Greg Reid: Geothermal - The "Sleeping Giant"The Energy...

Greg Reid: Geothermal - The "Sleeping Giant"The Energy ReportFont Scale: 16 April 2009 @ 04:37 pm EST

With the U.S. stimulus package in place and the politically contentious cap-and-trade program looming, one sector is poised to benefit from both measures. Calling it the "Rodney Dangerfield" of renewable energies, Greg Reid, director of Clean Technology at Wellington West Capital Markets, says geothermal doesn't get a lot of respect right now - but that's about to change. In this exclusive interview with The Energy Report, Greg discusses how the political push, and monetary allocation, for clean energy are aligning the political and social stars over geothermal.

The Energy Report: Greg, in one of your articles, you call geothermal the "sleeping giant" of renewable energy. What makes geothermal so interesting to you?

Greg Reid: I think the political and social stars are starting to align here. One of the key things is political will. You now have the governments that are pushing renewable energy. There was a lot of concern that as the economy went in the tank over the last year or so that the political will to continue to push forward on green energy initiatives would disappear.

But, given what's happened in the U.S. with the stimulus package and the money that's been pushed towards green energy, which includes geothermal, and given the recent draft bill put forward in the U.S. related to things like a national renewable portfolio standard and carbon credits, the U.S. government is really taking the initiative here. If you look globally, you have the successor to the Kyoto Protocol; with meetings coming up later this year in Copenhagen. Globally it now seems that being green has gone mainstream. So on the political end, the social side, it seems like things have lined up favorably for geothermal and for green energy.

TER: But geothermal currently is such a small part of the overall energy grid, whereas other renewables are higher. How would this play out over the next couple of years? Continue to be a smaller piece of the pie in a growing marketplace or will it take over from the other alternatives?

GR: I call it the "Rodney Dangerfield" of renewable energies. It doesn't get a lot of respect right now and I think a lot of it is both education of the political leadership and the education of investors so they realize that this is a very good green resource. If you look at it in terms of the timeline that geothermal property can run for, you're talking decades. So this is a very valuable resource in the ground; and there is a lot of it. I think the overall green market will grow, but geothermal will grow at least in line with the overall market rate.

TER: One of the downsides of geothermal is the cost of the initial drilling and building of the plants. Is there opportunity for geothermal companies who don't already have production?

GR: Yes. The biggest challenge for the smaller developers is the lack of access to credit today and having to have a better balance sheet to get these projects going, but we're hopeful that we're through the worst of it and things will start to get better. If you look at some of the initiatives in the U.S. - part of the stimulus package, for example - some of these developers will be able to take advantage of getting cash grants up front in lieu of tax credits, which should kick start some of the projects.

TER: When we look at the geothermal market place, most of the interesting plays are companies who are very close to production or already producing. What is the opportunity for smaller or exploratory companies?

GR: The opportunity in this market is tough right now. The reality is, it's very difficult to raise money to just go out for the drilling phase. It's even tough for the guys that are later in the development phase that are ready to build. But, like we said, we believe that because of things like the stimulus package in the U.S. and the fact that I believe we're through the worst of all the negative things in the economy, that things will slowly start to get better. That should make it somewhat easier to raise some money.

TER: If we start putting carbon credits and trading credits in, it appears that that's going to make certain types of energy like coal and oil more expensive. And the United States is a big coal-eating machine. So will cap and trade make coal more expensive? Will the politicians acquiesce as they look at people who can't heat their homes in the middle of winter?

GR: Yes, that's the million-dollar question. It may be one of the most highly contentious issues that we'll hear about this year on the political side. Obviously, you've got the government saying in the U.S. that they want to push cap-and-trade forward and maybe the concessions that they make to get it passed will be like what happened in Europe where a number of the allowances are given away as opposed to being auctioned off. So they're given away to particular industries. Maybe they're coal players, maybe they're a steel manufacturer.

There seems to be political will, both in the U.S. and around the world, to get something like a cap-and-trade program established. The devil will be in the details.

One notable misconception is that a lot of people think that geothermal is a more expensive form of energy, but the reality is it's more expensive than some other things up front, but when you look at it over the life of the plant, the operating costs are low and there's no fuel price risk, so it's actually at least as cost competitive or better than a lot of other energy sources. On that front, one of the major banks in the U.S. recently put out a report looking at the levelized cost of various energy sources and they said even with the existing incentive schemes in the U.S. with production tax credits and no carbon taxes, geothermal was the lowest cost of all energy sources - even better than coal and gas. Add in a carbon penalty and geothermal will look even better.

TER: If that's true, why don't we see more geothermal production facilities in transmission?

GR: I think it's just a matter of time that you'll start to see more and more. The reality is if you look at the industry today, there aren't a lot of public companies in North America. I think there are six or seven. Australia has a number of players, but they're all small companies with maybe on average $5 million in cash and sub $50 million market caps. The bulk of geothermal out there today is within divisions of large companies like Chevron or divisions of national energy companies. Because of the incentives, and as people get more educated on geothermal, and especially if we get into an environment where we have carbon being taxed through a cap and trade program, then I think geothermal will start to move up the list in terms of people's interest level.

TER: To what extent does the success of geothermal require cap and trade to be implemented? Could it be successful if that doesn't pass?

GR: Yes. I think if it doesn't pass, it still will be a successful and growing source of energy. Many experts believe that oil prices will rise again as the economy starts to improve. The numbers that I've seen, talking to various companies, was even at $40 to $45 a barrel of oil pricing, geothermal still makes sense. So cap and trade would be kind of icing on the cake to push people to geothermal and other sources even more.

TER: Will it continue to require some type of government subsidy?

GR: I think that will be one of the drivers of the industry. Besides the economics, there's timing. From when you first do surface exploration to when you actually have a plant up and running can take anywhere from four to six years. In some cases, people might be more interested in funding a wind project or solar project, which is up and running within a couple of years.

TER: What are some of the ways that individual investors can play the geothermal market?

GR: I think if you look at the Canadian-North American markets, you have your smaller players like a Polaris Geothermal Inc. (TSX:GEO), Sierra Geothermal Power Corp. (TSX.V:SRA), Western GeoPower Corp. (TSX.V:WGP), US Geothermal Inc. (AMEX:HTM) (TSX:GTH), and Nevada Geothermal Power Inc. (TSX:NGP) (OTCBB:NGLPF), and those are the smaller developing stories. Some of them have small amounts of power production today and then have other projects that, in Nevada Geothermal's case, they've got 40 megawatts that will come on at the end of this year. So they're going from development company to operating company.

Then, if you're looking for a more liquid name, an industry bellwether, that would be a company like Ormat. The company gets about 75% of its revenues from operating geothermal plants with 20- to 25-year power purchase agreements. The other 25% of their business comes from supplying equipment to the geothermal industry. All of the other development companies, in many cases, would use technology from Ormat Technologies Inc. (NYSE:ORA).

If you look at other countries, you've got a number of companies in Australia as well, companies like Geodynamics Ltd. (ASX:GDY), which I think has roughly $100 million in cash and Tata Power, which is an India power company, owns a stake in them. Then you have a number of other companies like Green Rock Energy Ltd. (ASX:GRK), Hot Rock, Panax Geothermal, etc. A lot of them are in the development stage and will still need to raise significant capital to get some of these projects over the goal line. But, on the other hand, they also have energy companies that have been taking ownership positions and have been helping them get things funded.