break a geothermal installation.

Then there is the Trilogy 40′s Q-Mode.  As Dan Ellis, president of Climatemaster told me in an interview, the potential savings from using geothermal to generate hot water year round from the Trilogy’s Q-Mode are likely to dwarf the savings from a point or two of EER or a fraction of a point of COP.  In fact, Climatemaster designed the Trilogy 40 with the whole system energy savings in mind, partially at the expense of efficiency ratings.  In a residential setting, Q-Mode (which is patent-pending to Climatemaster) is likely to make the financial returns decisively favor the Trilogy 40 in a head-to-head comparison.

In commercial settings, which typically have year-round cooling requirements, Q-Mode is unlikely to be important.  Furthermore, the two largest 7 Series heat pumps have higher capacity than the larger of the two Climatemaster Trilogy 40 models.  This should also give Waterfurnace an advantage in commercial settings, which typically have larger cooling loads than residential settings.

Ellis promised to send me some data to help quantify the overall energy savings from Q-Mode, which I plan to return to in a future article.


For residential customers in warm climates, Climatemaster’s Trilogy 40 seems like it will be the better GHP value when it becomes commercially available.  In other cases, the comparison is not as clear cut, and a customer should probably focus on finding a contractor who can deliver the best system design and installation possible.  That is the only way to capture the full benefit from either of these incredibly efficient geothermal heat pumps.

Disclosure: Long LXU, WFI

This article was first published on the author's blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 13, 2012

Waterfurnace 7 Series vs. Climatemaster Trilogy Geothermal Heat Pumps: The Best of the Best

UPDATE: I just looked into the 7 Series vs the Trilogy 40 in more detail here and came to a slightly different conclusion.

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) launched its new highly efficient 7 Series geothermal heat pumps (GHP) today.  The 7 Series commercial release beats Climatemaster’s (a division of LSB Industries (NYSE:LXU)) Trilogy 40 as the first commercially available GHP with a variable speed compressor.  The Trilogy 40 is currently available as part of a pilot program, and is expected to be commercially available later this year.  The variable speed compressor enables a significant jump in efficiency over previous two-stage compressors.

I looked at the technology behind these new heat pumps in the article Geothermal Heat Pumps: The Next Generation in May, soon after Climatemaster introduced the Trilogy.  At the time, we only knew that Waterfurnace expected the 7 Series to be “more efficient” than the Trilogy.   Now we have detailed specs, I thought I’d compare them head-to-head:

GHP Efficiency

As you can see from the chart above, Waterfurnace managed to nudge out Climatemaster in both cooling (EER) and heating (COP) efficiency ratings.  Both are on linear scales, so the Series 7 is 2.5% more efficient at cooling and 6% more efficient for heating than the Trilogy.  With top efficiency ratings, the Waterfurnace GHP will likely appeal to customers who must have “the best” of everything.

Other Factors

The efficiency of  the GHP unit is only one factor in overall system efficiency, and efficiency is only one factor in the decision of what to install.  Price will be an important factor as well, although given the likelihood that these variable speed GHPs will be priced at a significant premium, price sensitive customers will most likely install two-stage GHPs.  Waterfurnace’s Series 5 was launched in March, at a slightly lower price than the previous Envison product it replaced, while maintaining all the features and efficiency of that model.

The most important factor for installers will be dealer support and ease of install, especially for the residential market.  Both Climatemaster and Waterfurnace seem to have simplified installation with the new models, while dealer support is much more a local issue, and is determined by the installer’s relationship with their distributor.

Along with the Series 7, Waterfurnace is introducing  a new “IntelliZone2″ zone controller, which will simplify the installation and use of their Series 5 and 7 products with multiple zones.  On the other hand, Climatemaster’s Trilogy includes a propriatary “Q-mode” which allows the heat pump to create hot water year round.  Most rival heat pumps only create hot water when being used to heat or cool the building.  In new residential applications without an existing water heater, Q-mode could easily give Trilogy the edge over the 7  Series, since it would allow the contractor to dispense with a secondary hot water source.


Neither of these two GHPs is the clear winner, with the 7 Series’ edge in efficiency countered by the year-round hot water of the Trilogy’s Q-Mode.  Waterfurnace’s efficiency edge is more significant in heating-dominated climates, such as the Northern US and Canada, while Climatemaster’s Q-Mode will probably give the Trilogy an edge in new-build markets.  Existing relationships between installers and their dritributers will probably dominate both in many cases.  UPDATE: The Series 7′s earlier commercial availability will make Waterfurnace’s offering the only real choice for installations over the next few months.

The biggest winners will be consumers, who now have both cheaper versions of two-stage GHP technology available, as well as the option to enter a whole new frontier of HVAC energy efficiency.

Disclosure: Long LXU, WFIFF

This article was first published on the author's blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 17, 2012

Ram Power Negotiates for Higher Revenue

Tom Konrad CFA

Geothermal well photo via Bigstock

Ram Power (OTC:RAMPF, TSX:RPG) recently provided an update on progress at its flagship San Jacinto project in Nicaragua.  This was the project where cost overruns and construction delays last year sent the stock plummeting from over C$2 a share to around C$0.50 a share at the start of the year.  The decline has continued, despite the fact that the project seems back on track with the hiring of a new subcontractor, and the stock now trades at C$0.23, a fraction of book value (C$0.91.)

Tariff Increase

According to the update, a tariff increase was “contemplated by the initial Project concession [and] will allow the Company to recover unanticipated Project costs associated with both the development of the resource and plant construction.”   Because it was part of the original agreement, it seems likely that some tariff increase will be granted.

The company estimates that a new tariff would result in an annual revenue increase for Ram of between $8 million and $11 million upon completion of 72MW San Jacinto project expansion, which the company expects in December 2012.

Since any additional revenue from a tariff increase would not involve additional costs, we can expect substantially all additional revenue to flow to pre-tax income, and would amount to an additional 2 to 4 cents per share.   I expect the stock to jump on this news, with a much bigger jump in the event that the tariff negotiations are successful.   I think successful negotiations are very likely, since management would probably not have announced the negotiations if they had significant doubts.


I think past setbacks at Ram and the high profile problems at rival geothermal company Nevada Geothermal Power (OTC:NGPLF,TSXV:NGP) have led markets to heavily discount Ram’s chances of completing San Jacinto on time and on schedule.  In particular, I don’t think markets are considering the fact that geothermal field expansions are substantially less risky than initial development, because much more is known about the structure of the geothermal reservoir.

Ram’s COO of Latin America, Tono Rodriguez says,

With a majority of the engineering and construction completed, the Phase II expansion construction continues at a rapid pace. We fully expect the project to come in on time and on budget, with an expected on-line date in the fourth quarter of this year.

I believe this.  The riskiest part of project development is over, but investors are treating it as if it were riskier than ever.  While I doubt Ram will see a C$2 share price in 2012, I think a price double is likelier than not upon completion of San Jacinto and a successful tariff renegotiation.

Disclosure: Long RAMPF

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 05, 2012

Geothermal Heat Pumps: The Next Generation

Tom Konrad CFA

The most efficient way to heat and cool a building just got more efficient.

Geothermal heat pump diagram via Bigstock

Climatemaster, a division of LSB Industries (NYSE:LXU), recently announced that their new Trilogy 40 geothermal heat pump (GHP) had been certified by the Air Conditioning, Heating, and Refrigeration Institute (AHRI) to exceed 40 Energy Efficiency Ratio (EER) under ground loop conditions.

EER is the ratio of effective cooling (heat removed) to the energy used, at maximal load, and is the standard measure of cooling effectiveness for geothermal heat pumps. A quick perusal of the list of Energy Star qualified GHPs shows just how big a leap this is: the highest EER rating currently available is 30, and many Energy Star qualified heat pumps have EERs as low as 17.  So the Trilogy 40 is a third again as efficient for cooling as the most efficient commercially available GHP, and more than twice as efficient as some Energy Star qualified GHPs.

Scott Lankhorst, President of Synergy Systems, a GHP installer in Kingston, NY, called the jump in efficiency “pretty amazing… 30 EER has been the max for quite a while now.”  Lankhorst says that Climatemaster hopes to have the Trilogy 40 in full production by the end of the year.

According to Barry Golsen, President and COO of LSB, the Trilogy 40 will also have improved heating performance, with a Coefficient of Performance (COP, the industry measure of heating efficiency) of 5 at ground loop conditions.  This is also a significant increase, with the best GHPs in the Energy Star list having COPs of 4.1.


In addition, they’ve added new functionality, called “Q-Mode.”  Q-Mode is the result of a collaboration between Climatemaster and Oak Ridge National Laboratory.  It allows the GHP to produce hot water even when it is not being used for space heating or cooling.  According to Chris Williams, technology evangelist at Heatspring, a provider of renewable energy and energy efficiency training and certification, producing hot water year round required additional equipment (and cost) with traditional heat pumps.

The Competition


Climatemaster is not moving into 40 EER territory unchallenged.  On GHP manufacturer Waterfurnace Renewable Energy’s (TSX:WFI, OTC:WFIFF) first quarter conference call, an analyst asked CEO Tom Huntington if Waterfurnace had an answer to efficiency breakthroughs at “a competitor.”  It does.  Huntington believes Waterfurnace’s new 7-Series GHP’s will be even more efficient than Climatemaster’s Trilogy.  Variable speed compressors (see below) are available from a number of vendors, and Huntington believes that the compressor used in the Trilogy is less efficient than the on Waterfurnace has selected for the 7-Series.

The Technology

How did they achieve these efficiency breakthroughs?  Both companies speak of “variable speed technology.”  According to Lankhorst, what they mean is variable speed compressors.  Current GHP models use two stage scroll compressors.   Variable speed blower motors and pump fields have been available for some time, although they often require the special controllers.

Variable speed compressors are new.  According to Williams, “there has been a huge amount of innovation in air source heat pumps,” and the innovations are now being applied to ground source technology.

Climatemaster’s Q-Mode a control system that integrates the GHP and components with the hot water tank, enabling the heat pump to deliver hot water year round.  Previously, year round hot water required additional components, or a back up heating source.  Q-Mode is patent pending, so it may be that it will give Climatemaster a competitive advantage if competitors like Waterfurnace are unable to duplicate the functionality without infringing patents.

ApplicationLSB logo

The integration of components and jump in efficiency should make these new systems attractive to installers in the field.  According to Lankhorst, the Trilogy may be especially cost effective in high-end residential applications, where the integrated system will eliminate several separate components.  Year round hot water is less of an advantage in commercial applications, since commercial installations operate nearly all the time in cooling mode, when free hot water is produced as a byproduct of cooling the building.

On the other hand, the spot efficiency ratings of a GHP are far from the only factor in determining the effectiveness of a GHP system.  According to Williams, proper ground loop, distribution, and system design can potentially have a greater impact on system efficiency.

Competitive Advantage

When contractors select a GHP, technology tends to be more important in commercial operations than in residential ones.  The cost of the heat pump is a small fraction of the cost of drilling the loop field, so residential installers are more interested in the level of technical support offered by the distributor, so these competitive advantages will vary from region to region.

On the other hand, if Q-Mode makes for much simpler installations, Climatemaster stands to gain residential market share unless its competitors can offer similar integration without infringing its intellectual property.


The next generation of efficient ground source heat pumps are a significant step forward in energy efficient climate control.  Nevertheless, for the next few years, I’d expect that these variable speed compressor pumps will only be used in a small fractions of installation.  Geothermal heat pumps are already so efficient that the additional savings may not be enough to justify the higher up-front cost.  Additionally, Waterfurnace introduced their new 5-Series line of GHPs with two stage compression in March, at a slightly lower price point than the Envision product it replaces.

Either way, the cost of saving energy continues to fall, and the potential customer base for geothermal heat pumps will grow as higher efficiency and lower prices make them an even more economical approach to climate control.

Disclosure: Long LXU,WFI.

This article was first published on the author's blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 29, 2012

Geothermal Heat Pump Stock a Deep Bargain

Tom Konrad CFA

LSB logoUncertainty surrounding the damage caused by a sulfur fire at LSB Industries‘ (NYSE:LXU) chemical facility Tuesday has brought the stock down $5 from Monday’s close, although the company was already well-valued and had just beaten analyst’s expectations for its first quarter results.

This is extremely short-sighted of investors, who are no doubt spooked by the lack of information about the extent of the damage.  However, we have enough information to make a reasonable estimate as to the damage to LSB’s profits.  As I outlined Tuesday night, we know:

  • The facility is insured for both damages and work stoppage.
  • The potential uninsured cost will amount to at most 13 cents a share, or less than $3 million.
  • Only minor injuries were reported.  Some workers were treated for high blood pressure and shock.
  • There was no environmental release, so an EPA investigation is unlikely.

Even with the inevitable distraction of management time from other business, I find it hard to see how more than a $1 per share sell-off is justified.  Yet the stock is down $5.

A Second Opinion

I follow LSB because of its geothermal heat pump business, which only accounts for about 1/3 of revenues.  This business has been looking up, with breakthrough products recently introduced, and signs of a pick-up in demand.  For the chemicals business, I rely on other analysts.  They seem to agree with me.

BCMI Research analyst and biochemist Chris Damas CFA, gives an in-depth look at the fire with added perspective on the chemicals involved.  He concludes:

I think the stock is a buy here, with the insurance proceeds covering the reconstruction of the nitric acid plant. There appears to have been no environmental release, with a long EPA action as a result.

The lost sales business during the busy growing season will no doubt cause a significant operating loss for the chemical segment next quarter. But LSB has business interruption insurance that kicks in after 30 days.

This morning, Northland Securities reiterated it’s ‘Outperform’ rating, and lowered their price target from $41 to $38.


Analysts were predicting $3.02 in earnings for 2012 before the explosion.  If we reduce that to $2.89/share, we still have a forward P/E of 9.6.  LSB has no net debt, and is poised for growth, both from a reviving HVAC business, and from growth in the chemicals business with an upgraded plant which was brought online in the first quarter.  Analysts estimate 39% growth for the coming year, although some of that growth may be deferred (but not eliminated) because of the damage at the El Dorado facility.


Writing about this incident has side-tracked my plans to write about the leap in efficiency coming from both LSB and geothermal heat pump rival Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF), but it is providing a great buying opportunity.  With uninsured losses (including work stoppage) capped below $3 million, it seems crazy that LSB has lost over $110 million in market cap over this incident.

Now is clearly the time to buy LSB, and, incidentally, Waterfurnace, which is also well valued and seeing a market turn-around.

Disclosure: Long LXU,WFI.

This article first appeared on the author's Green Stocks blog.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 26, 2012

Ormat Technologies: Shame About the Price

Tom Konrad CFA

Ormat Heat exchanger at GKW Landau. Geothermal water evaporates the carrier medium. Preheater and the evaporator. The steam line above connects to the turbine.
Photo by Claus Ableiter via Wikimedia Commons

Last Wednesday, Ormat Technologies (NYSE:ORA) reported a great quarter, beating analyst expectations for both earnings and revenues.

Investors loved it: ORA was up 8% on the day to $20.69, and are up 14% at $21.85 as I write.

I’m a big fan of geothermal power, and would love to own Ormat at the right price.  They have a great business with strong technology and fairly reliable cash flow.

Yet I have not owned Ormat stock since 2006.  The company is simply too expensive, quite likely because it is the only geothermal company large and liquid enough to be owned by institutional investors.

Although Ormat trades near book value ($19.99/share), it’s in a very capital intensive business with thin profit margins.  Profits have recently been depressed by the low natural gas price, against which some of the electricity it sells is priced.  Because of this and some problems at the firm’s North Brawley plants,  Ormat showed a profit of only $0.40 in 2011.

Going forward, analysts expect a $0.58 profit in 2012, and $0.76 in 2013.  That’s nice earnings growth, but it’s not driven by revenues, it’s driven by cost control.  Revenue is expected to grow only 13 percent in 2012, and only 5% in 2013.  Given the geothermal industry’s capital intensity and Ormat’s large size, it would be crazy to expect long term growth of more than 10% going forward.

For a company with moderate growth prospects like Ormat, the current price of $21.85 puts the forward P/E at 38.  That’s two to three times too expensive for my taste.  I also have trouble getting excited the fact that they recently doubled their quarterly dividend to $0.04.   “Double” sounds great, but a 0.7% dividend yield leaves me wanting a few more doubles.

Disclosure: None

This article first appeared on the author's Green Stocks blog.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 21, 2011

Can the Geothermal Industry Overcome Challenges to Raising Capital?

By Jane Pater Salmon, Navigant Consulting

Geothermal energy presents baseload clean energy at a lower cost than many other renewable energy alternatives. Despite this compelling value proposition, long development horizons and the risks associated with exploration and drilling activities present hurdles to developing the country's rich geothermal potential. Financing projects that use conventional geothermal technology remains challenging in the uncertain economic environment.

In the past year, geothermal project developers used alternative strategies to overcome three common challenges to geothermal project finance. While the challenges for raising capital at the project level are consistent with those faced in previous years, they have become even more pronounced as investors' risk-tolerance remains low and capital constraints continue.

Three key challenges to raising capital for geothermal project investment have adversely affected developers in the past year.

  • Concerns about creditworthiness of smaller firms. The geothermal industry is a fragmented one, with many smaller companies holding portfolios of just a few projects. With fewer assets against which to secure loans, these smaller firms pose a more significant risk than firms with more diversified portfolios. Even though many of these companies are traded on public exchanges, their capitalization levels are relatively low compared to larger renewable energy technologies companies like Vestas (VWDRY.PK), First Solar (FSLR), and Iberdrola (IBDRY.PK).
  • Challenges securing debt with recourse to a single project. When conditions permit, developers prefer to secure project-level debt with no recourse to the company in the event of default. This "non-recourse debt" reduces the developer's risk in the event of default because the company's other assets are protected. Non-recourse debt, however, increases risk for lenders who generally have been unwilling to provide this type of loan in the past year. Lenders have sought more collateral to reduce the risk of loss.
  • Higher transaction costs at the project level. Geothermal projects that have reached at least the permitting stage in the U.S. are smaller in terms of capacity as compared to other renewable energy projects. With few exceptions, geothermal projects are in the range of 25 to 50 MW, while wind projects are typically at least 100 MW. Similar levels of due diligence and negotiation are required for investments at this scale, resulting in relatively higher transaction costs for geothermal projects.

As a result, companies developing geothermal projects in the United States have deployed a diverse set of strategies — fitting each company's unique circumstance and leveraging the available resources — to address these challenges.

Overcoming Concerns about the Creditworthiness of Smaller Firms

Well-known but smaller-cap geothermal firms have partnered with larger, more well-established firms. These partnerships provide smaller firms with the capital needed to move forward on their projects and in some cases, the credibility needed to secure financing. At the same time, larger firms benefit from the financial returns on the project and the strategic benefits of partnership.

Over the past year, both Nevada Geothermal Power and U.S. Geothermal deployed this strategy. Nevada Geothermal Power's (NGLPF.OB) 30-MW Crump Geyser project in Oregon is a joint venture with geothermal industry giant Ormat (ORA). With a vertically integrated business model and a long history of strong financial performance, Ormat was seen as an ideal partner for the growing Nevada Geothermal Power. By providing the cash needed to complete the project, Ormat gained access to a lower-risk return on a project that was further into the development cycle than others in its own portfolio. The partnership also provided both companies with the potential to consider future collaboration.

