the problem with geothermal

For the emerging geothermal sector, there are two distinct phases of challenges that must be encountered. In the short term, there is the technical risk of drilling and managing temperatures/pressures. Upon completion of the geothermal well, establishing a reservoir that demonstrates constant flow and near-constant temperatures will be critical. From there, surface operations, such as producing electrons from heat, are well established, and not bound by the same risk-premiums that will be attached to earlier phases.

The real problem, one that has until now inhibited the entire industry, is locating an area with the specific qualities required for economic heat extraction. With the heat exchange occuring up to 5000m underground, it is impossible to predict the quality of the resource before target depth is reached.

The cost of deep drilling runs upward of several million dollars per well, and more if delays are encountered. There is no way to infer anything but the temperature of a full scale well, and even this inference is a guideline only. It will continue to be difficult for GEO companies to simply acquire a series of GELs and prove an extractable resource. The cost is inhibitive, and the success rate is not understood, but could be estimated to be low.

Unless the right combination of temperature, pressure, flow rates, depth, containabilty (to operate as a closed loop), and fracturing is displayed, the viabilty of the operation will be compromised. The proven exponenial correlation between temperature and output is well understood. If temperatures towards the high two-hundreds are not achieved, a project will most likely generate too few electrons for the static capex.

This inhibitive entry barrier has been overcome once. There is one exception to the logic, and that is GDY.

GDY sourced what were understood to be the hottest granite bodies in Australia. Through a combination of foresight and sheer luck, they struck upon a resource that is unprecedented in quality. The Inamincka project showed temperatures that approach 300C, and natural fractures that allowed strong communication within the system. The system itself is actually part of a reservoir that is full of water at enormous pressure, proving that the reservoir is fully contained and will operate as a closed loop. The company had intended, at first, to simply intersect dry rocks, and pump many millions of litres of water into the system as the geofluid. This huge cost, and the risks, have been romoved entirely.

To have established a resource like this was, in the eyes of many, an absolute fluke. I would never have expected to see the quality displayed by HAB1,2. It is an advantage that is so thoroughly huge, it is difficult to assess and price the implications. The barrier to entry that is very real will continue to suffocate the sector as a whole, but GDY has entire immunity.

Genuine dominance in a sector that is about to see proof-of-concept makes GDY an attractive company, and the current sell down only enhances the value and upside offered.

With the upcoming need for national power capacity increases, and the difficulty in meeting this bulk with anything but coal or geothermal, the lack of alternative defined and viable geothermal resources puts GDY in a unique position over the coming years.

There is no alternative exposure to the geothermal sector that has the required geological characteristics to provide geothermal energy at around $45/MWh.

I cannot reasonably tell holders they should continue to hold, but only point out that GDY holds a strong geological advantage in a sector that gives every indicator of success. The time will come when the impending business model GDY are developing will attract investment from the wider market community. The fundamentals on this company are outstanding, and with so much else going on (Kalina, Rig, Erorka, REDI, Flow tests, Demo Plant, Scaling-Up, etc.) the good times of cheap buying will not be sustainable.

Cheers