U.S. Geothermal (HTM)partnered with Enbridge to raise equity for its 23-MW Neal Hot Springs project in Oregon. This partnership brought Enbridge, a Canadian gas transportation and distribution company, its first geothermal investment. The partnership leveraged Enbridge's familiarity with the early-stage risk profile of geothermal development, which is closely related to that of oil and gas resources. It also provided Enbridge with the opportunity to experiment with investments in the renewable energy space at a much lower risk.

The creditworthiness of the Neal Hot Springs project was further strengthened by a U.S. Department of Energy Loan Guarantee, which backed a $97 million loan provided by the Federal Financing Bank. The loan represented the balance of capital needed to complete construction on the project. With the loan and the combined equity of U.S. Geothermal and Enbridge, the debt-to-equity ratio on the project was 75 to 25.

Addressing Challenges to Securing Debt with Recourse to a Single Project

Over the past year, geothermal developers have bundled combinations of their assets in order to leverage their equity investments with debt. In many cases, these assets are limited to a portion of those owned by the company but are broader than those assets tied to a specific project. This approach limits the amount of leverage developers have because the debt typically appears on the company's balance sheet. In exchange, however, developers have secured the capital needed to continue to develop the resources to which they have rights.

Gradient Resources (formerly Vulcan Power) and Ram Power (RPG.TO) have each used corporate assets as collateral to secure credit in order to continue development. Gradient Resources secured a $13 million loan from GB Merchant Partners, LLC, with the firm's geothermal drilling and cementing equipment. The proceeds from the loan enabled Gradient Resources to continue development of three projects in Nevada. This limited-recourse loan only put select assets at stake, but was unique in that the capital was not tied directly to the projects it will support.

In March 2011, Ram Power closed on a two-year $50 million credit facility providing additional working capital to support its portfolio of projects under development. The credit facility was secured by "unspecified assets" of the company but is not tied to a single project. In addition, the lenders retained rights to exercise warrants based on Ram Power's reliance on the credit facility. The warrants provide the opportunity for the lender to earn additional returns on its investment if it elects to exercise them.

Reducing Transaction Costs Associated with Project Finance

Bundling projects to reduce transaction costs benefits both the lender and the borrower. The lender benefits from access to a portfolio of assets used to secure the loan. The borrower benefits from lower costs of capital, in terms of both fees to lenders and any arranger as well as in terms of staff time committed to closing the deal.

Both Ormat and John Hancock Life Insurance Company took advantage of these benefits in an application to the U.S. Department of Energy (DOE) for a Federal Loan Guarantee. Ormat bundled three projects — McGinness Hills, Jersey Valley and Tuscarora — that total 121 MW, achieving a scale similar to those achieved by wind projects. Meanwhile, bundling diversified John Hancock's resource risk and development risk for projects in multiple stages of development. In June 2011, DOE conditionally awarded the bundle a partial guarantee of up to a $350 million loan.

Jane Pater Salmon is an Associate Director with Navigant. Her work focuses on strategic planning, market assessment, the intersection of business and policy, and the diffusion of innovation. Her recent geothermal projects include the development of a project finance guidebook for conventional geothermal projects and the analysis of business models for coproduced and geopressured resources. Ms. Salmon earned a BA in Government from the University of Notre Dame and graduate degrees in energy and business from the University of Colorado.

July 07, 2011

Drill for Geothermal Power in Developing Countries and on King Street

Tom Konrad CFA

Hezy Ram

Geothermal industry veteran Hezy Ram has worked in the industry for over three decades.  His career began with 28 years of experience at Ormat (ORA), where he was Executive Vice President of Business Development, after which he founded Ram Power Corp. (RPG.TO/RAMPF.PK) in 2009.  In February, he resigned as CEO of Ram Power shortly after the company warned of significant delays and cost overruns at a key Nicaraguan project, a move he says was motivated by irreconcilable differences with other board members and major shareholders regarding the company's strategy. 
Hezy Ram.png
Today, he has his own geothermal company, advising clients like drilling technology innovator Potter Drilling, and lesser known but equally deserving technology innovator Geotek Energy.  GeoTek's Gravity Head Energy System, which improves geothermal plant efficiency by eliminating parasitic loads, is less flashy than Potter's drilling innovations, but it should make many more geothermal resources economical by significantly increasing net efficiencies in the relatively near term.  Ram also serves on the board of Latin American and Caribbean Council on Renewable Energy.

I caught up with Ram at the 8th Annual Renewable Energy Finance Forum Wall Street (REFF), an event co-hosted by the American Council on Renewable Energy (ACORE) and Euromoney Energy Events, and followed up with him in a phone interview this week.  Ram sees a lot of potential for growth in geothermal power, but thinks the best opportunities are outside the US, while much current development is domestic.  He's looking at opportunities in developing countries himself.

High Oil Prices Create Opportunities for Geothermal Developers

In North America, current low natural gas prices are creating headwinds for geothermal by lowering wholesale price of electricity.  In places like Chile, Central America, and Africa, all of which have excellent geothermal resources, most electric generation comes from oil.  With oil around $100 a barrel, that means the cost of electricity exceeds 20 cents per kWh.  There, geothermal can be the low cost producer of energy, and need not rely on subsidies or Renewable Portfolio Standards to create demand.

John Anderson, Head of Power and Infrastructure Investing at John Hancock, also spoke at REFF and sees the best potential for clean energy in the developing world.  He said the most important question for renewable energy projects is, "Are you displacing oil?"  The advantage of displacing oil is not unique to geothermal, but where good geothermal resources exist, geothermal power is not only cheaper than solar and all but the best wind resources, but it's baseload power, and easier to integrate onto the electric grid.

Drilling on King Street

The other opportunity he sees is consolidation in the industry.  Like many industry observers (myself included; see this recent article on Nevada Geothermal Power (NGP.V/NGPLF.PK), Ram sees an industry ripe for consolidation.  He sees a sector currently at a low point in investor attention, and there is a lot of unrecognized value in geothermal companies. 

He also thinks that consolidation would be good for the junior public companies.  Speaking with the voice of painful experience, he describes the mismatch between investor expectations and the small plays and long lead times of geothermal projects.  The market expects regular news updates, but there is not much to say when you spend a year on permitting, while compliance and committee meetings are a distraction from running the company. He thinks only Ormat has the billion dollar scale to afford the distractions of being public.

The smaller geothermal players (Ram Power, Nevada Geothermal, Alterra Power (AXY.TO/MGMXF.PK), and US Geothermal Power (HTM)) would all benefit from the scale and cheaper funding that would come with consolidation.  Since three of the four are listed on the Toronto Stock Exchange, I like to call this strategy "Drilling on King Street," in homage to the oil and gas industry tradition of drilling on Wall Street when reserves get hard to find through traditional exploration.

Possible Consolidators

Which companies might start drilling on King Street?

The most obvious consolidators are those already in the geothermal industry.  I've been surprised that Ormat has not already made a move to acquire the cheap assets available on King Street, given that they have signed up for a more expensive joint venture with Nevada Geothermal just last year, but one reason for the lack of action may have been the financial position of the controlling Bronicki family.  On July 7, it was announced that the family is in negotiations to sell a large stake in Ormat's Isreali parent company, Ormat Industries (ORMT.TA) to cover debts.  If the sale goes through, holding company Shikun & Binui  (SKBN.TA) is expected to be the major shareholder.  Shikun & Binui describes itself as "a leading infrastructure, real-estate and environmental group," and already operates some renewable energy and energy efficiency projects internationally.  Israeli Analyst Shay Lipman said "Ormat combines excellently with Shikun U'Binui's portfolio."  Will other geothermal companies combine equally well?

In addition to internal industry consolidation, Ram sees two types of companies for which he thinks it makes sense. 

The first of these are the traditional drillers on Wall Street: Oil and Gas companies.  They have expertise with much of the same equipment and techniques used in geothermal, money to spend, and could benefit from the positive PR, such as that used by Chevron around their Philippine and Indonesian geothermal assets.

The other group he thinks might become interested is utilities, following the pattern with wind and solar, where companies like NextEra Energy (NEE) are large players.  NextEra used to be known as FPL Group after its utility subsidiary Florida Power and Light, but set up a large wind and solar development arm and re-branded itself to reflect the new focus on green power. 


Will a utility or an Oil and Gas major be the first to decide that the opportunities to pick up quality geothermal projects for little more than spare change on King Street are worth moving into a new (but related) industry?  I think Oil and Gas is more likely, since they are more accustomed to accepting drilling risk.  While Independent Power Producer Calpine Corp. (CPN) has significant geothermal assets, these were all acquired when they were already operating, not during exploration and development.

But the more important question for investors considering geothermal companies as an out of favor value play is: When will a consolidator appear?  Neither I nor Ram has the answer to that one.


DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 08, 2011

When Will the Geothermal Power Slump End?

By Dana Blankenhorn

Gas Letdown GeneratorOf all the energy harvesting technologies out there, geothermal remains the most maddening.

In theory, there should be more than enough energy below our feet to power our world, and it should be cost-competitive for a fraction of the investment needed in wind or solar.

In theory.

Right now, the extraction of geothermal energy in the U.S. remains tied to Nevada and California, where the heat is close enough to the surface and in stable enough formations that a drill can reach it without the heat dissipating quickly. This has caused investors to sour on companies like Ormat Technologies Inc., that once made Reno a hotspot for renewable energy.

In some ways, geothermal today is pretty boring, as with Ormat's Steamboat complex which provides Reno with base load power. Push water down one well, pull it up hot in another, run it through a turbine, extract the heat. Simple.

Turns out geothermal is really two industries.

The business of drilling into the Earth and extracting heat is waiting for Enhanced Generation Systems (EGS) technologies to prove themselves.

Google has invested $11 million in EGS, but in the way of a venture capitalist, not an investment banker. EGS needs better drilling techniques and it needs to become more cost efficient.

More ominously, EGS seems dependent on the same hydraulic fracturing techniques being pushed for natural gas, oil, and oil shale, which have become a red flag to environmentalists for the damage they can do to the water supply.

As a result Ormat  seems more active in the area of recovered energy generation (REG) than geothermal. An REG plant takes the unused energy from some other industrial process and turns that heat into electricity in the same way it would use Earth energy. Not as green, but it's the back-end, the cutting edge of the process, and the knowledge of how to do this efficiently is valuable.

These techniques could be useful in the oilpatch, which wastes tons of power in the form of briny wastewater. An SMU conference this month  will look into exploiting that energy, using existing infrastructure. Most speakers, like Suri Suryanarayana of Blade Energy Partners, and executives from GE and Pratt & Whitney, are interested in adapting existing products and techniques to the generation of electricity from oil industry waste.

One of the more interesting speakers will be Richard Langson, whose Gas Letdown Generator (GLG) (right) gets power directly from the pressure of natural gas wells at a price of just 4 kilowatts per penny. Gas fields, oil fields, petrochemical and industrial waste plants, and existing steam plants can all be making money using the GLG, he says.

But the GLG, if it's as good as Langson says, could be highly disruptive. It could turn go-generation systems like Ormat's into rather expensive horse-and-buggy systems, the Stanley Steamers of the 21st century.

It would be nice to report that there's a clear investment opportunity here, either in a publicly-traded geothermal company like Ormat, in an EGS play, or in a co-generation device like that of Langson. But it remains unclear which solutions will win.

What seems clear is that something will. Co-generation is going to go into every factory producing heat, as costs for extracting it keep going down, and the value of heat keeps going up. Oil companies are going to remain interested in geothermal technologies that approximate what they are doing now. Places with the largest supplies of easily-tapped Earth heat, like Japan,  are ripe for investment.

How or when remains a mystery.

May 12, 2011

Blue Mountain Disappoints; Nevada Geothermal Power Looks Like a Takeover Target

Tom Konrad CFA

Which company might snatch battered Nevada Geothermal Power out of the scratch-and-dent bin for a song?

When Raser Technologies (RZTIQ.OB) declared bankruptcy at the end of April, I shrugged it off.  I saw the writing on the wall for Raser in September 2009, when they failed to get a DOE loan guarantee.  But part of the letdown also had to do with resource risk: the company was producing consistently less power from their 10MW (rated) Thermo plant than expected.

Early in 2011, Ram Power (RPG.TO, RAMPF.PK) stock was clobbered when they announced construction delays and higher than expected procurement costs in their Nicaraguan San Jacinto-Tizate project, requiring them to switch drilling contractors.  In order to make up the extra cost, they recently priced a stock and warrant offering at an 80% discount to where the stock had stood at the start of the year.

Then Nevada Geothermal Power (NGLPF.OB, NGP.V) announced "lower than anticipated power production and a forecast gradual temperature decline" at their flagship Faulkner 1 geothermal plant at Blue Mountain.  They now predict that the 49.5 MW rated plant will produce only 35 MW (net) in 2011, and then decline about 2.5% per year.  Although NGP tried to soften the blow by also providing information about several of their other projects that are proceeding well, the stock sold off 50% on the day of the announcement, most likely prompted by the statement that they "will not be able to meet the terms of its loan with EIG Global Energy Partners (EIG)... and accordingly... the Company has begun discussions with EIG in order to make changes to the capital structure." 

Investors are clearly afraid of stock dilution as the result of the negotiations with EIG, and although the bad news at Falkner 1 probably does not justify the $30M drop in market capitalization that occurred the day of the announcement, the prospect of dilution tends to cause undervalued stocks to become more undervalued over time in a viscous cycle, since new capital raises usually happen in reference to the current (depressed) stock price.

goethermal E&P Companies stock chart

Takeover Target?

Nevada Geothermal's enterprise value (market capitalization plus debt) at the close on May 11 was $202 million.  The company has over 70 MW (net) of producing power plants, plus a number of other projects such as Crump Geyser, which is currently being developed in a joint venture with Ormat Technologies (ORA), in which Ormat is providing all the necessary cash to develop the project.  Even if we assume the value of these other projects is zero, the market is currently valuing the producing projects at less than $3/W installed.  While that might be a fair price for solar project with a 20% capacity factor, geothermal plants are baseload, and produce more than 4 times as much energy per MW as solar.

Both Ram Power and Nevada Geothermal look like bargains in terms of assets, although Ram looks like a less likely takeover target, having recently raised capital.  I would not be surprised to see takeover offers for NGP from better capitalized companies in the coming months. 

Ross Beaty, CEO of Magma Energy Corp. (MXY.TO,MGMXF.PK), which is soon to become Alterra Power Corp in a takeover of Plutonic Power Corp (PUOPF.PK) is one likely buyer.  Part of Beaty's justification for the Plutonic takeover was the scale to raise money for renewable energy development.  Taking over Ram Power or Nevada Geothermal in an all-stock deal would help him achieve this goal while increasing Alterra's revenue per share.  Before the Plutonic acquisition, Beaty said that his company was looking beyond the geothermal industry for accretive growth opportunities.  At current share prices, he might take a page from Oil companies' play book, and drill for opportunity on Wall Street (or King Street West, in this case, since both are listed on the Toronto Stock Exchange.)

If that's what Beaty has in mind, he may not lack for competition.  Ormat has $65M in cash on its balance sheet.  With Nevada Geothermal trading at a $29M market cap, why do expensive joint ventures like Crump Geyser with NGP, when they could buy the company outright to get access to its geothermal prospects?

Other deep-pocketed potential bidders are oil major Chevron (CVX), natural gas power producer Calpine (CPN) and the Italian utility Enel (ENLAY.PK), all of which have experience with geothermal.


I don't expect to recover my investments in Nevada Geothermal or Ram Power anytime soon, but given the current rock-bottom valuations, there's a lot of room for a bigger player to come in and scoop up the pieces for more than the stocks are currently trading for.


DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

See also: Oil Money Needed for Geothermal Projects.

Oil Money Needed for Geothermal Projects

By Dana Blankenhorn

Despite America's leadership in geothermal the industry remains in the “and” category. As in, “solar, wind, tidal, biofuels AND geothermal.”

It's an afterthought. (Picture from Evergreen State University.)

Why are geothermal companies having to organize politically to gain crumbs from the capital table?

The answer is pretty obvious, but no one seems willing to state it plainly.

The oil industry is holding back.

A recent Time Magazine article on renewables and oil investment makes it pretty plain. Total's bought into solar, Shell and BP into biofuels. Chile's state oil-and-gas company sold-out its geothermal interests to a specialty firm.  One of the bigger geothermal players, Raser Technologies (RZTIQ.OB), has just gone into bankruptcy.

What's holding up geothermal energy is an issue the oil business knows a lot about – drilling risks.  As Brian Harenza of of Hannon Armstrong, a geothermal financier, told “There are a lot of providers of capital who are interested in start-up and operation, but no one wants to finance the drilling risk.”  Hannon Armstrong has united with an Icelandic bank to invest in geothermal, but they're having a tough time because they don't want to take on drilling risks.

What's missing? Oil industry expertise is what's missing. (Where's Sarah Palin when you need her? Drill, baby drill.)

Japan, for instance, should be the Saudi Arabia of geothermal, especially as hopes for a nuclear future fade in the Fukushima fall-out. Yet a recent New York Times piece on Japan was filled with excuses as to why this hasn't happened – hot water can run cold, you might bring up smelly hydrogen dioxide, drilling can cause earthquakes, and ryokans don't want competition for their resource.

But it's not a question of geothermal or solar, geothermal or wind. It's a question of geothermal and wind and solar and tidal projects or oil and gas and coal, which are guaranteed to keep getting more expensive and, in time, run out.

The Time story, which didn't take much note of geothermal, nevertheless ends this way. “If Big Oil can really start treating renewable energy the way it does potential drilling sites—as the source for future revenue—maybe it will earn an early end to the latest round of demonization.”

Instead of pressing Big Oil to put pennies into biofuels or solar start-ups, it's time to make their tax breaks contingent on serious investment in something we know is more abundant than even oil – that's the heat of the rocks beneath our feet.

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

Related stories: Geothermal Stocks Overview, Geothermal Companies Receive Cost Sharing Grants from DOE

April 03, 2011

The Magma/Plutonic Merger

A Great Deal for Plutonic Shareholders, Not bad for Magma

Tom Konrad CFA

As a shareholder of Magma Energy Corp. (MGMXF.PK), I'm reading through the joint information circular [PDF] on the proposed merger of Plutonic Power Corp (PUOPF.PK) and Magma to form "Alterra Power Corp." I'm not thrilled with the merger, although I plan to vote for it, now that it's arranged.

Overall, I think the merged Alterra will be a stronger company than either company alone. Both companies are in capital intensive niche Renewable Energy industries, so the added scale and diversification of Alterra should better enable the merged company to borrow money to finance projects at lower rates. Obtaining financing at favorable rates is essential to the profitability of renewable energy projects.Statistics

My misgivings about the merger arise from the price. Magma shareholders will have a controlling stake of 66.5% of the merged company, with current Plutonic shareholders owning the balance. Plutonic shareholders are being paid a 32% or 17.5% premium, based on pre-merger market capitalization or book value, respectively. That would be a normal buyout premium, except that Magma was a much stronger company, and so Plutonic shareholders also gain more as part of the merged entity. Although the two companies work in different renewable energy industries, their projects have much in common. In addition to raising finance, environmental permitting, grid interconnection, and negotiating with utilities are crucial to the success of any renewable power producer, and a larger company with more projects may be able to make more effective use of employees with specialized local knowledge or skills in these areas.

Before the merger, I considered Magma shares a good buy, but I would not have bought Plutonic shares, because the company would have needed to either do a deal like this or raise money in the next year or so. This put Magma in the stronger bargaining position, and so I would have liked to see a smaller premium paid for Plutonic shares. That said, since two thirds of Plutonic shareholders will need to vote for the merger in order for it to be a success, this premium is probably necessary to gain sufficient support. Passage by Magma shareholders is a virtual certainty, since the owners of 38.7% of Magma shares have already committed to vote for the deal, and only 50.01% support is needed.

As a Magma shareholder, I think the deal is acceptable, and will be a way for Magma to pursue opportunities for growth beyond Geothermal power, part of the company's current strategy. I also like Plutonic's Run of River and Pumped Hydroelectric assets, although until this proposed merger, I was unwilling to buy the company's shares because I felt its balance sheet wasn't strong enough.

Overall, I'm in favor of the deal. Too bad they couldn't have come up with a better name. Apparently "Alterra" means "Other Earth" or "Other land" in Latin, but it doesn't do much for me. I liked both Plutonic and Magma better.

Plutonic shareholders will gain an instant 32% premium on their shares, while the shareholders of both companies can look forward to steadier growth.


Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 10, 2011

Must Renewable Energy Be Diversified?

Dana Blankenhorn

Most renewable energy companies specialize.

Solar companies do solar. Wind companies do wind. Geothermal companies do geothermal. Biomass companies do biomass.

But a small Canadian merger challenges that assumption.

Magma Energy (MGMXF.PK), a geothermal company, said it will spend about $100 million in stock to buy Plutonic Power (PUOPF.PK), which has wind and hydropower projects, and ambitions to get into solar. The combined companies will go by the name Alterra Power.

Both companies are based in Vancouver.

Size really does matter, crowed Magma CEO Ross Beatty on a conference call announcing the deal. Their merger presentation calls the resulting company "a dominant renewable power developer in Canada."

True, but is this truly size?

Plutonic has only two projects operating at present, with three more under construction. The solar play is, for now, an ambition.

What the deal may really speak to are the prospects of the geothermal industry. "Geothermal is a small energy sector and has real limits to its growth since it only occurs in specific places on earth and many of the world's best geothermal assets are already developed," Beatty said on that same conference call.

Is that true? Last time I heard the Earth was round, and its thermal assets are beneath all of us.

What Beatty is doubtless referring to are the current requirements of geothermal plants. They need to be relatively close to warmth, so they can reach it at low drilling cost, but they can't be so close that the ground they are drilling through will be unstable, prone to earthquakes.

The question I'm asking of my friends in the business today is, then, are these limits absolute? We can drill miles down into the Earth, and slant that pipe so it goes horizontally. We already do this for natural gas. Why not for heat? And I know you don't want to tap directly into magma (despite the company's original name) but aren't there ways to tap heat that don't require absolute stability?

The floor's yours on this one.

There's a second question asked by this merger. Should renewable energy companies specialize in one form of energy, or is consolidation in the whole space inevitable? What is really gained by combining wind, solar, hydro and geothermal assets under one corporate umbrella, other than financing power?

Good questions for this week of the Renewable Energy World show in Tampa.

DISCOLSURE: No positions.

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned last month after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

February 15, 2011

Ormat No Longer Stands Alone

Tom Konrad, CFA

The market for Organic Rankin Cycle geothermal turbines has become competitive.

In my October 2010 profile of geothermal industry leader Ormat Technologies (ORA), I quoted a conversation I'd had with a Geothermal Energy Association (GEA) representative in 2006, where she told me that Ormat stood head and shoulders above all the other geothermal players. 

As the only truly vertically integrated geothermal developer, with in-house exploration, drilling, turbine technology, and operations, Ormat is still unique among geothermal companies.  But not too long ago their Organic Rankin Cycle turbines (which they call Ormat Energy Converters, OEC) did not have much serious competition when it came to exploiting relatively low temperature (liquid water) resources. 

Organic Rankine Cycles

The Organic Rankine Cycle (ORC) is also called Binary cycles because there are two fluids involved: a working fluid as well as the geothermal fluid which provides the heat.  "Organic" refers to the fact that the working fluid is usually an organic liquid such as isopentane or one of several refrigerants.  The working fluid is chosen so that it has a much lower boiling point than water, and so it is in gaseous phase and can drive a turbine when the heat source is too cool to boil water.  ORCs are also often used as bottoming units to generate power from the waste heat from conventional turbines at higher-temperature geothermal resources, or from the waste heat from other types of industrial waste heat.

Ormat's over 300 million hours of turbine operations is still unmatched by other companies' technology, but several rivals now have enough history in the field and financial strength to provide product guarantees so that geothermal developers and their banks can feel confident that the projects will be reliable and durable enough to lend money against.

The Competition

Mark Taylor, the lead analyst for geothermal and CCS at Bloomberg New Energy Finance gave an overview of the market for geothermal turbines at the GEA Finance Forum in New York on February 9th.  Binary turbines are still only a small fraction of the market, with the majority of installed turbines being larger conventional steam turbines, with leading suppliers being Toshiba, Mitsubishi, and Fuji.  Binary plants are only about 12% of the market by installed capacity, and Ormat's OECs are installed in 92% of these.  However, in terms of recent installations, Ormat has only about half of the market for binary plants.

One sign of the increased competition was Ormat's deal with Nevada Geothermal Power (NGLPF.OB, NGP.V) to develop the latter's Crump Geyser property.  Under the deal, Ormat will earn a 50% stake in the property by doing all of the development work, and paying for most of it, in addition to providing enough financing to Nevada Geothermal that the latter will not need to pay anything more out of pocket to develop the property.  According to John McIlveen of Jacob Securities, a significant factor in Ormat's willingness to do this deal was the assurance that Ormat would be the contractor on the project.

While Ormat's competitors cannot offer drilling services as well as construction and financing, many geothermal developers are comfortable using their own drilling contractors.  The two competitors to present at the forum both appeared to me to have compelling offerings.

One turbine manufacturer that presented was Turbine Air Systems (TAS).  TAS is headquartered in Houston, with several offices in the Middle East and South East Asia.  Unlike the other manufacturers, TAS manufactures their turbines in their factory, and move them on site in a minimum of modules, which they claim saves time and on-site labor during installation.  Another way TAS saves time for developers is by working only with nonflammable refrigerants, which can simplify the permitting process.  Perhaps more importantly, TAS has the financial strength to provide vendor financing, as they did for US Geothermal's (HTM) San Emidio property.

The other major turbine supplier to present was Pratt & Whitney, a division of United Technologies (UTX)Pratt & Whitney purchased Turboden in 2009 adding full size binary turbines to their small-scale mass produced PureCycle offering (I discussed PureCycle in more depth in my 2007 overview of Geothermal power.)  Turboden is a European supplier of ORC turbine with 30 years experience and 174 plants installed mostly in Germany, Austria, and Italy.   Most of their existing plants run off biomass and waste heat, but they have made sales in geothermal, in Germany, Austria, and France.  Despite Turboden's limited experience in geothermal markets, Pratt & Whitney's strong balance sheet and deep experience in power generation markets mean the company has to be considered a serious contender for geothermal power plants, and their competitive offerings are likely to grow stronger as they develop a longer track record in geothermal power generation.

Implications for Investors

For Ormat, the emergence of serious competition for ORC power plants may reduce potential future growth in their product segment.  This may not slow the company's overall growth much, especially since the product segment has recently been lagging anyway, mostly due to many developers' difficulties in obtaining financing.  While the financing problem for geothermal developers is easing, some of the rebounding market is likely to be captured by other turbine suppliers.  Ormat is likely to be increasingly reliant on its electricity generation segment, which may put an upper limit on how quickly the company can grow in future years.  In my recent profile of Ormat, I concluded that it was difficult to justify the company's valuation even with the consensus five year expected growth of 29% which was expected by analysts when I wrote that article in October.

If anything, the newly competitive turbine market will reduce Ormat's potential growth rate.  Apparently other analysts agree, because the current consensus is now reported as 9.8%, a number I feel is much more reasonable.  However, at the current stock price of $29.32, Ormat's forward P/E is 30.2, giving a Price/Earnings Growth ratio of a stratospheric 3.63. 

For geothermal developers, the advent of serious competition to supply binary turbines is good news, because it means that vendors will compete for geothermal developers' business, meaning that more attractive deals will be on offer.  I continue to add to my holdings of Magma Energy Corp. (MXY.TO, MGMXF.PK), Nevada Geothermal Power (NGLPF.OB, NGP.V), Ram Power Corp. (RPG.TO, RAMPF.PK), and US Geothermal (HTM).

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 11, 2011

Outlook for Geothermal Energy Stocks in 2011

Tom Konrad CFA

My take-aways from the GEA Finance Forum

After a long time lost in the proverbial desert of high capital costs and few financiers willing to step up, a number of geothermal companies made breakthroughs last fall.  The Department of Energy (DOE) loan guarantees for geothermal power development began to come through, and financiers were beginning to step up. 

With this background, I entered 2011 feeling optimistic about the prospects for geothermal power companies, and even included two geothermal developers in my 10 Clean Energy Stocks for 2011.

So far, 2011 has not been kind to geothermal stocks

On February 9th, I had the opportunity to attend the Geothermal Energy Association's (GEA) Finance Forum in New York.  The main question in my mind was:
Will the rest of 2011 offer more positive news about successful financings of geothermal projects, or will the news be more political risk and construction delays?
Overall, I left with my optimism for geothermal stocks restored. 

The Good

HS Orka: I was one of several members of the press to question Iceland's President Grimmson about the rumors that the Icelandic government might force Ram Power to sell HS Orka back to the government.  He repeated the current party line that the government has no intention of seizing Orka, but mostly ducked the question, saying that Magma's President and CEO Asgeir Magnussun was the best person to answer the question.  But he did mention that Magma was engaged with a group of Icelandic pension funds in negotiations to sell a share of HS Orka. 

Later in the conference, Magnussun said his company was working on finalizing an agreement with the Icelandic government, in which they will agree with the government to amend the long term lease of the resource.  This should allow the government to save face before the populist protests.  Magnussun also said that he suspects some of the protesters are motivated not just by resource nationalism, but also by a wish to stop industrial development.  The driving force for Iceland's current industrial development is cheap renewable geothermal and hydro power, and if geothermal expansion can be delayed, so can Icelandic industrialization. 

Financing: It seemed like every other person I spoke to at the conference was from some financial company interested in funding the construction of geothermal plants.  It seemed clear that geothermal developers who have proven resources should be able to get the money to build plants. 

In  particular, there were the following encouraging developments:

  • Islandbanki and Hannon Armstrong announced a joint venture (to be called GeoBanc) to provide a full service, one-stop financial shop for geothermal developers.
  • Johnathan Zurcoff, VP of finance at US Geothermal (HTM) said his company hopes to close on its DOE backed loan in the next couple weeks.
  • John McIlveen Research Director at Jacob Securities pointed out the significance of Enbridge's 2010 deal with US Geothermal (HTM) to finance drilling and construction at Neal Hot Springs.  This deal was significant for two reasons.  First, the project was relatively early stage, with only two completed production wells, so the investment was riskier than the typical construction loan.  Second, it was significant because Enbridge is an oil and gas company.  He thinks we'll see one or two more large players from outside the industry entering into this sort of deal in 2011.
  • Jimmy Leung of Raymond James said he's currently working on a $184 million geothermal financing he expects to close in the second quarter of 2011.
In other words, there is likely to be a lot of money flowing into geothermal projects in 2011, and that should be good for the stocks.

Risks for Geothermal

That said, neither drilling risk nor political risk is going away.

It's a truism that geothermal exploration is considerably more risky than oil and gas exploration, simply because geothermal reservoirs are much more complex than oil and gas reservoirs.  Using a very broad brush and oversimplifying somewhat, geothermal resources are hot fluids moving through cracks in complex geologic formations with hydrothermal features such as vulcanism, while oil and gas are typically in fairly simple sedimentary formations where an impermeable layer caps a pool of fossil resources in a relatively permeable layer below.

Given the complex geology, drilling risk will continue to be a long term feature of geothermal exploration, and it is the first risk that comes to mind of many industry observers. 

Nor is political risk going anywhere.  Not only will there be continuing problems with resource nationalism, such as we are seeing in Iceland, but the United States is hardly a safe-haven, with Republican congressmen falling over each other to introduce bills to grab back any unspent ARRA money which could affect future DOE construction loan guarantees and the ITC cash grants.

On the other hand, if subsidies for geothermal are cut as part of budget cutting efforts, it will not be only geothermal, but many energy sectors.  Since geothermal is one of the most economically viable renewable energy sectors, it may even emerge relatively well off.  Finally, as John Pierce of Wilson Sonsini Goodrich & Rosati pointed out, the Republican-controlled House will be largely irrelevant to whatever legislation actually gets passed: it will be the Senate where the real decisions (if any) are made.


Drilling risk and political risk are nothing new for geothermal developers.  What is new is the emergence of a new class of financiers who are willing to step up and fund geothermal projects.  We saw the beginnings of this trend in 2010, and it looks like the trend will only accelerate in 2011.  This can't help but be good for the publicly traded geothermal developers who can't fund their projects internally (the only ones that can are Ormat and Calpine Corp. (CPN).

The four I currently own are Magma Energy Corp. (MXY.TO, MGMXF.PK), Nevada Geothermal Power (NGLPF.OB, NGP.V), Ram Power Corp. (RPG.TO, RAMPF.PK), and US Geothermal (HTM).  After what I learned at the conference, I've been adding to my holdings.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

November 12, 2010

Three Top Geothermal E&P Companies

Tom Konrad CFA

Last week, I was on a panel at the Inside Commodities Conference, and spent some time talking with Tyler Mordy, director of research at Hahn Investment.  He's a top-down analyst (and CFA Charter holder) who had recently grown enthusiastic about Alternative Energy in general because the sector is so beaten down. 

We agreed that the most-beaten down sector of alternative is geothermal power stocks, which Tyler finds frustrating because Hahn works with managed ETF portfolios, and there simply is no geothermal ETF.  Nor is there likely to be, since one publicly traded company dominates the industry (Ormat Technologies [ORA]) and the rest of the geothermal Exploration and Production (E&P) companies are small to microcaps. 

My current enthusiasm for geothermal stocks is why I recently began writing about them again.  Last month, I published an overview of the eight geothermal power stocks that trade in North America, as well as an in-depth look at Ormat.  I currently don't like Ormat's valuation, so I've been meaning to delve deeper into the five Geothermal E&P plays to pick the best.  I have not yet had the time to write that article, but Martin Katusa at Casey Energy Opportunities has been following them for years.

Martin just did an interview with The Energy Report, and here is an excerpt of what he has to say:
Because there are so few players and [the geothermal power industry] is so front-CAPEX extensive, consolidation will have to happen... Whether it's Ram Power Corp. (RPG.TO, RAMPF.PK) taking over Nevada Geothermal Power (NGP.V,NGLPF.OB), Nevada Geothermal taking over Ram, Nevada taking over Magma Energy Corp. (MXY.TO,MGMXF.PK), Magma taking over Nevada or a merger between Ram and Magma—there's going to be consolidation. But the question of who will be the consolidator is still up in the air.

You want to be in the company that's going to have the largest upside. We put Nevada Geothermal, Ram and Magma as buys because they're run by excellent people. They're undervalued compared to a year ago. In January, Nevada Geothermal was over $1. We recently wrote about it trading in the $0.50 range. Now the company's refinanced its debt and had a recent equity financing in which very smart money like Rick Rule participated in (as did we). It's producing close to 50 MW now and will be growing production in the very near future; and, better yet, Ormat Technologies Inc. (NYSE:ORA) just bucked up some big money to farm into one of its other projects. A year and a half ago, it wasn't producing; so it's so much cheaper today and is a much better company.
That's the meat of it: his top picks are Ram Power, Nevada Geothermal, and Magma Energy.  Like me, he's not currently a fan of Ormat.  I recommend reading the entire interview; there's a lot more good information about each company, what he likes about them, and the sector in general.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 19, 2010

Ormat Technologies (ORA): The 500-Pound Gorilla of Geothermal Power

Tom Konrad, CFA

 Ormat is the 500-pound gorilla of the geothermal power industry.  Should you buy the stock?

I've owned Ormat Technologies (NYSE:ORA) stock off and on since I first began to invest seriously in clean energy companies.  At one of the first renewable energy conferences I attended five years ago as part of my quest to understand the renewable energy investing landscape, I encountered a representative of the Geothermal Energy Association (GEA).  Here's how I recall our conversation:

Me: "What are a few of the leading geothermal power companies?"
GEA Rep: "Ormat."
Me: "Are they a leader in the technology, in development, or in running geothermal power plants?"
GEA Rep: "All three."
Me: "Wow.  But surely there are some other companies worth mentioning."
GEA Rep: "Not really."

I was stunned.  Shouldn't a geothermal industry representative make every effort to be even-handed when discussing companies in the industry?  Not in geothermal power, at least not five years ago: After this article was published, I was contacted by another GEA rep who wanted to make clear that the above is not the GEA's current position.

Ormat Technologies is a giant in an industry of pygmies.  Of the publicly traded geothermal stocks, only Calpine (CPN) comes close to matching Ormat as an independent power producer (IPP).   But that is the only way in which Calpine rivals Ormat.  As I discussed in my geothermal power sector overview, Calpine's main business is power production, and less than 1% of it comes from geothermal.  In contrast, Ormat's Ormat Energy Converters (ORC) are the gold standard for the Organic Rankin Cycle turbines used in electricity production from the most common lower temperature geothermal resources. 

The Ormat Energy Converter is the core technology around which the company was built.   Starting in 1972, when Ormat commercialized Organic Rankin Cycle technology for remote power solutions, ORCs have been tested, adapted and customized to a wide range of real world conditions, and have a multi-decade proven track record in geothermal power, waste heat recovery, and remote power.  According to Ormat's most recent quarterly report, OEC's account for over 90% of installed binary generation (which includes all Organic Rankin Cycle generators.)

Although this is a series about geothermal companies, the potential waste heat recovery, where an ORC is used to convert waste heat from industrial applications such as cement plants should not be underestimated.  Unlike geothermal, waste heat recovery is a very low risk source of reliable green power.  Developing a geothermal resource is always risky because of the geology of geothermal reservoirs, which is much more complex and usually occurs in hard (and hard to drill) volcanic rock formations than is typical of oil and natural gas, which occur in sedimentary basins. 


Ormat's large size and experience developing and managing geothermal reservoirs give the company several advantages over other geothermal firms.  In today's tight credit environment, Ormat is less dependent on Department of Energy loan guarantees in order to obtain financing for geothermal projects than the smaller players, although those guarantees make such projects more attractive.  They also have internal expertise for all stages of geothermal exploration, development, and operation that the smaller firms can generally only match by hiring outside contractors, one of which is often Ormat.  Their scale and large number of projects under development allows for a level of diversification, so the whole company is not invested in any one such risky development prospect.

Conversely, Ormat's large size, prominence in the industry, and NYSE listing mean that any gains in the stock price are not likely to come from the company being "discovered" by a new class of investors.  Future gains will have to come from internal growth rather than rising investor awareness.


Below is a brief summary of some important share statistics.

Share Price 10/6/10
TTM Income Yield
Price/Earnings (TTM)
TTM Free Cash Flow
Cash on Hand
Dividend Yield
Current Ratio
Consensus 5 year expected growth (p.a.)
Past Five Year's Growth (p.a.)

The very high P/E ratio of over 35 is enough to fully discount analysts' projected five year growth rate of 29%.  From just those two statistics, Ormat would appear to be fairly valued.  However, the company's aggressive expansion of its geothermal projects has led to heavy investment far in excess of operating cash flow, leading to negative free cash flow.  My reading of the most recent quarterly report and investor presentations leads me to believe that management intends to continue this high level of investment for some time to come. 

Without enough cash on hand to fund this level of investment, the company will have to raise significant additional debt or equity to proceed with it's investment plans.  Given the current availability of generous DOE cash grants and ARRA loan guarantees for geothermal projects, Ormat should not have too much trouble raising the necessary funds, but this need for external funding is still likely to impact Ormats' future stock performance.  If funds are obtained by issuing equity, earnings per share will not grow as fast as revenues.  If funds are raised as debt (as has been recently the case) the company's Debt/Equity ratio will increase, along with the riskiness of the company's earnings.  In either case, the extreme P/E ratio seems unlikely to be justified.


Although I think Ormat is a great company with great technology in a market segment enjoying strong and growing government support, I find it impossible to justify the company's $30 stock price.  I sold my most recent holding in the company at around $30 in mid-2009, and I am waiting for income to increase or the share price to fall significantly before I'd consider buying this stock again.  Nevertheless, given Ormat's domination of one of my favorite sectors, geothermal stocks, I'll buy it as soon as I can at a more favorable valuation.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 17, 2010

The Rodney Dangerfield of Cleantech

David Gold

Wind turbines stand tall and mesmerize with their motion. Solar cells bask in the sparkling sun.  Meanwhile, hidden down in the dark dirty underworld, a compelling technology sits quietly and gets no respect.  Once installed it largely goes unseen and, it seems, it’s equally invisible in the world of clean technology press, venture funding and government R&D funding.  Yet this technology provides some of the most intriguing economic returns available for reducing a building’s net energy consumption and I would welcome the right opportunity to fund an exciting business in this category.

What is this Rodney Dangerfield of cleantech?  Geothermal heat pumps, also referred to as ground source heat pumps or geoexchange.  Anyone who has gone down a hundred feet or so in a cave on a hot day probably noticed how nice and cool it was down there.  That is because in most geology, a zone of nearly constant 55-degree Fahrenheit temperature exists 50-200 feet below the ground we walk on.  Even at shallower depths the temperature hovers within a much narrower range than on the surface. Geoexchange is technology that uses the constant temperature and huge heat sink that the earth represents to generate heat in the wintertime and to cool in the summer time.  They leverage technology inside the house that has similarities to your refrigerator (which is, itself, a heat pump).  (more detailed explanation of geoexchange here).  

Much like solar and wind, this is not a new technology; it’s been around and used for decades.  Although the economics of a geoexchange system vary from location to location based on geology, local energy rates, and the need for heating/cooling, in most places the payback on a geoexchange system for a home or commercial building beats solar or small-scale wind -- usually sizably.  Whereas solar or wind generate electricity, geoexchange reduces the consumption of energy for space heating and cooling and also can be utilized to generate hot water. It has near year-round benefit, working when the sun doesn’t shine and when the wind doesn’t blow.  It is “base load” energy savings for a building.  A $1,000-$2,500 annual savings in energy costs for a middle class home is fairly typical, and the CO2 reduction is roughly equal to taking two cars off the road – permanently.

(Table from Climate Master)

In many markets, a geoexchange system can be installed with paybacks of 10-15 years without any government incentives. By comparison, except in the best markets (high sun, high electricity cost and high state tax incentives on top of federal incentives), solar still struggles today to provide 10-15 year paybacks with government subsidies. 

And here’s where it get’s really exciting:  The cost of installing the technology can pay itself back in as little as three years.  A geoexchange system isn’t like that of a solar or small-scale wind system, which almost always has a 100% incremental cost because no existing system is being replaced.  In most climates, buildings need either heat or air conditioning to be usable 365 days a year, and in many climates they need both.  Those systems age and need to be replaced (a 20-year lifetime is typical).  So for a building needing new HVAC equipment, the relevant cost is the incremental cost of the geoexchange system.  Netting out the cost that would have been spent on traditional HVAC replacement equipment in most cases drops the payback calculation down to six-12 years.  Add the current federal 30% tax rebate off the full system cost, and the buyers payback can be an incredible three to six years. 

 (Source: Cleantech Consulting Services)

27 Case Studies of Residential Ground Source Heat Pump Paybacks

(Oregon Institute of Technology)

So why is it that solar has received about 33% of all venture capital investment in cleantech and around $1B in government R&D funding over the past ten years while virtually no federal funding or venture capital has gone to geoexchange?  There are several contributing factors:

·      Each geoexchange installation is an “art” project. This is a challenge that the solar industry used to face, when every system required fairly extensive design, engineering and coordination of a potpourri of vendors.  Solar has largely overcome this by better productizing their offerings and streamlining installation; at the same time, the number of solar-focused installation companies has proliferated. Geoexchange has yet to mature in this manner, and many of the companies in the space are largely traditional HVAC vendors that can do geoexchange. 

·      Out of sight, out of mind.  One might think this is a good thing, but I suspect that it hurts geoexchange.  Your neighbor who spent $25k on his solar system is proud to have it on his roof, advertising that he’s green.  But no one knows about the neighbor who invested in a geoexchange; after the drilling rigs leave, nobody can see the good deed being done for the environment. 

·      Fragmented, unfocused installers.  Geoexchange systems are installed by a hodgepodge of mostly small HVAC contractors.  Because most don’t focus exclusively on geoexchange, there isn’t a strong marketing and sales engine to streamline the sales and installation process. 

·      A misconception that geoexchange is “low tech.” What technology advancement could there be in putting pipes into trenches or holes to capture or dissipate heat?  The common view is “not much.”  But the process of heat transfer is a complex engineering challenge that could include advanced materials, fluids and designs to enable increased efficiencies, reduced materials and reduced installation costs for a given performance level.  I believe that technological advancements and economies of scale could result in a reduction in geoexchange system costs of 20-50% with a directly corresponding drop in payback time. 

On the last point, it is truly a shame that there isn’t any federal R&D spending going to innovative technologies in this area.  I would love to find an innovative geoexchange company with compelling technology advantages, innovative financing tools and a great management team that could build a large national business to invest in.  If you know of any, send them my way.  I promise I’ll show them some respect even if I can’t promise that we’ll invest in them.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (  This article was first published on his blog,

Related Article:  Geothermal Heat Pump Stocks

October 11, 2010

Geothermal Stocks Overview

Tom Konrad CFA

Geothermal power generation has several advantages over higher profile alternative energy such as wind and solar, but gets much less attention. 

Part of the lack of recognition for Geothermal power arises from a confusion with the technology variously called Geoexchange, Ground Source Heat Pump, or Geothermal Heat Pumps.  Geoexchange uses the near constant temperature of the soil a few feet to a few hundred feet below the ground to heat and cool a building.  According to the Environmental Protection Agency, Geoexchange is the most efficient way to heat and cool a building, and is a very interesting energy efficiency technology (and investment opportunity) in its own right, but it has little in common with Geothermal power.

In contrast, Geothermal power involves using much higher temperature heat from hot springs or wells much deeper into the earth to generate electric power.  Unlike Geoexchange, current Geothermal power technology requires an existing geothermal resource where natural geologic forces have brought an unusual amount of hot liquids into permeable formations relatively near the Earth's crust.  There is currently a great deal of research going into Enhanced Geothermal Systems (EGS) which use modern drilling and fracking technology to recreate the natural conditions that make Geothermal power generation possible, but EGS technology needs more development to become commercially competitive.

In contrast, Geothermal Power with a good resource can produce electricity for pennies per kWh.  Electricity from one of the world's best geothermal resources, The Geysers in Northern California, is sold for 3 to 3.5 cents per kWh, although many the lower grade resources being exploited today need prices between six and twelve cents, depending on who you ask.  These prices are comparable to natural gas fired generation and wind, and are considerably less expensive than solar photovoltaic.  Unlike natural gas, the operating costs of running geothermal plants are very low, and they produce minimal emissions of any kind.  Unlike wind, geothermal power is available in all weather conditions, and geothermal plants generally run more than 95% of the time, which makes them more reliable even than coal power plants, which typically only produce power 80-90% of the time.

Geothermal Power also has a small footprint, requiring only 7.5 km2 per TW*hr/year, less than Coal (9.7 km2 per TW*hr/year), Natural Gas (18.6 km2 per TW*hr/year) and all other Renewable Electricity generation technologies. This small footprint and lack of emissions mean that geothermal power plants can even be located inside cities without disturbing the neighbors... if there is a geothermal resource available. 

All these factors mean that a good Geothermal resource located near transmission can be very valuable to a company that can tap it.  Unlike wind and sun, such geothermal resources are as rare as they are valuable, since they only occur in areas with tectonic or volcanic activity.  This rarity is one of the factors keeping geothermal a relatively undiscovered technology among investors interested in renewable energy, but it also means that the rights to develop these resources are valuable, in much the same way as a good mineral deposit is valuable to a mining company. 

Perhaps most importantly, Geothermal power enjoys support from both Republican and Democrats, with the recently proposed Geothermal Investment Act of 2010 receiving bipartisan support.  Perhaps one factor in this support is that relatively small size of the industry means that government incentives can make a large difference for the industry with only a tiny budgetary impact.

Here is a previous article where I take a deeper look at the business of geothermal power.

Geothermal Stocks

Geothermal stocks fall neatly into two categories: Large cap companies and junior exploration and development companies.  The large-cap companies are:

  • Ormat (NYSE: ORA): Ormat is the leading vertically integrated geothermal power giant, involved in exploration, development, power production and maintenance both for themselves and as a contractor almost everywhere geothermal resources are found in the world.  Ormat is as close as you can get to a one-stop shop for exposure to the geothermal power sector. 
  • Calpine (NYSE:CPN): Calpine is the largest independent power producer (IPP), owning 19 of 21 generation stations in the world-class Geysers geothermal field near Santa Rosa, CA.  Despite producing one-fourth of the non-hydro renewable power produced in California, Calpine should not be analyzed as a renewable energy IPP, since renewable generation accounts for less than 3% of total generation capacity.  The vast majority of Calpine's capacity comes from natural gas fired units, so investors in Calpine are really getting a natural gas IPP with some expertise in geothermal power production.  In the context of this article, Calpine is  most interesting as a possible acquirer of the small geothermal exploration and production companies, as it acquired its interest The Geysers in 1999 and 2000.
  • United Technologies (NYSE:UTX): Like Calpine, United Technologies is a diversified industrial giant included here because of the modular PureCycle geothermal and heat recovery engine from its Pratt&Whitney unit.  While not a significant contributor to the results of a giant corporation like United Technologies, PureCycle might open up low temperature geothermal resources that cannot produce enough power to justify the cost of a custom Ormat Power Converter, but may be productive enough for an off-the-shelf generator such as PureCycle.
Junior Geothermal Exploration and Development Companies

None of these companies are currently profitable, but all own geothermal resources in various stages of development, including producing plants.  With substantially all the cost of geothermal development coming up-front, investors in these companies need to consider the availability of funding for development as well as the riskiness and time line for developing each company's geothermal assets.  There has been a recent trend of consolidation in the industry which is likely to continue in the current difficult financing environment, despite growing government support for geothermal.

These small micro cap companies include:
If you know of any other geothermal stocks missing from this list, please let me know in the comments.  I plan to take a closer look at each of the exploration and development companies in coming weeks, and I'll add your suggestions to the list.


DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer

January 05, 2010

“An opportunity to ‘back up the truck’ on this new HOT stock at a significantly reduced price.”

by Travis Johnson teases out the geothermal stock that is the current come-on for Casey's Energy Report. reviewed a sister publication, Casey Energy Opportunities, last year.

Today we’re looking at a newsletter from Doug Casey’s stable, the first one of his teasers that I’ve looked at in quite a while.

The pitch is that Marin Katusa has picked 19 consecutive winning stocks for his Casey’s Energy Report, and that you can subscribe now to get in on pick number 20, which is apparently getting close to their buy price.

As they put it …

“Marin’s just getting started. Winner #20 is already on his radar, and chances are it’s going to deliver even higher returns than any of the other 19.”

Katusa apparently has a “three-tiered formula” that helps him make money for subscribers — the first tier is a network of energy insiders that he cultivates, the second tier is some kind of mathematical valuation/screening “system” that helps him target buy prices, and the third tier is his team of energy analysts, who he naturally believes are “the best and brightest.”

I have no idea whether or not those “tiers” really mean anything or are just a marketing ploy, but I would imagine that they’re probably not lying about the 19 winners (though they may not count or credit them the way you would) — notice that we weren’t told that he’s had 19 picks that beat the market, just 19 “winners,” which the little footnote indicates were all chosen in the last quarter of 2008 and the first eight months of 2009, so it’s possible that even picking 19 “winners” in a row could have your overall portfolio trailing the S&P 500. Not to throw cold water on the claim, I certainly haven’t ever picked 19 winners in a row, but we might also argue that every hot streak has to end at some point.

I didn’t receive the email ad for this one directly, I just got the link sent along to me recently, so I can’t tell you for sure when the ad started running — which means it’s possible that this “number 20″ pick has already been made.

So, with those caveats, what is this stock that’s Marin Katusa’s possible 20th consecutive hot pick? You may or may not be delighted to hear that it’s a geothermal stock … a sector we’ve looked at many times in the last couple years, but which one?

“Winner #20 is a geothermal company. And geothermal energy is not only one of the most reliable alternative energies — it will be one of the most profitable, as President Obama continues to pump money into the green sector through subsidies.

“The man behind this company is a legend in the resource sector for his financial insight. It’s no wonder he’s been dubbed the ‘broken slot machine’ for his unrivaled ability to make shareholders money.”

OK, so that’s actually maybe enough for us to identify this stock … but we get a few more clues, let’s use ‘em …

“Recently, winner #20 filed its IPO (initial public offering), and investors as well as industry insiders clamored to get a piece of the action.

“As often happens with IPOs, this frenzied buying quickly inflated and then deflated the stock price, which for now has returned to a more realistic level. During the imminent market decline, Marin believes all stocks will suffer a temporary setback, creating a tremendous buying opportunity.

“An opportunity to ‘back up the truck’ on this new hot stock at a significantly reduced price.”

And as every good copywriter knows, throwing in some quotes from well-respected news organizations makes your deal look more substantive, and quiets the voice in the readers head that says, “what if this is all just a scam?”

So yes, we get a few press quotes, too:

“‘Investors around the world are leaping on the initial public offering of [this] Canadian geothermal energy company, highlighting the soaring interest in the geothermal space and the superb track record of [the company's] founder.’ -Reuters”


“[This geothermal stock] ‘is definitely one of the hottest deals of the year.’ -The National Post”


“Geothermal is one of the great answers to our energy crisis. Add the facts that: [1] you’re not exposed to commodity prices, [2] you’re not exposed to the dictators of the world, and [3] you’re not throwing away your domestic product to foreigners. It’s just a great, great business. -IBT Commodities”


“‘President Barack Obama’s American Recovery and Reinvestment Act provides tax credits for geothermal projects, and the American Clean Energy and Security Act is laden with more incentives for clean energy investment.’ -The Financial Post”

If you’ve been around these parts for a while you’re probably familiar with the concept of geothermal energy — drilling into hot zones, pumping in water, using that heated water to create steam that powers turbines and generate electricity, it’s been proven as a concept for years, at least in hot zones like Iceland and The Geysers in Northern California. Geothermal generation is certainly a lot more “green” than burning coal or natural gas, and provides baseload (”always on”) energy unlike sun-dependent solar or wind-dependent turbines, though it also comes with complications (not least that it can be expensive to drill and develop, and for best results you need a very hot area, and the process is pretty tough on the equipment), so I’ll spare you the rest of Katusa’s general argument in favor of geothermal energy.

This last bit, then reiterates the importance of the man behind the company:

“When asked about winner #20, ‘Vancouver’s mining maven’ had this to say:

“‘The object is to do the same thing we did [with my silver producer]: to build the biggest geothermal energy business in the world.’

“We have every confidence he will do it.

“Indeed, the long-term profit potential is staggering.

“That’s why Marin and the whole Casey team are on board with winner #20.”

So who is this elusive “number 20?”

Thinkolator sez: Magma Energy (MXY in Toronto, MGMXF on the pink sheets — click here for the free trend analysis, which isn’t currently very pretty)

This is the latest endeavor of Ross Beaty, that “mining maven” teased above who has indeed been called the “broken slot machine” for his record of past success (he sold Equinox to Hecla Mining 25 years ago, and more recently built Pan American Silver into the world’s largest silver producer). The quote above, about how he wants to build Magma into the biggest business of its kind in the world, is from an interview that he gave almost a year ago, before Magma went public.

And the company did have it’s Canadian IPO this Summer, a bit behind their original schedule, but they got a fair amount of attention and at the time it was the biggest Canadian IPO of the year — and Beaty apparently got what he wanted, in that interview he noted that he was hoping the IPO would value Magma at $300-400 million, and it’s now got a market cap of C$450 million. That makes them one of the bigger “junior” companies in the space, bigger than the small firms that have just one or two sites under development like U.S. Geothermal, but much smaller than Ormat or Calpine. Probably the closest competitor, in terms of market cap size and focus, is Ram Power (RPG in Toronto, RAMPF on the pink sheets — one of two geothermal stocks in an uptrend at the moment, according to MarketClub), which is a similarly new company in its current form, a rollup of Ram Power and the junior geothermal companies Polaris Geothermal and Western GeoPower, both of which have been teaser targets in recent years as well.

Magma is still very much an early stage company in terms of operations — they are buying into a big established geothermal project in Iceland (they own about 43% now and are investing in expansion, it’s primarily a site that generates power for aluminum smelting), and they own one operating geothermal site in Nevada (Soda Lake, which has been operating for close to 20 years and is at about 1/3 of its nameplate generation capacity). Their other projects are elsewhere in the Northwestern US, in Utah and Oregon as well as more sites in Nevada, and in South America, with concession applications in Peru and some early-stage projects that they own in Argentina and Chile. Aside from Soda Lake and Iceland, it’s all early stage exploration, or flow testing, or drilling and mapping that they’re doing right now. I have no idea how long it takes to get these projects off the ground, but it sounds like a lot of the work they’re doing, in addition to the few places where they’re actually doing exploratory drilling, is updating old seismic and survey data from these sites that is in some cases 20-30 years old. The company describes their pipeline as having 24 early stage projects and seven advanced stage exploration projects around the world, including several new exploration targets that they just acquired in a government auction earlier this year.

The way Magma reports its projects, they have 86 MW of reserves (75 from Iceland, 11 from Soda Lake — though from what I can tell Soda Lake is only 8MW right now) and over 600MW of “resources”, which is apparently the documented potential of their other projects. Of that 600 MW about half is Iceland (HS Orka is the site they have part ownership of), and the other half is split between one big discovery in Chile and a number of smaller Nevada and Utah properties. Another 20 or so early stage properties are not counted in the reserves or resources. According to the timeline they’re projecting, they will boost production to about 100 MW overall next year, and bump up slightly again in 2012 through expansions in Soda Lake and Iceland, then have production close to double in 2013 with two new Nevada plants online, and jump considerably in 2015 with several of their other projects joining the party, including most notably the large 140 MW Maule project in Chile. So that’s the five-year growth plan, and their goal is to be acquisitive and create a global company to consolidate global geothermal generation, so they may well buy up some other projects along the way.

Magma does not have any debt, and they’ve raised well over C$100 million recently (from the IPO, the over-allotment, and a subsequent private placement) and have another C$20 million in credit available, so they should be in fine shape financially, and ready to keep growing by investing in exploration and perhaps acquiring other companies and projects, but there seems little chance that they’ll be profitable anytime soon — which is perhaps why they funded the Iceland investment by selling new stock instead of using their IPO proceeds. They have already received some federal money for their Nevada projects, and it looks like part of their calculus certainly depends on federal “green energy” grants and similar funding, which is no surprise. You can see Magma’s most recently quarterly report press release here, which details their work so far this year and their financial position, and a December investor presentation that goes into some more detail on their projects here [pdf file].

I don’t have any particular insight into which geothermal stocks are the best bet, but it does seem that Magma might be the best “story” right now — having a charismatic and successful resource investor at the helm, lots of cash, and a nice big position in the most well-known geothermal resource in the world (Iceland) certainly helps. As I noted, the other company that has a somewhat similar profile is Ram Power, and smaller firms include US Geothermal (HTM in NY, GTH in Canada — this is the other one that MarketClub thinks is in an uptrend) and Nevada Geothermal (NGP in Canada, NGLPF on the pink sheets), both of which are currently generating electricity, and Sierra Geothermal (SRA in Canada, SRAGF on the pink sheets), which is more capital constrained and not yet producing, but apparently has some promising sites and permits and may be bought up by Ram Power (or so I’ve read in one place, at least). The biggest pure play I know of is Ormat (ORA), which is an Israeli company as well known for building geothermal plants for others as for operating them themselves, it’s fairly expensive, but profitable and much less volatile.

So there you have it — one more geothermal stock to throw on the pile, it may or may not work out as they hope but I’m quite certain that this is the pick teased by Casey’s Energy Report. If you’re more “hotted up” about this sector than I, I’m sure you’ll have some insight or information to share … that’s why the friendly little comment box is sitting below, just waiting for your input.

Travis Johnson is the Stock Gumshoe.  He unravels the email teasers from investment newsletters and advisors, and tracks their performance.

December 19, 2009

World Energy Solutions (XWES) and Ram Power (RPG.TO) Appear Promising

From Small Fries to Big Shots? Part 1 of 2

by Bill Paul

Feel like rolling the dice on some small alternative energy stocks that appear to have big-time potential?

Just remember: sometimes you roll snake eyes.

First up: World Energy Solutions Inc. (Symbol: XWES), which currently trades on NASDAQ for $3 and change per share.

Worcester, MA-based World Energy Solutions operates online exchanges for energy and green commodities, including the one administered by Regional Greenhouse Gas Initiative Inc. (RGGI), the regulatory scheme under which 10 Northeastern and Middle Atlantic states "cap" their power plants' emissions by requiring plant owners to buy permits for the gasses they emit.

World Energy Solutions is a poster child for how to run a cap-and-trade system. "RGGI auctions continue to run like clockwork," RGGI's chairman recently said, adding, "RGGI is showing that cap-and-trade works."

With Europe and Asia already well on the way to having full-blown cap-and-trade systems, it would seem only a matter of time before World Energy Solutions attracts far wider investor interest (and just maybe a corporate suitor). While the company is still in the red, last month it reported that third-quarter and nine-month losses had narrowed significantly from a year ago, on increased revenue.

Next up: geothermal power developer Ram Power Corp., which trades on the Toronto Stock Exchange under the symbol RPG (RPG.TO, RAMPF.PK). Nevada-based Ram shares also currently sell for $3 and change, although just two months ago they were selling for under $1. But then the World Bank's International Finance Corp. proposed to arrange $216 million in debt financing for the company's 72 megawatt geothermal project in Nicaragua, now due to come online in 2011.

Ram Power's chairman clearly believes this is the start of something big for his firm. Chris Thompson said this past week that "Ram Power's mission (is) to be the premier provider of geothermal energy in Central America. We see this region, especially Nicaragua, as an area where our company can develop stable, long-term energy supply relationships."

Unlike World Energy Solutions, Ram's third quarter and nine month losses widened - significantly so - from year-earlier results, though that clearly hasn't hampered its recent stock activity. The company has other geothermal interests in Nevada, California and Canada.

(Next Week: Two more small fries whose prospects appear promising.)


DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of

October 30, 2009

Geothermal Companies Receive Cost Sharing Grants from DOE

Tom Konrad CFA

My entire portfolio of Geothermal companies received DOE cost-sharing grants Friday.  Here's a quick run-down:

Market Reaction

While the geothermal exploration companies (NGP, HTM, and SRA) were all up today, Ormat and the geothermal heat pump stocks were down (ORA -1.23%, WFI.TO -1.12%, and LXU -2.67%, on a day the S&P 500 fell 2.81%)  Ormat was probably down in sympathy with the market because it is much larger than the other companies listed, and these grants won't make that much difference to its bottom line.  Waterfurnace and LSU may have gotten less market benefit since the grants were not directly to them, and money for geothermal heat pumps was already expected to be part of these grants.

Practically the only (nearly) pure-play geothermal company that didn't get something was Raser Technologies (RZ), which I told readers I sold in September when the DOE announced they were no longer under consideration. I sold Raser at $1.78, taking a small (11%) loss.  It closed Friday at $1.18. I'm glad I got out when I did, although readers of the article who sold on my recommendation will have done better than I.  Raser bumped around in the $1.80-85 range for a couple weeks after I published my article, and even hit $2 briefly.


DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 18, 2009

What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.


The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO2 reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)


Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO2 emissions (CO2e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 abatement cost.GIF

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO2e per year, and no practical increase in abatement beyond 20 15 Gt CO2e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO2 at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO2e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO2e (for a total of 18 Gt CO2e, or portfolio 4) by 2060.  abatement portfolios.bmpSince the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.


The most striking thing about these portfolios is that Forestry dominates CO2 abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.


Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.


Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.


We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.


Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.


DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

September 14, 2009

Book Review: Investment Opportunities for a Low Carbon World (Geothermal + Efficiency)

Charles Morand

Last Thursday, I reviewed two chapters from the recently published book "Investment Opportunities for a Low Carbon World"*. This post reviews two more.

 Geothermal Energy

Alexander Richter, Glitnir Bank (now Íslandsbanki)

Geothermal is one of the most interesting forms of clean power generation there is. As noted by the author, the most convincing argument for geothermal electricity is the fact that it operates at capacity factors in the upper 90s. This makes it the only renewable technology suitable for baseload power with the exception of dam-based (i.e. large-scale) hydro.

However, as the chapter demonstrates, global potential is unevenly distributed, with Asia, North America and Latin America having around three to four times more potential than Europe, Africa and Oceania. Besides a brief review of the global picture, the book focuses largely on the US, which will most likely remain the most active market for a few more years (the US currently accounts for a third of global installed geothermal electric capacity).

The author does a good job of breaking the geothermal development business model into its main phases (exploration, pre-feasibility, feasibility and design & construction) and explaining the various types of capital flows required at each stage, as companies move from a mining exploration business model (exploration, pre-feasibility, feasibility) to a power generation utility model (design & construction). What's missing, however, is a discussion of the probability of project success at each stage, with risk typically culminating in the feasibility phase with important sums of cash being spent on exploration drilling with no guarantee that the resource will materialize.

The chapter's strength is undeniably its assessment of the current state of the US market. The author uses data from a number of different sources to show the future potential of the market. California is expected to lead the way with Nevada coming in second. Based on a database of where the overall pipeline of US projects was at at the end of 2008, the author estimates that several projects will reach the feasibility and design & construction phases in 2011 and 2012, which should lead to greater demand for capital by the industry.

The chapter also touches on direct use geothermal, although the discussion is far less detailed than that on geothermal electricity. This despite the fact that the author writes: "[t]he biggest potential and prospects for the shorter term are in the direct use of geothermal energy, particularly for heating and other applications that use heat directly."

As with the first two chapters I reviewed, I would have liked a few stock picks, and I believe a sub-section on opportunities in the equipment sector might have been interesting. However, this chapter fulfilled its purpose well; it provided a good introduction to the sector and can serve as reference material for later on. The US data was also very useful.

Energy Efficiency as an Investment Theme

Zoë Knight, Cheviot Asset Management

Energy efficiency is the most straightforward way of cleaning up our electricity supply and, given the right incentives, could also be the cheapest one (up to a point, as efficiency investments eventually run into diminishing marginal returns). We learn that in 16 IEA countries with strong efficiency profiles, efficiency measures resulted in aggregate savings worth US$180 billion in 2005 - not bad!

Incentives is thus exactly what a large part of this chapter focuses on. The author provides a thorough review of European policies and US efficiency targets outlined by the Obama administration to date. In both cases, it appears evident now that a trend toward greater energy efficiency incentives and regulations is well underway.

The author also provides a breakdown of global fuel consumption by category and identifies sectoral investment opportunities that could arise in each category. On the manufacturing side, the greatest opportunities are in machine drives (refrigeration, fans, pumps, compressors and materials processing). For households, hot water and central heating are key areas. 

However, as with other chapters I've reviewed so far, there are no specific stock picks. I did learn, however, that Merrill Lynch created an energy efficiency equity index. However, because all substantive info on the index seems to be accessible only to clients, this won't help retail investors much.

I found the review of US and EU policies very useful, but would have appreciated a greater focus on some of the main technologies that are currently commercially available (with the exception of LED lighting which is well covered), as well as some stock picks.

The author makes the following useful point about large companies with exposure to efficiency (most of the opportunities currently available to investors in this area are large conglomerates): "investors need to identify whether the theme is a large enough driver to warrant stock selection or whether there may be other factors that will drive valuation of the stock [...], outweighing the positive structural drivers from increased investment at a government level into energy efficiency. As with any equity investment, positive long-term structural drivers may differ from short-term trading cyclicality."


* We are always interested in reviewing books and reports in the areas of alternative energy, cleantech or other environmental industries, especially where they add value to the investment decision-making process. If your organization would like a new book or report reviewed, please
contact us

September 02, 2009

Just Sold: Raser Technologies (RZ)

Raser Technologies (NYSE:RZ) did not get the hoped-for DOE loan guarantee.   The company still has good long term prospects, but the short term upside chances are much weaker, prompting me to sell in the hope of buying back in after a general market sell-off.

Raser Technologies (NYSE:RZ) dropped from $2.10 to $1.95 on September 1st, prompting a regular reader to leave a comment asking me if it was time to sell on the original Raser article. (Because he's a regular, he knows my policy of preferring to answer questions posed as comments on the blog to email comments: At the time, I did not see any new news, so I assumed the 7% drop was just part of the general sell-off on Monday.  

The news broke this morning: The DOE had denied a loan guarantee application for Raser's East Thermo project.  This does not mean that the project is dead (as Raser hastened to point out,) but the reason I had bought Raser was the hope that one of Raser's attempts to gain funding would pay off quickly.  I thought the DOE loan guarantee was the best prospect for a quick upside move.  

With the loan guarantee no longer an option, there are still plenty of other possibilities, such as receiving ARRA funding, or working out some sort of customer financing arrangement, like the pre-paid PPAs Raser has been working on.  I think these may take some time to come to fruition, and in the meantime, I'm still worried about a general market decline, which should hurt Raser as well.

I sold the majority of my positions at $1.78 on Sept 2 (a 12-13% loss).  I'm going to wait and see what happens to the stock over the next few months before I buy it back, just like the other 39 stocks on my Clean Energy Shopping List.  I do still own a few option positions on Raser, because options are much less liquid than the stock itself, and they're harder to sell in a hurry.

DISCLOSURE: Tom Konrad and/or his clients have long positions in RZ.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.


July 23, 2009

Raser Technologies (RZ): A Bargain, or Just Cheap?

Tom Konrad, Ph.D., CFA

Raser Technologies (NYSE:RZ) stock has fallen almost 50% since the company announce an offering of shares on June 30.  Although the round quickly filled, the stock continued falling, and it seems like a screaming deal.  Is it?

Raser Technologies

On July 7, Raser Technologies sold $25.5M of stock and warrants in a secondary offering.  According to press reports, this amounted to 13% of Raser's stock, thereby valuing the company at (very approximately) $200M, or $175M pre-money.  

The units, each consisting of 1 share and 1/2 a warrant exercisable at $4.62 was offered at $2.98.  Depending on how you value the warrants, this means that the institutional investors who purchased the shares valued the stock at between $2.50 and $2.75 per share, which was approximately what the company's shares were trading at the day the offering closed.

Low Temperature Geothermal Development

Raser's model is to focus on previously known, relatively low temperature geothermal resources which had previously been passed over because they had historically been to cool to develop for electric power.  As I discussed in my overview of Geothermal Power, exploration risks have historically prevented much geothermal power production.  By using known geothermal resources, Raser completely avoids the risk and expense involved in exploration.  

There is also little technology risk, since the modular PureCycle turbines produced by United Technologies Corp. (UTX) are only slightly modified (by UTC) from a decades old production chiller from the same company.  Assembly-line manufacture of the turbines also speeds deployment.  The twelve to 18 months within which they expect to be able to develop projects is half that of the industry standard 2-3 years.

Raser is currently in negotiation with lenders in order to obtain financing for its 300MW geothermal development pipeline.  In order to obtain that financing, lenders want to know that Raser will remain in business in order to build and operate the proposed plants.  The additional cash from the secondary offering will go a long way towards alleviating that concern.

Raser is also pursuing a Department of energy loan guarantee, as well as stimulus funding under the ARRA.  With Raser's Thermo plant now in New Mexico selling power to the city of Anaheim since 2008, utilities now seem to believe that Raser can deliver on its promises.  Some evidence of this came in the form of a (non-binding) term sheet with  the Southern California Public Power Authority (SCPPA) for 110 MW of geothermal that envisions part of the purchase price paid up-front, in effect, having SCPPA finance part of the plant construction.

If any of these multiple avenues for project finance are finalized, I expect the stock price to receive a big boost from the currently depressed levels.

The 100 MPG Hummer

If turning the business model for geothermal development on its head is not enough, Raser is also working on hybrid vehicles.  They've put together a range extended electric drive train for large vehicles, which they chose to showcase in a Hummer H3.  Like Trinity AFS, they choose to grab headlines by ignoring the electricity used to charge the vehicle, and emphasize the relatively meaningless MPG number.  I'm not sure if much of this technology is unique; large vehicles like the Hummer are especially well suited for dual mode EV conversions because the frame is capable of carrying the extra weight of batteries without an extensive redesign.

I personally would be happiest if Raser divested their Transportation and Industrial segment, in which they are pursuing the hybrid technology.  There seems to be little obvious synergy between the two segments, and they don't seem to have an outstanding technology or business model.  Furthermore, they face significant competition, not only from incumbent car and heavy duty vehicle manufacturers, but also from countless startups, such as Trinity.  I know of two other pure-play publicly traded companies in the large electric vehicle space: Balqon Corporation (BLQN.OB), and UQM Technologies (UQM), and where there are two public companies, there are bound to be several private ones.  A third public company, Odyne, went bankrupt last year and sold its assets to Dueco, which is now a competitor in the hybrid heavy equipment market.  I would prefer if management were to focus on geothermal, where their business model is relatively unique in the industry and the main competition is with increasingly expensive fossil fueled electricity generation.

However, while management denies any intent to shed the transport arm in interviews, they seem to be doing the next best thing: Devoting most of their resources to geothermal.  According to the last annual report, assets in the Transport and Industrial segment fell from almost $1M in 2006 to $750,000 in 2008; they have "reduced our resources committed to new developmental efforts" in this segment.  Meanwhile, assets in the Power Systems (geothermal) segment grew from approximately $6M in 2006 to $168M in 2008.

Too Cheap to Ignore

RZ Chart.png

Raser's future success will be highly dependent on their ability to raise project financing for their very ambitious development plans.  In the current environment, raising such financing is far from certain.  They will need to raise significant amounts of money for project finance, and successfully develop those projects if they are ever to reach profitability.  If they fail, the stock price will continue to fall.

With such large uncertainties, it is difficult to value the company, so my inclination is to rely on the implied valuation from the recent offering, of between $2.50 and $2.75 a share.  These large investors would only have invested if they felt they were getting in at a discount to the value of the business, and so I am comfortable buying at slightly over $2.00, giving me a comfortable discount to the offering.

At these beaten-down prices, any good news should cause a sharp spike in the stock price in very short order.  

End Notes 7/23/09

 I wrote this article over the weekend, and have since then tripled my position, at prices between $2.00 and $2.05.  I also bought some January 2011 $5 calls.  This morning, Raser announced the restructuring of an existing line of credit, not something I would consider major news, but it's a step along the way to advancing the projects in their pipeline.  The stock seems to be starting to rebound on the news.

Other recent articles: 

Clean Energy Stocks Shopping List: Landfill Gas and Geothermal
Q2 Performance Update: Ten Green Energy Gambles for 2009

DISCLOSURE: Tom Konrad and/or his clients own RZ and UTX.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

July 09, 2009

$3 Billion For Cleantech & Alt Energy

Charles Morand

The DOE made public earlier today the amount of money that will awarded to clean power projects in lieu of the usual tax breaks: $3 billion.

This will allow project proponents to receive a direct cash grant now instead of a Production Tax Credit or an Investment Tax Credit later on. The guidance document notes the following:

"Section 1603 of the Act’s tax title, the American Recovery and Reinvestment Tax Act, appropriates funds for payments to persons who place in service specified energy property during 2009 or 2010 or after 2010 if construction began on the property during 2009 or 2010 and the property is placed in service by a certain date known as the credit termination date (described more fully below in the Property and Payment Eligibility section). Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10% or 30% of the basis of the property, depending on the type of property."
This is the cherry on a sundae of cash handouts announced over the past few months for the alt energy and cleantech industries. Solar and wind installations - which account for the lion's share of alt energy investments - have yet to come back to life in any significant way. It is hoped by both government and industry people that this new measure will provide sufficient impetus in the near term to carry the sector through the remainder of the recession.

To be continued... 

July 02, 2009

Money Is Flowing Into Alt Energy Again, But We Are Not Out Of The Woods Yet

Charles Morand

It seems as though the darkest clouds are finally dissipating over alt energy's financing horizon. Over the past few weeks, money has started flowing into the sector again, as evidenced by a number of recent deal announcements:
  1. On June 9, I reported on the upcoming IPO for Magma Energy Corp., a geothermal exploration company. The IPO's size will be upped from an initial C$50 MM to C$100 MM, a sign of increased market appetite 
  2. SunPower Corp. raised $418 MM in early May through a share and debt offering, and recently announced it had reached a $100 MM deal with Wells Fargo to fund commercial-scale solar PV projects across the US
  3. John reported a few days ago that A123 Systems had amended the SEC registration statement for its proposed IPO, positing that it could be much larger than initially anticipated
  4.  In late May, Suntech Power raised $277 MM from a follow-on offering of its American Depositary Shares (ADSs), and recently received a $50 MM convertible loan from the IFC
  5. On June 23, Yingli Green raised $193 MM through a follow-on offering of its ADSs
  6. On June 25, Trina Solar secured credit facilities of about $57 MM
  7. New Energy Finance just reported a slight increase in asset financing for Q2 2009, although it cautioned that money flows into renewable energy projects were: (1) down substantially from what they were a year ago (~66% in the US); and (2) far below the level where they need to be if greenhouse gas emissions are to be brought under control by 2020
As noted by both New Energy Finance and John, requirements for matching funds under the ARRA mean that firms that want to access government grants will have to put up some of their own money, potentially leading some of them to go to market even if conditions aren't ideal.

The recent upsurge in public market financing also certainly has to do with  buoyant markets and higher oil prices, a window that could close if the general sentiment turns negative in the coming weeks.

This increased financing activity is good news to be sure. Pure-play alt energy firms, by virtue of the sectors they do business in, typically have much weaker balance sheets than conventional energy firms or firms in more established industries. They are thus generally in a much weaker position to ride out a long capital markets drought.

But the industry is far from out of the woods yet, and I remain convinced that questionable firms are in a much weaker position to conceal their flaws behind generalized cleantech exuberance than they were in 2006 and 2007. The last rally lifted some boats that didn't deserve lifting, and sooner or later those boats will sink again.

DISCLOSURE: None       

July 01, 2009

Clean Energy Stocks Shopping List: Landfill Gas and Geothermal

Stocks seem expensive now, but that may not last.  Here are two Landfill Gas stocks and three Geothermal stocks I'm hoping to buy if the market falters.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  So far I've brought you:

This article takes a look at two of the most economical clean electricity generation technologies, landfill gas and geothermal.

Kilowatts from Trash

As I discussed in my recent article on Advanced Biofuels, I expect that advanced biofuels are likely to have to compete with electricity generation for feedstock, and electricity generation is likely to take a large part of the pie.  More importantly, the most likely companies to gain are the ones that control the feedstock.  I like waste management companies because they already have contracts and experience in dealing with local governments.  As those governments adopt broader recycling measures, waste-to-energy, and even mandatory composting, waste management companies that have the skills to process waste effectively will be able to provide these additional services.  This should increase their revenues and profits from the same amount of trash, and may lead to new opportunities to sell byproducts such as recycled materials and electricity.

#1 Waste Management Inc. (WMI). Waste Management not only collects trash, but also does recycling and waste-to-energy services.  Over the last few years, they have been aggressively expanding their methane gas recovery facilities at existing landfills, and often works under contract with governmental entities.  To me, this portfolio of skills seems ideal for exploiting future opportunities to find value in the stuff that we throw away.

WMI has a rock solid balance sheet, with almost $1 billion in cash, strong cash flow, and low debt-to-equity and current ratios.  A modest forward P/E of 13, and a dividend yield of over 4% makes this company attractive to cautious investors, even at current prices.  This is fortunate, since the low Beta means that the stock is unlikely to decline much in response to a general market decline.

#2 Veolia Environnement (VE) Also provides world-wide waste management services, but is a much broader company with an expertise in government contracting.  In addition to solid waste, they offer a large range of environmental management services, from water and wastewater treatment (there are also opportunities to generate electricity from methane produced at wastewater treatment plants.) They're also involved in several of my other favorite sectors: energy efficiency through their energy management services, and clean transportation through their transit and rail services.

The company is much more highly leveraged than Waste Management, however, and had a very thin profit margin in 2008.  This makes the company much more riskier than Waste Management, with a Beta of 1.8 compared to Waste Management's 0.5.  However, a market downturn may provide the opportunity to buy this company at a dramatically reduced valuation.

Geothermal Stocks

Hot rocks are a hot industry these days, and geothermal electricity has a lot going for it.  First, electric utilities are very comfortable with it, since geothermal plants are baseload and are very reliable, and costing only about 6 to 11 cents per kWh.  Geothermal also has strong support on Capitol Hill, gaining explicit mention and ($350 million) in the Recovery Act.  

#3 Ormat (ORA), a vertically integrated geothermal company works with almost all the players in the industry.  Many of the exploration companies, such as US GeoThermal (HTM), contract with Ormat to build their power plants.  They also do their own exploration, construction, and operation of geothermal plants world wide.

Although I consider the company a core geothermal holding, I recently sold much of my position because the recent rally carried the company to very high valuations, with a forward P/E and dividend yield of 25 and 0.4%.  Given that the stock price has almost doubled since early March, I expect to be able to get back in at much better prices.

#4 Raser Technologies (RZ) is a sharp contrast to Ormat, being the industry upstart with a disruptive business model.  Raser is leveraging cheap, off-the-shelf technology from United Technologies Corp. (UTX) in order to greatly decrease exploration costs and time.  This modularity means that Raser can start building a power plant before they have fully explored a geothermal resource.  If they later find that the resource can support a larger plant, they can simply add units.  Their first plant in Thermo Utah was completed in less than a year, on a known low temperature resource that had been previously been considered too cool to generate power, meaning that exploration was not necessary.

The company recently completed a $25.5 million offering at a 22.5% discount to the stock price at the time.  The stock promptly sold off more than 30%.  With the company rapidly burning through cash, the raise was necessary in order to continue their rapid expansion plans.  I would not have touched the company before the raise (although I listed it as one of Ten Clean Energy Gambles for 2009.  With Raser down almost 30% since then, and some fundraising out of the way for the short term, the odds of the gamble are looking a lot better.  

#5 Nevada Geothermal Power (NGPLF.PK) is a more conventional exploration and development company with a few high quality projects.  This company now expects their first producing project at Blue Mountain to be fully operational in October 2009.  The shift from an exploration company to a power producer should bring a whole new class of investors to the stock, although the recent doubling of the stock price has quite possibly discounted most of these gains.  But with thinly traded stocks such as NGP, any change in investor sentiment could easily drop the price significantly and provide new buying opportunities in the meantime.

DISCLOSURE: Tom Konrad and/or his clients own WMI, VE, ORA, HTM, RZ, UTX, and NGLPF.  

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

June 09, 2009

Will The Recovery Act Trigger Alt Energy IPOs?

Charles Morand

It goes without saying that the alt energy IPO market has been rather quiet over the past few months. Could this be about to change? Will the slew of alt energy and cleatech incentive programs announced under the Recovery Act, coupled with a return of investors' risk appetite, be enough to convince firms to start going public again?

On Monday, I had a chat with Robert Peterman, who handles cleantech for the TMX Group, the owner of the Toronto Stock Exchange and of the TSX Venture Exchange. In the past few years, Toronto has attracted a number of high-profile cleantech and alt energy stories.

Among other things, Toronto, probably in part because of its heavy mining focus, has been the exchange of choice for several early-stage North American geothermal development companies, including Polaris Geothermal, US Geothermal, Western GeoPower, Sierra Geothermal and Nevada Geothermal.           

Mr. Peterman informed me that a geothermal development company with activities in the US West, Southwest and Latin America had filed preliminary documents for an upcoming IPO in Toronto. The company is called Magma Energy Corp. and has one operating facility and a pipeline of projects at different stages of development.

I had a quick glance through the company's preliminary long-form prospectus (accessible here), one of the required documents for a Canadian IPO that typically provides information on the size of the offering, the nature of the firm's activities, what the funds will be used for, etc.

The size of the offering, the pricing of the shares and even the closing date were left blank for now, so there is not much to go with just yet. The company's investment bankers will soon come up with this information so we can get a better idea of what this IPO means. As I discussed last week, geothermal development is a risky enterprise that has more in common with mining exploration than it does with power generation.

A successful IPO for an early-stage geothermal firm would most likely be a positive sign for the alt energy sector as a whole. Recovery Act programs will require that firms raise significant amounts of money, so don't be surprised if activity picks up over the coming months.


June 01, 2009

Geothermal & The ARRA: Some Steamy Details

Charles Morand

In October 2007, Tom wrote an excellent overview of the geothermal power sector. By way of recap, geothermal power produces electricity by using steam from naturally-occurring Earth heat that travels up from the planet`s mantle and core by conduction. Conventional geothermal harnesses hot water and fluids already present in the rock while enhanced geothermal systems (ESG) - or next-gen geothermal - works by injecting cold water into hot dry rock (HDR) and pumping out resultant hot water and steam.

In terms of business risks, geothermal stands at the confluence of mining and utility/independent power production. Extensive testing and drilling must initially be conducted to determine resource availability and quality. If sufficient resource potential can be ascertained, it is often just a matter of negotiating a power purchase agreement with a utility and connecting to the grid (the latter can be a real challenge!)

Geothermal's excellent capacity factors, ranging from the mid-80s to the high 90s, qualify it for both baseload and peak (dispatchable) generation, thus making it the most valuable type of power there is. Unlike gas-fired generation, which accounts for the bulk of peak power today, geothermal power prices are not exposed to volatile energy commodities, although construction costs are impacted by the price of steel, cement, etc.               

In the 2008 edition of Geothermal Today, the DoE's EERE estimated that conventional geothermal electricity costs, before any reductions related to resource credits, between $0.63/kWh and $0.102/kWh to produce. Using crude (WTI), natural gas and retail electricity data from the EIA, I created the graph below to put this into perspective. The graph's geothermal cost band is static and does not reflect actual cost evolution overtime - if it did it would probably be sloping downward with perhaps a lump in 2007/2008 when the prices of construction commodities peaked.

As mentioned by Tom in his original article, risks in the geothermal industry are heavily concentrated in the resource assessment and exploration phases, although the largest component of total development cost is facility construction. According to the investment bankers who underwrote a large chunk of the financing for the North American geothermal pure-plays, each hole drilled while looking for geothermal resources costs around $5 million, which is a fair chunk of change for companies with market caps of under $100 million (see table below).

EERE breaks down development costs for a "typical geothermal power plant" - which account for the bulk of geothermal power's levelized cost - as follows:

Development Stage Cost ($/kW) Percent Total
Exploration and resource assessment 400 10%
Well field drilling and development 1,000 25%
Power plant, surface facilities, and transmission 2,000 50%
Other development costs (fees, working capital, and contingency) 600 15%
Total 4,000 100%
Although geothermal's high capacity factors and inherent predictability give it a clear edge over wind and solar PV, economical geothermal development is currently constrained to a handful of areas with the right geological conditions. This led Tom to call conventional geothermal "boutique" clean power, meaning it can never account for an appreciable proportion of total power production (although in certain regions it can definitely be scaled up substantially.)  

The following table lists out the main geothermal stocks available to North American investors. Besides Ormat, the mother of all geothermal stocks and a mature and profitable company, the rest are development-stage companies that have taken a solid beating along with the rest of the alt energy sector over the past year.  

Needless to say, the current financing environment is not favorable to either the mining exploration business model or the project development by inexperienced teams business model. This has resulted in more expensive capital for geothermal firms - Nevada Geothermal got a loan last September with an interest rate of 14% plus other fees, a punishing cost for any company.   

Name Ticker US$ Price
(May 29)
Market Cap (US$M) TTM EPS (US$) TTM PE LTM Share Price Performance (%)
Nevada Geothermal NGLPF.OB 0.56 52.6 (0.07) N/A (40.8)
Polaris Geothermal PGTHF.PK 0.59 44.8 (0.07) N/A (48.8)
Raser Technologies RZ 3.93 257.4 (0.79) N/A (60.6)
US Geothermal HTM 1.35 90.6 (0.09) N/A (52.5)
Western Geopower  WGPWF.PK 0.23 52.4 NMF N/A (43.2)
Sierra Geothermal SRAGF.PK 0.19 13.6 (0.04) N/A (68.3)
Ormat Technologies ORA 39.89 1,809.2 1.21 ~33x (21.6)
Average market cap 331.51
Average market cap w/o Ormat 120.42
Average LTM share price performance (47.9)
Average LTM share price performance w/o Ormat  (52.3)

New ARRA Money For Geothermal

What led me to want to write about geothermal - arguably one of the alt energy categories that has been the least discussed recently - was the announcement last Wednesday of funds for geothermal under the American Recovery and Reinvestment Act.

In fact, the pool of money announced was for both geothermal and solar, although geothermal caught my attention because I am working on a couple of geothermal mandates at the moment. Geothermal got $350 million, broken down as follows:

  1. Demonstration projects ($140 million): This will go toward geothermal in unconventional settings, including: "geothermal energy production from oil and natural gas fields, geopressured fields, and low to moderate temperature geothermal resources." The first two areas are of special interest to me. I did a bit of work on what is called "geopressured geothermal", or the type of geothermal resource typically found in and around oil & gas (O&G) operations. This resource generally comes in the form of hot, methane-saturated brine that flows to the surface under its own pressure. The methane can be separated from the brine and used in power production along with the geothermal resource in a hybrid plant. Currently, the O&G industry considers this more of a nuisance than an asset, but things could change. The Gulf Coast area is estimated to have substantial geopressured geothermal potential, and the DOE even ran a pilot project in Texas in the late 80s. Although the pilot ran fine, it was estimated that this resource was not economical at the time due to low energy prices. We know now where that argument stands and how short-sighted it can be. There are no public companies that I know of that are currently active in geopressured geothermal development, but this is an area to watch closely in my opinion.
  2. Enhanced geothermal systems technology R&D ($80 million): As discussed above, EGS is the next frontier in geothermal development. Because they allow for geothermal electricity production in HDR, EGS considerably expand the geographical scope of economical geothermal development; in fact, EGS could allow for geothermal electricity production in nearly every region. A 2006 MIT study concluded that, with investments in technology development of between $800 million to $1 billion over a 15 year period, EGS could be improved to allow for the economical construction of 100,000 MWe of capacity over a 50 year period in the US. This initial money takes us 8% to 10% there, and there have already been investments by the private sector (see the Google video at the end of this post.) Should these expenditure levels be maintained in the next four years, EGS would receive a strong boost.
  3. Innovative exploration techniques ($100 million): This is described as: "Funding [that] will support projects that include exploration, siting, drilling, and characterization of a series of exploration wells utilizing innovative exploration techniques." Unlike #1 and #2, this should benefit the whole of the industry. As mentioned above and in Tom's article, drilling represents the apex of risk for geothermal investors and significant improvements here could remove a major barrier to further geothermal development.
  4. National geothermal data system, resource assessment, and classification system ($30 million): This is described as follows: "To fully leverage new low-temperature, geopressured, co-production, and EGS technologies, DOE will support a nationwide assessment of geothermal resources, working through the USGS and other partners. Second, DOE will support the development of a nationwide data system to make resource data available to academia, researchers, and the private sector. Finally, DOE will support the development of a geothermal resource classification system for use in determining site potential." In my view, this will be beneficial mostly to the unconventional geothermal players such as EGS and geopressured.

There unfortunately is not a whole lot of near and medium term actionable material for public equity investors in the ARRA geothermal package presented by the administration. The financing environment will most likely continue to be difficult for early-stage geothermal companies, and lower prices for natural gas probably aren't helping its case. The immiment arrival of carbon trading in America could, however, provide tailwinds. 

The package does, however, give a significant boost to unconventional geothermal resources that had traditionally gotten little attention outside of energy geek circles. If maintained, this financial commitment could substantially shorten the time line for these resources to play a notable role in our energy mix. Opportunities for public equity investors could thus arise before long.     

A Vid On EGS With Steven Chu (now US Secretary of Energy)



August 17, 2008

U.S. Geothermal, Inc (AMEX: HTM)

US Geothermal, Inc. (AMEX:HTM) ) is one of only two pure-play geothermal power companies traded on US exchanges.  The other is Ormat (NYSE:ORA), a vertically integrated company widely considered to be the industry leader.  As baseload, extremely reliable power, Geothermal fits easily into utilities existing grids, making it a popular source of green power, especially with utilities uncomfortable with the intermittent and difficult to predict nature of wind and solar.  

Unlike wind and solar, the potential resource for geothermal power is quite small relative to electricity demand. At least until Enhanced Geothermal Systems (EGS) technology is commercialized, geothermal will remain a boutique form of electricity generation, producing less than 1% of our electricity supply.  In many ways, the prospects are like those for new hydropower development in the US: new large resources are unlikely to be developed, but there is a lot of potential for small projects.  Until last year, the relatively small potential for geothermal led the technology to be mostly ignored by investors.  Now geothermal is getting more of the attention it deserves as a rapidly growing (if still tiny) source of clean power.

The Portfolio Approach

I bought US Geothermal last year as part of a small portfolio of Geothermal exploration companies.  Others I bought around the same time were Sierra Geothermal (OTC: SRAGF, SRA.V), Raser Technologies (RZ), and Western GeoPower Corp (WGPWF.PK, WGP.V), which I added to previous holdings of Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V) and Ormat.  The group as a whole has performed well, although I have small losses in Sierra Geothermal and Western Geopower.   In general, I have not evaluated these companies in depth.  Understanding a geothermal exploration company is a lot like understanding other mining exploration companies.  To gain insight into their likely success or failure, one would have to delve into the underlying geology of their leases, something I lack the skills to do.  This is why I prefer to take a portfolio approach to the sector, which has so far been effective at protecting me from company specific risks.

US Geothermal

That said, I agreed I would look into HTM in more detail, and since their annual meeting is coming up, the annual report for the fiscal year ended March 31, 2008 was conveniently sitting in my inbox.  I find reading the annual report from cover to cover an excellent place to start when researching a company.  Here are my impressions:

  1. The company has a handful of leases, at many stages of development, from Gerlach and Granite Creek, exploration prospects, to Raft River, which began producing power this year, but which they are continuing to expand.  In between are Neal Hot Springs, where they have what sounds like very promising test results from their first well, and San Emidio, a recently acquired older geothermal plant which they have plans to upgrade and greatly expand (they recently received drilling permits to start the expansion.)
  2. The company seems to be following their stated strategy of acquiring only leases where there is strong evidence of good geothermal prospects.  Although all natural resource exploration is risky, this should help to ameliorate the risks of exploration and development.
  3. The company will need a substantial amount of cash to follow their chosen strategy.  This will probably come in the form of additional private placements, and joint ventures to develop specific projects.  The need to do additional private placements (where large blocks of stock are sold at a discount to the market price) will likely keep downward pressure on the stock price, which makes it likely that the share price will not see the quick tripling it had last year.
  4. The interest among utilities in geothermal power is remarkably strong, so much so that they felt comfortable starting over from scratch on the Power Purchase Agreement (PPA) for the second stage of their Raft River project.  Management exudes confidence in their ability to negotiate favorable PPAs for future generation.  This is a marked contrast to other renewable electricity producers.  From my personal experience talking to wind, solar and hydro developers, they typically feel mistreated by utilities which often have the upper hand in negotiations for PPAs.

Overall, HTM seems as solid a company as could be expected from an early stage resource development company.  If you do want to venture beyond Ormat to buy a few geothermal exploration companies, HTM should be on your short list.  While it may not have the price growth potential of companies which do not yet have US listings, it is also relatively less risky due to the relatively high quality of the projects the company is pursuing.

Tom Konrad

DISCLOSURE: Tom Konrad and/or his clients have long positions in ORA, HTM, RZ, SRAGF, NGPLF, and WGPWF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 03, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #10 United Technologies

Like most conglomerates, United Technologies Corporation (UTC), (NYSE:UTX) won't be found in any of the Clean Energy indices, but its growing portfolio of clean energy businesses makes it fit well into a diversified portfolio with a clean energy tilt.  A conservative capital structure and solid earnings and cash flow, and a decades long history of constantly increasing dividends make this a company that I'm comfortable holding for the long term.  

In terms of sustainability, the company has been recognized by Dow Jones as in the top 10% of the world's most sustainable companies.  Long before it became fashionable for companies to greenwash by reducing their environmental impacts, UTC pledged in 1996 to reduce their power and water usage by 25%, and they have met these goals while growing their business.  Their long track record of reducing their energy usage gives them a significant head start against rivals who have only recently jumped on the climate change bandwagon.

Of the company's eight major business units,  UTC Power and Carrier are both crucial to how we generate electricity and how we use it.  Carrier has a history of pushing for more stringent energy efficiency and environmental standards for air conditioning, a strategy which helps their business strategy since UTC's scale and research allow them to remain on the technological forefront.

UTC Power has a large portfolio of products which will help modernize our energy infrastructure.  They supply microturbines and Solid Oxide fuel cells, as well as integrated combined cooling, heating, and power products, which I feel are likely to become much more popular as more companies seek ways to lessen their environmental impact and energy bills at the same time.

With their PureCycle binary cycle turbine, UTC introduced the benefits of volume production to geothermal power by making slight modifications to an existing line of Carrier's industrial chillers which allow them to operate in reverse.  Raser Technologies (RZ) plans to use this technology in their aggressive plans to develop a large number of lower temperature geothermal resources throughout the Southwest.  According to a personal conversation I had with a Raser employee. UTC's ability to deliver the turbines quickly, and willingness to guarantee performance was key to Raser's selection of that technology in preference to rival products.

One other technology likely to be of great interest to clean energy investors is their molten salt storage technology, which provides a rare opportunity for a US-based public investor to participate in what I consider to be one of the most promising solar technologies: Concentrating Solar Thermal Power (CSP).  The thermal storage provided by molten salt gives CSP the potential to provide power on a dispatchable basis, allowing it to compete directly with expensive electricity from natural gas turbines.

Other divisions of UTC, such as the Sikorsky helicopter division, are major military suppliers, so traditional socially conscious investors may wish to avoid UTC.  On the other hand, the short supply of helicopters needed in modern warfare (as well a a large backlog in their Otis elevator division) have propelled strong earnings growth, while even relatively efficient air conditioners could not prevent Carrier from being hurt by the housing slowdown.  Such are the benefits of diversification.

At roughly $74, and a 17.3 P/E, UTX is not currently cheap.  I currently have only some out-of the money short puts on the company, but it's one that I intend to continue writing puts on until the stock falls and I'm assigned shares.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in UTX, RZ.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

January 01, 2008

Ten Alternative Energy Speculations for 2008: Geothermal, Wind and Wave, and Thin Film Hype

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction to that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks are part of that same article linked to above; the moderately risky picks are here.  This article contains the most speculative three picks.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) US$1.29 or CAD$1.26

Geothermal first started catching investors' attention about six months ago.  I went into detail as to the reasons for its appeal, and the factors bringing it to investors' attention in this profile of Geothermal power in October.  

Since then, we have been given an added reason to appreciate Geothermal in the United States.  While the recent energy bill did not contain a national RPS, nor tax credits for renewables, it did give the geothermal community much of what they were asking for since it contained the "Advanced Geothermal Energy Research and Development Act of 2007." 

There are three ways to invest in geothermal power: through the technology, through existing plant operators, and through resource explorers and developers.  The provisions relating to Enhanced Geothermal Power and Co-production in oil fields should help technology and service providers such as Ormat (NYSE:ORA) and United Technologies (NYSE: UTX) over the long term, since they will help open up new opportunities for Geothermal.  Over the short term, which is what this article is about, I expect the "Industry-coupled drilling" provision will be most important, and help explorers and developers of conventional geothermal resources.

According to the Geothermal Energy Association, the Industry-coupled drilling provision "pairs the federal government with geothermal developers to reduce drilling risks and improve drilling precision."  Geothermal exploration and development is a very risky process, so government risk-sharing should greatly increase the value of Geothermal prospects by lowering the effective discount rate at which they are valued.  Coming as it does early in the development process, a reduction in risk could easily be worth more to a company which owns the rights to develop an undeveloped geothermal resource than the later boost to income that would come from a Production Tax Credit, even though the industry-coupled drilling provision is likely to cost the government far less than a Geothermal Production Tax Credit.

US-based geothermal developers are most likely to benefit from this provision.  These include US Geothermal (OTCBB: UGTH, GTH.TO), Sierra Geothermal (OTC: SRAGF, SRA.V),  Raser Technologies, (NYSEArca:RZ), and Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V)).  US Geothermal and Raser Tech are up over 3x from their 52 week lows, while Sierra and Nevada Geothermal are each up about 2x, although the Nevada Geothermal share price was stagnant for the previous two years, while Sierra Geothermal has been following a steady uptrend.

Comparing these last two with the least recent appreciation, Sierra Geothermal has many more early stage projects, while Nevada Geothermal has just four high quality projects nearer to production.  In fact, Nevada Geothermal owns Sierra Geothermal's most advanced project (Pumpernickel), and Sierra's exploration and development efforts will earn them at most a 50% share of the project.   This is only Nevada Geothermal's second most advanced project, after their wholly owned Blue Mountain project which is on track to begin producing electricity in 2009, and for which they have already completed a Power Purchase Agreement and an interconnection agreement with local utilities. Nevada Geothermal is currently funding development of its projects with loans from the likes of Geothermal specialist Glitner Bank and Morgan Stanley, while Sierra Geothermal is financing its exploration needs with dilutive private placements.

Because of the relatively small recent run-up for Nevada Geothermal, its strong financial position, and ownership of a late-stage project (as well as sufficient promising projects to keep them busy with development for many years to come), I see the most potential for robust returns in Nevada Geothermal among geothermal developers.   

#2 Finavera Renewables (TSX:FVR or FNVRF.PK) CAD$0.335 or US$0.3371

I chose to include Finavera in my Top Ten Speculations for 2008 for my own reasons, but Editor Charles Morand has been following the company longer and more closely than I have myself, so I asked him to profile it.  You can read what he has to say about Finavera Renewables here or simply scroll down to the next post.

#1 First Solar (Nasdaq:FSLR) $267

When I disclosed that I was short First Solar in the first installment of this series, I received an incredulous comment soon after the article was syndicated on Seeking Alpha: "OUCH!! You have a short position in FSLR? I hope it doesn't come back and bite you!"  I'm sure the commenter is not alone in his conviction that First Solar's rise will continue.  The fact that First Solar has risen so far so fast only because people like the commenter have been purchasing the shares like hotcakes all year.

Shorting is inherently more dangerous than being long, because in a long position you can not lose more than you initial investment.  Shorting a momentum stock, even when it is overvalued, can be especially risky, because momentum tends to be a self-fulfilling prophecy, with more investors becoming interested and driving the price up as they try to buy the stock.  For all those reasons, shorting First Solar deserves to be the #1 riskiest of my 10 speculations for 2008. 

Why did I decide to short at all?  What makes me think that 2008 will be the year that First Solar's bubble pops?

First Solar's valuation seems out of line because of an inherent limitation on their profitability.  Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust.  In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.  In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies.  PrimeStar Solar, a private company is using a recent infusion of capital from General Electric (NYSE:GE) to quickly begin production of their own CdTe modules.  They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; I expect they will begin production in 2008.  

With this much demand on short-term Tellurium supplies, we can expect continued price increases.  First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.  With the failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it it has in recent years.  If anything, this should cause prices per watt to fall somewhat in 2008.

Ethanol producers were caught in a commodity squeeze this year by using 25% of the United States corn supply.  In contrast to First Solar, ethanol production has only been growing 20-25% a year, much slower than the demand for Tellurium from CdTe cells, and corn production was artificially sustained at an uneconomically high level before the advent of corn ethanol by farm subsidies.  Hence, I would expect a commodity squeeze for CdTe producers at a lower percentage of supply.  My 16% projection for 2008 does not seem out of line to trigger a commodity squeeze, which could cause First Solar to miss (or at least cease to beat) earnings estimates in the coming year.  Missing or just failing to exceed earnings estimates almost always leads to quick price drops for high multiple companies.  According to Yahoo!, First Solar's trailing P/E is about 195.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million [NOTE 3/8/08: I received a comment that I had lost a decimal in this calculation, with actual Te cost being only $8.7 million... don't take this as gospel, make sure to double-check if this makes a difference in your investment decision.], compared to First Call average estimated Revenues of $800M, and $146M estimated earnings.  I don't know what Tellurium prices were used in those estimated earnings, although I expect it was over $100/lb.  Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008, and, as the oil price has shown us, even moderate increases in demand for a commodity with inelastic supply can create massive price rises.  What will new demand for Te rising from 4% of supply to 16% of supply in two years do to the price?

UPDATE 1/2/08: Ken Zweibel, President of PrimeStar Solar and former head of NREL's thin film partnership program, got back to me today on a research question for this article, now that the holidays are over.   He couldn't tell me much for strategic reasons, but did say that he isn't skeptical of First Solar's valuation, and "There is more Te from nontraditional sources than people are aware of."  I believe he is referring to Te from oceanic ridges, which I don't believe can be extracted in significant quantity within the next couple years, although a Tellurium price rise like the one I anticipate would lead to mining of oceanic ridges in the medium to long term.  Nevertheless, Ken is responsible for much of what we know about CdTe technology, so his comments should not be taken lightly, and there may be other nontraditional sources which can ramp up production more quickly. 

The other reason to believe that First Solar's meteoric rise might halt in 2008 has to do with investor sentiment.  An unscientific survey of sentiment among Seeking Alpha bloggers (myself excluded) has turned negative (as far as I can tell, only Andrew Ling is still writing positively about the stock), and the Tellurium problem is getting wide attention.  How long will it take the mainstream press to latch on to the Tellurium story?  It's impossible to say, and another run like last quarter could easily squeeze out the shorts.  

Taking this all into account, my short position is only about 0.1% of my portfolio, more of an intellectual experiment than a real bet.  As Keynes said, "The market can remain irrational longer than you can remain solvent."   I wouldn't advise anyone to take a short position in FSLR so large that they could not sleep through another doubling of the stock price. 

If any play is for gamblers, this is it.  But cards are stacking up against First Solar.

Links: Picks #10,9,8; Picks #7,6,5,4. Pick #2 Finavera Renewables

DISCLOSURE: Tom Konrad and/or his clients have long positions in UGTH, SRA, RZ,  NGP,  ORA, UTX, FNV, GE, and a short position in FSLR.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 21, 2007

Geothermal: The Other Base Load Power

Last Thursday and Friday I attended the Geopowering the West Investors' Forum in Montrose, CO (hosted by the Delta-Montrose Electric Association, Colorado's most progressive Rural Electric Cooperative.)  I've long been interested in geothermal stocks, and I first started adding them to managed portfolios in 2003.  As a whole, those stocks have more than doubled in the 1-4 years since they were purchased.

Fundamental Advantages of Geothermal Electricity

Why did I make those first purchases?  Geothermal power has some unique advantages over other forms of renewable energy.

  1. Geothermal is base load power.  Utilities have a strong preference towards base load and dispatchable power generation (basically power which is always on or power which they can turn on at will.)  In fact, geothermal plants often have capacity factors 86-95%, well above traditional base load generation such as coal.  So geothermal power is a premium electricity because of its reliability.  Until a recent fire (not caused by the geothermal facility) the plant installed last year at Chena Hot Springs in Alaska, was running at 99.4% availability. 
  2. It is inexpensive.  Depending on the resource, the price of geothermal power is comparable to that of wind power, new coal plants, or biomass.  It is considerably less expensive than solar photovoltaic or nuclear power, or the cost projections for "Clean Coal" otherwise known as Internal Gasification Combined Cycle with carbon capture and sequestration.  Using numbers presented at the conference, a geothermal power plant will cost $3-4 per rated watt, but produce about five times as much electricity as a similarly rated (and more expensive) photoelectric panel because of the much higher capacity factor.
  3. Geothermal has a small environmental footprint.  Where solar and wind farms gather energy over large areas, a geothermal plant gathers heat from the hot rock or fluids below ground by means of one or a few wells.  Because of this, the footprint needs to be only the size of the turbines which actually generate the power, smaller than the footprint of a coal fired plant generating the same amount of power, without the the necessity of coal mining and without significant emissions of carbon dioxide or other pollutants.
  4. In the later life of a geothermal plant, operations produce excellent income streams. While the plants often require refurbishment, with careful management geothermal reservoirs need not degrade over time, and net margins often exceed 60%.

New Developments

Why are people only now starting to talk about geothermal power?

  1. Geothermal electric is not a new industry.  The first geothermal electric power plant was built in the 1920s.  But now we have a maturing industry seeing progress in new technology.  Not only can lower temperature resources now be used, but United Technologies (NYSE: UTX) has recently introduced a low temperature capable generator based on proven water chiller technology.  This has the potential to rapidly increase the speed and lower the cost of project development.
  2. There is a growing awareness of the need for carbon-free sources of power.  The IGCC's and Al Gore's recent win of the Nobel Peace Prize is just one recent sign of this.  
  3. Energy Policy Act of 2005 changed the regulatory environment.  There is a new commitment from national government to simpler lease structures and royalty payments.
  4. Current projects typically developed over a three year period, which is actually quite quick when compared to typical 5 year lead times for coal plants.
  5. There exists an abundance of overlooked resources because of greater temperature reach.  Historical studies assumed that electricity simply could not be generated below 300 F, but new technologies can handle temperatures below 200F, which geometrically increases the number of sites with potential for generation.
  6. Was seen as relatively small potential until the MIT Study which came out this year.  Enhanced (aka Engineered) Geothermal Systems (EGS) hold out the promise that the extractable amount of energy is not limited by the resource size or availability.   There is simply so much heat stored in the Earth's crust, that only extracting a fraction of a percentage of it would allow us to meet our energy needs for the foreseeable future.  While EGS holds out promise, the technologies needed still require significant research.  From an investor's perspective, more concerned with the prospects for the next ten years than the next fifty years, EGS is much more important for the interest it generates in geothermal than it is for investment opportunities.   Nevertheless, in terms of meeting our long term energy needs, I expect Enhanced Geothermal Systems to be a much cheaper and simpler solution than Carbon Sequestration from Coal plants.
  7. Geothermal as oil co-product.  Many existing oil wells also bring up sizeable quantities of water at temperatures sufficient to run small binary cycle turbines.  While this resource at any one oil well is likely to be small (less than a megawatt), aggregating all the wells in a large oil field could produce significant power at low cost given that the costs of exploration and exploratory drilling need not be paid for by the geothermal electricity generated. 

Tricks of the Trade

What does a geothermal investor need to watch out for?

  1. Exploration risks. Prospecting for geothermal resources using remote sensing and surface sampling is useful for defining the drilling target, but does not significantly reduce the risk of not finding a resource sufficient to produce power.  This is in distinct contrast with oil prospecting, where prospecting significantly reduces risk.
  2. Risks to resources currently in use.  Attendees were treated to a Jeep tour through the geothermal history of the town of Ouray.  Over twenty years ago, the city started a series of test wells around the town with the hope of finding enough geothermal hot water for a district heating system, and to keep their Hot Springs Pool open year round.   All did not go as planned, and three of the owners of springs around the city filed lawsuits against the city charging that the city's drilling had reduced their flows.  The parties settled, but the city was forced to discontinue drilling.  While the city of Ouray officials did not admit to decreasing flow rates of other pools, after listening to both sides, I think the owners of the springs had real grievances (and the courts seemed to agree with that assessment.)
  3. Unexpected effects of new technology.  One large potential problem is induced seismicity [MS Word document] when trying to stimulate reservoirs in hot dry rock for EGS.   One reason for an investor to consider geothermal development companies rather than geothermal equipment suppliers is that a company with a known geothermal resource will generally benefit from the evolution of technology, while a technology supplier could easily lose market share to competitors.
  4. A geothermal resource developer must be able to connect to the grid.  No matter how hot the resource nor how close it is to the surface, the developer must be able to connect to the electric grid at a point where there is sufficient available capacity to sell the electricity.  The ability to negotiate a Power Purchase Agreement with a local utility having a respectable credit rating will also enable the developer to gain access to financing on more favorable terms.
  5. Ownership of geothermal resources is legally complex.  As the City of Ouray found in the dispute mentioned above, unless an owner has put a resource in use, they may find that a court of law will not uphold their ownership of that resource.
  6. Many of the future resources to be developed are likely to be "blind."  That is, there is no surface indication of the hot rock below.  Exploration for such resources is likely to be more lengthy and costly than past exploration. 
  7. As with any industry, quality management and personnel will be able to find opportunity in a crisis, while less able teams will be unable to exploit all the opportunities available.
  8. Skill in managing geothermal reservoirs is essential.  Pumping a reservoir too quickly or reinjection of cool fluids in the wrong place can greatly reduce the production from geothermal reservoirs.
  9. Except when the developer plans to use less efficient and more expensive air cooling, the availability of low temperature cooling water in sufficient quantities will be necessary to generate electricity.  


Here is a short list of interesting companies involved in geothermal power production and some reasons you may want to consider them for investment.

  1. Ormat (NYSE:ORA).  Ormat is the granddaddy of geothermal stocks.  A vertically integrated company, they not only explore and develop their own resources, they also will contract to manage resources for other developers (such as US Geothermal's Raft River project).  Their long history and current profitability gives them the safest pure-play geothermal stock available.  They are experts with binary cycle turbines and reservoir management, as well as applying their binary cycle technology to waste heat recovery as well as a concentrating solar power experiment.
  2. United Technologies (NYSE: UTX) is not really a geothermal company at all, but I include them because of their recent innovation in producing low temperature binary cycle turbines on an assembly line basis, using an adaptation of their industrial chiller technology, for which they recently won a R&D 100 award.  While this may never become a significant part of UTX's bottom line, it is likely to change the economics of geothermal development for the better.  I also expect to see the PureCycle turbine applied to a myriad of waste heat applications, quite possibly more than to geothermal.
  3. Raser Technologies, (NYSEArca:RZ), Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V) , US Geothermal (OTCBB: UGTH, GTH.TO), Sierra Geothermal (OTC: SRAGF, SRA.V), Polaris Geothermal (PGTHF.PK), and Western GeoPower Corp (WGPWF.PK, WGP.V) are geothermal developers.  I find it very difficult to determine which will succeed and which will fail, and so prefer to own a little of each, buying when I feel the stocks are relatively inexpensive from a technical analysis standpoint.  Raser is not a pure geothermal developer; they also develop high performance electric motor technology which is interesting to me, but the synergies are far from obvious.)   

Geothermal has long been an underappreciated renewable energy technology.  That seems to be changing, which will be an excellent thing both for our hope of moving to a less carbon-intensive economy, and for early investors in the sector.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ORA, RZ, NGLPF, UGTH.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.


May 16, 2006

Nevada Geothermal Power Inc. Commences Blue Mountain Development Drilling

Nevada Geothermal Power Inc.
(NGLPF) announced that it has initiated development drilling at Blue Mountain Nevada. Production test data from the wells will be used to complete a feasibility study for an initial 30 MW geothermal power plant.

In the initial program, four 13-inch diameter production wells will be drilled to 4000 feet (1200 metres) into the moderate temperature (300-330 degrees C) geothermal resource intersected in previous test holes. Permits have been obtained and drill pads are under construction. A water well rig will be used to drill the top 800 feet of each well and to set surface casing. A production drilling rig with a substructure to accommodate blow-out-prevention-equipment will then complete the holes to total depth. A suitable rig has been identified and is expected to be on site by the end of May. NGP expects to complete initial development drilling over the next six months. [ more ]

May 04, 2006

Ormat Technologies Increases Ownership Position-in Zunil Geothermal Project in Guatemala

Ormat Technologies (ORA) announced that an Ormat subsidiary signed an agreement to purchase from CDC Group plc., a 14.09% partnership interest (13.67% on a fully diluted basis) in Orzunil I de Electricidad, Limitada (Orzunil), which owns the Zunil Geothermal Project in Guatemala. CDC Group's investment in this project has been managed by Globeleq, an emerging markets power company.

As a result of this acquisition, Ormat's annual net income from the Zunil project is expected to increase by approximately $0.6 million on a full year basis. [ more ]

April 28, 2006

US Geothermal Begins Construction of Idaho Geothermal Power Plant with the help Of Ormat

US Geothermal Inc. (UGTH) has initiated a contract with Ormat Technologies (ORA) to begin building a binary cycle geothermal power plant that is designed to deliver 10 MW monthly average electrical power to Idaho Power Company under a 20-year term power purchase agreement. [ more ]

February 22, 2006

Nevada Geothermal Power Inc.: Geophysical Survey completed at Pumpernickel Geothermal Project, Nevada

Nevada Geothermal Power Inc. (NGLPF) reported the completion of a geophysical survey at the Pumpernickel geothermal project in Nevada. The project is managed by Nevada Geothermal Power Company (a subsidiary of NGP), as Exploration Manager.

The final report is pending, however a preliminary assessment of the data shows that the survey successfully defined the contact between the valley fill and the basement rocks, and most importantly it established the positions of valley faults and their relationship to the geothermal system.

The data showed a good correlation with the 2005 resistivity data. The combined data will aid significantly in defining the boundaries of the geothermal reservoir and the subsequent design of the first production test wells, planned for 2006. [ more ]

January 25, 2006

Ormat Technologies Inc. Signs Power Purchase Agreement With Puget Sound Energy for Supply of Power From Recovered Energy Generation System

Ormat Technologies (ORA) has entered into a 20-year power purchase agreement with Puget Sound Energy Inc. for the supply of power from a Recovered Energy Generation System (REGS), which will be located adjacent to the Sumas Compressor Station of Northwest Pipeline Inc. (NWP) in Sumas, Washington State.

The REGS will be owned by Orsumas and will use recovered waste heat from three NWP existing gas turbines driving compressors at the station, as well as interconnect to Puget Sound Energy's transmission grid. The facility will employ an ORMAT ® Energy Converter (OEC) and will have a design capacity of 4.95 MW net. [ more ]

This deal is expected to generate annual revenues of approx $2.3 mln with a 1% annual escalation.

January 19, 2006

Raser to Acquire Power Generation Technology Company

raser_logo-small.gif Raser Technologies (RZ) announced a definitive agreement to acquire Amp Resources ("Amp"), a private company with technologies focused on geothermal heat and power generation. The deal is for about $260 million in cash and stock.

Raser will acquire Amp and its portfolio of technologies for heat transfer and renewable power generation. Raser will also assume ownership of multiple, long-term geothermal energy sales contracts with public and private utilities. These contracts call for an aggregate of $966 million from gross energy sales over 20 years. It is anticipated that these power generation projects will be developed and placed in service by December 2007. [ more ]

Raser is an early stage development company that specializes in electric motors and is a founding member of the Plug-In Hybrid Development Consortium. The shares of Raser have been up over 100% in the last month. Today the stock is currently trading down over 20% on the news. This could be interpreted as profit taking. Also, typically the shares of the acquiring company heads down on the day of the announcement due to fears of increased liabilities. Raser will assume liabilities and about $50 million in debt once the deal closes.

Green Car Congress has additional details about the technology. [ more ]

December 14, 2005

FPL Group in Talks to Buy Constellation Energy Group

fpl_logo.gifFPL Group Inc (FPL) is currently in the advanced stages of negotiations to acquire Constellation Energy Group (CEG). An FPL-Constellation merger would create a giant East Coast-based utility with a market capitalization, based on Tuesday's closing stock prices, of $26.97 billion - $16.93 billion for FPL and $10.04 billion for Constellation.

Constellation Energy Group is based out of Baltimore Maryland and is the holding company for Baltimore Gas and Electric. They also have an extensive presence in the wholesale power supply and generation business. The Power Generation Division currently uses 4.6% alternative sources for power generation.


FPL has a strong commitment to alternative energy generation and is one of the largest utilities in the US utilizing extensive wind farms. CEG has a large footprint in Nuclear power generation and the combination of these two companies would make a top-tier producer of power generation for the East coast markets and a potential of 30,000 megawatts of power generation. CEG also gives FPL the ability to enter the wholesale supply side of the power generation business.

Typically you would see shares of the acquiring company down and shares of the acquired company up with this type of announcement. The market is liking this potential merger and CEG is up over 7% and FPL is also trading up 0.6% this morning.

November 30, 2005

Ormat Buys Added Stake in Geothermal Guatemala Plant

Ormat Technologies (ORA) said it has agreed to buy a 50.8 percent partnership interest in Orzunil I de Electricidad Ltd., owner of a geothermal plant in Guatemala, for $14.8 million. The Zunil project includes one power plant with a capacity of 24 megawatts that is expected to generate $12.5 million in revenue next year and boost Ormat's net income by $1.9 million in 2006. [ more ]

November 23, 2005

Calpine Gets Hammered

Shares of Calpine Corp. (CPN) suffered a greater than 20% loss yesterday and is now down almost another 13% today. All of this was caused by a court ruling stating that they will be unable to use the $395 million in cash they received from the sale of oil and gas fields earlier this year for the purpose of buying natural gas to run its power plants.

The dispute stems from the Bank of New York's decision in September when, acting as trustee for Calpine bondholders, it withheld proceeds from Calpine's sale in July of North American oil and gas fields.

The bank froze the money after the bondholders said money from the sale couldn't be used to buy fuel futures but should be used instead to buy other assets or pay off debt.

The move prompted Calpine to file a lawsuit against the Bank of New York and Wilmington Trust Co. seeking release of the funds, arguing that buying natural gas in storage is allowed under the terms of its notes. [ more ]

When I purchased this stock for the mutual fund I mentioned it was a very speculative play.

Shares in FPL and Calpine Purchased August 15
Calpine Corp. (CPN) is the other utility that I started a position in today. This one is a more aggressive play, but has the potential to generate better results. Calpine supplies electricity from natural gas-fired and geothermal power plants to wholesale and industrial customers in North America. This company has had some serious financial difficulties in the past and is trying to right itself. This is a very speculative purchase and I did not commit very much money into it. I purchased this stock with an average entry price of $3.35 for the mutual fund only.

With the stock now sitting at a dollar and change the big question is should I sell now? As I stated above I didn't purchase a large amount of the stock, so this loser doesn't seriously affect the portfolio. If they would have gotten a positive ruling then the small amount of stock would have seen some good gains. It was a gamble and one that is lost. There are now fears that bankruptcy is just a couple of quarters away. I'm going to sit with my shares for now since it is sitting at the 52 week lows. I will continue to watch this stock to see if they can get an appeal, but the hopes are fading quickly. The company still has a book value of over $6, so it could see itself purchased by a larger company in the future. So I will hold for now.

This is also just another reminder that many of the stocks in the Alternative Energy sector are very small companies. Many are on the verge of breaking out big over the next couple of years, but there are also many that can blow up in your face. So as they say, make sure all your money is not in one basket.

July 12, 2005

Ormat Technologies, Inc. Completes Well Re-drilling at Puna Geothermal Project in Hawaii

Ormat Technologies (ORA) announced that Ormat subsidiary, Puna Geothermal Venture ("PGV"), completed the re-drilling of an existing production well at the Puna Geothermal Project (the "Puna Project") located on the Big Island, Hawaii. The well re-drilling increased net generating capacity of the power plant by approximately 4 MW, bringing total net generating capacity to approximately 29 MW. [ more ]

June 24, 2005

Nevada Geothermal Begins Mapping of Deep Geothermal Source Waters at Pumpernickel Site

Nevada Geothermal Power Inc.
(NGLPF) reported that exploration work at the Pumpernickel Geothermal Project (5710 acres/8.92 square miles) is underway. In Phase I - 3D "E-SCAN", resistivity survey methods will be utilized to map the deep geothermal source waters feeding surface hot springs. Results are expected in four weeks. Subsequently a series of six 250-meter (820 foot) gradient wells will be drilled to test the interpretation of the E-SCAN survey. [ more ]

June 08, 2005

US Geothermal shares to begin trading on the Over-The-Counter Bulletin Board of the NASD

US Geothermal Inc. (UGTH) announced today that the company has met requirements for a listing on the OTC Bulletin Board, as confirmed by J Giordano Securities Group of New York City, market maker for the company's securities.

US Geothermal holds the rights to approximately six and one-half square miles, which comprise the Raft River project development in Southeastern Idaho, a geothermal reservoir that was a former US Department of Energy geothermal research facility. [ more ]

May 11, 2005

Nevada Geothermal Power Inc.: Drilling Resumes at Blue Mountain Geothermal Site

Nevada Geothermal Power Inc.
(NGLPF) reported that the next phase of development is underway at its Blue Mountain Geothermal site, with drilling to deepen the Deep Blue 2 (DB2) well by an additional 700 metres (2,300 feet).

"We are investigating a potential deep - hotter production zone that would make Blue Mountain's economics extremely robust," said Brian Fairbank President and CEO. "A deep high temperature resource would allow us to use more efficient and cost effective 'dual-flash' technology similar to the 60MW power plant at the Dixie Valley high temperature field in Nevada. A Monte Carlo simulation by Susan Petty of Black Mountain Technology infers a minimum resource capacity of 110MW if temperatures between 220 degrees - 250 degrees C can be confirmed." [ more ]

Ormat Technologies, Inc. Completed Negotiation of Two New Power Purchase Agreements at Ormesa and Heber, and Breaks Ground for New Plant Addition to Heber Geothermal Power Complex

Ormat Technologies (ORA) announced that it completed negotiations for two new 25 years Power Purchase Agreements (PPA) with Southern California Public Power Authority (SCPPA) for the purchase of renewable energy from its geothermal projects at the Ormesa Geothermal Facilities Complex and the Heber Geothermal Facilities Complex.

Ormat also announced that it celebrated the ground breaking and dedication of a new geothermal power plant within the Heber Geothermal Facilities Complex on Monday May 2, 2005. The new plant is dedicated to Mr. William R. Gould, who served as the Chairman of Southern California Edison (SCE) from 1980 through 1984, and was a driving force behind much of California's renewable energy programs. The new 10 MW William R. Gould plant is part of an 18 MW enhancement at the Heber Geothermal Facilities Complex, including an 8 MW enhancement to existing facilities, which supply power to Southern California Edison under ongoing PPAs. [ more ]

March 16, 2005

Ormat Breaks Ground on New Geothermal Power Plant

Ormat Technologies (ORA) broke ground today on the first geothermal electric generating plant to be built at Steamboat, Nevada since 1991. Known as the Galena Geothermal Project, when completed the plant will be added to the existing Steamboat geothermal plants and bring the total output from this geothermal complex to 44 megawatts of electricity through a process that extracts and re-injects the hot geothermal waters from the ground. One megawatt of electricity can supply energy up to approximately 1,000 typical homes in the area. [ more ]

February 14, 2005

Ormat Technologies Secures $25 Million Contract for Geothermal Power Plant in the Azores Islands

Ormat Technologies (ORA) announced that two of its subsidiaries have entered into Supply and Engineering Procurement contracts for a new geothermal power plant to be constructed on Sao Miguel Island in the Azores. The contracts are for a total of 19,151,422 Euro (approximately $25 million), with construction on the power plant expected to be completed within 19 months from the contract date. [ more ]

February 04, 2005

Ormat Technologies Receives the End Customer Final Approval for $16.9 Million Purchase Order for Remote Power Units

Ormat Technologies (ORA) announced that the customer rendered final approval of the Purchase Order valued at approximately $16.9 million, for the supply of 102 remote power units for Communications and Cathodic Protection along a pipeline on the Sakhalin Island in the Russian Federation, as described in the press release dated December 9, 2004, and the Purchase Order became a definitive agreement. [ more ]

January 04, 2005

Ormat Technologies Enters Into Power Purchase Agreement for the Supply of 22 MW from Recovered Energy Power Generation

Ormat Technologies (ORA) announced that through a newly established project subsidiary, it has entered into a 25-year Power Purchase Agreement (PPA) with an electric utility according to which ORMAT will supply approximately 22 MW from recovered energy generation power plants. The power plants are to be constructed by ORMAT between 12 and 18 months from the effectiveness of the PPA. The power plants will be constructed on gas compressor stations along a Natural Gas pipeline in the Midwestern United States. [ more ]

December 21, 2004

Nevada Geothermal Power Inc.: Blue Mountain Drilling Results DB-2 Test Indicate Potential Shallow Geothermal Production Zone

Nevada Geothermal Power Inc.
(NGLPF) is pleased to report on recent flow and injection testing of Deep Blue No.2 (DB-2) which penetrated the upper reaches of the geothermal resource, and an eight-hole temperature gradient drilling program at the Blue Mountain project in Nevada. The program has provided positive information on production capability of the inferred resource and expanded the known extent of the thermal anomaly. [ more ]

November 23, 2004

Pennsylvania to Generate 3,600 Megawatts of Wind Power by 2016 Due to New Standard

As mentioned in a previous entry, the Pennsylvania legislature passed SB1030, the Alternative Energy Bill, on November 20, 2004 which will require a total of 18% of Pennsylvania's electricity to be generated by alternative energy sources by 2020.

The standard requires 8% of Pennsylvania's electricity to be generated by so-called "Tier I" renewable sources of energy by 2020. Tier I resources include solar, wind, geothermal and biomass. The standard also requires 10% of the state's electricity to come from a second category of resources that include waste coal, integrated combined coal gasification technology, municipal solid waste, large-scale hydro, demand-side management and distributed generation systems. [ more ]

November 05, 2004

Colorado Voters Approve Amendment 37

Colorado voters have approved an amendment requiring utilities to get part of their electricity from the sun, wind or plant and animal waste.

The amendment requires the state's seven largest utilities to get a portion of their retail electricity sales from renewables, beginning with 3 percent in 2007 and climbing to 10 percent by 2015. Four percent of the renewables should be solar sources. [ more ]

October 26, 2004

Nevada Geothermal Power Inc. Acquires Third Nevada Geothermal Project In Prolific 'Corridor Of Heat'

Nevada Geothermal Power Inc.
(NGLPF) announced today that it has acquired 7 square miles of private land and has applied for a one section federal geothermal lease for a total land area of 8 square miles (22 square kilometers) south and east of Black Warrior Peak, Washoe County, Nevada. The leases are on private land and are subject to a 3.5% royalty on gross revenue from electricity sales, however, NGP can purchase the royalty for US$1,000,000. Leases include surface and water rights. [ more ]

October 15, 2004

Pumpernickel Valley Geothermal Project: Inovision to Spend $5,000,000 to Earn 50% Joint Venture Interest

Nevada Geothermal Power Inc.
(NGLPF) announced that Inovision Solutions Inc. (ISI), a TSX-V listed company, will fund up to C$5,000,000 in exploration and development expenditures for the Pumpernickel Geothermal Project under an option agreement to earn a 50% joint venture interest. In order to earn its interest, ISI must complete C$5,000,000 in project expenditures, make C$120,000 in cash payments and issue 600,000 shares to NGP over a five year period. In the first year, ISI must fund a C$400,000 work program, issue 100,000 shares and make a C$10,000 cash payment to maintain its option. NGP will be project manager. [ more ]

October 11, 2004

Tax Credit to be Extended to Geothermal Energy

The Production Tax Credit (PTC) -- a critical factor in stimulating the growth of the US wind industry -- is very likely to be expanded to include geothermal energy as part of the JOBS tax package (H.R. 4520, the "American Jobs Creation Act of 2004") just approved by a Congressional Conference Committee. [ more ]

September 29, 2004

Nevada Geothermal Power Inc.: Further Blue Mountain Temperature Drilling

Nevada Geothermal Power Inc. (NGLPF) is pleased to report that a temperature gradient drilling program is near completion at the Blue Mountain project in Nevada. Eight holes have been drilled to depths up to 1020 feet using an air rotary rig to map the subsurface thermal anomaly outward from the central thermal zone. At three valley locations where the depth of overburden exceeded the capability of the air drilling equipment, additional drilling with a mud circulation rig may be conducted after the initial results have been compiled. Results from the current drilling combined with earlier temperature gradient data and test wells Deep Blue No. 1 and 2 will be used to determine the optimum location for two production test wells. [ more ]

September 23, 2004

New York to rely more on renewable power

New York will dramatically boost its reliance on renewable energy sources like wind and water over the next nine years under a policy approved by state regulators Wednesday.

Clean energy advocates and state officials said the action by the state Public Service Commission places New York among the leaders nationwide in the development of renewable energy. It comes 20 months after Gov. George Pataki first called for a statewide standard that would encourage the production of environmentally friendly energy. [ more ]

August 30, 2004

Newsweek Special Report

"Experts generally agree that our current reliance on fossil fuels is unsustainable. Already oil is near $50 per barrel, and the great millions of Chinese and Indians destined to take to the road in the next decades have not yet gotten behind the wheel."

This week Newsweek has written several special reports about alternative energy in all its forms. All of these reports can be found at the following link. [ more ]

August 27, 2004

Campaign for renewable energy begins

Colorado House Speaker Lola Spradley, R-Beulah. and U.S. Rep. Mark Udall, D-Eldorado Springs, co-chairs of Amendment 37—the Renewable Energy Initiative—kicked-off their statewide campaign Thursday with stops throughout Colorado.

Amendment 37 would require 10 percent of Colorado's electricity be generated from renewable energy by 2015. The program is scaled beginning with a 3 percent requirement by 2007, 6 percent by 2011, and 10 percent by 2015. [ more ]

August 19, 2004

A push for renewable energy in Colorado

Colorado is the first state in the nation to place renewable energy on its ballots, thanks in part to grassroots support from Summit County.

On Nov. 2, Colorado voters will decide whether to require the state's seven largest utilities to generate 10 percent of their electricity from environmentally-friendly sources like wind power by 2015. [ more ]

August 12, 2004

Western GeoPower Project Moves Ahead

Western GeoPower Corp (WGPWF) has received approval to start drilling on their new Geothermal energy operation facility at South Meager in Canada. This new facility could amount to over 100 MW capacity. [ full story at ]

GeoPower expects to have the South Meager plant ready for commercial generation by mid-2007.

August 01, 2004

Western states take lead in the drive for renewable energy

The political climate for many of the western states are slowly starting to change to see the need for conversion to renewable energy sources. These test installations for Solar, Geothermal, and Wind energy are now producing real power for these areas. The key for us is to find the vendors that supply these installations. As the funding increases in these test beds, our growth will increase.

Here is a good article from the about the various western states initiatives.

"California's goal is to produce 20 percent of its electricity from renewable sources by 2017. New Mexico is aiming for 10 percent by 2011. Texas, despite its oil industry, has set a goal of 2.7 percent by 2009. A referendum headed for the Colorado ballot in November would require the state to get to 10 percent by 2015." [ full story at ]

July 29, 2004

Kerry's High-Wattage Energy Plan discusses John Kerry's plan to increase alternative energy usage for the country.

John Kerry's blueprint for energy independence doesn't suffer from lack of ambition. In early August, he'll unveil an energy plan that he says can break America's addiction to foreign oil, revitalize the U.S. auto industry, help farmers and coal miners, fight global warming, and create jobs -- all for just $2 billion per year. "We can live in an America that is energy independent," Kerry promises. [ full story at ]

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