Investors, environmentalists and policymakers have long pushed for the growth of geothermal energy in the US and they are starting to reap the rewards of their work. The country is now a world leader in geothermal capacity, having pioneered the use of the resource for energy production in some states for over a century.
Power capacity in the US rose by 6% in 2009 as 6 new geothermal plants came online and over the coming year the number of states with geothermal power will reach double figures. Geothermal projects could bring the nation 7 GW of new base-load geothermal power over the next few years.
At that level, geothermal power will satisfy the needs of over 10 million people and still have tremendous growth potential in the country. The US Department of Energy (DoE) will soon officially recognize a near-term potential of at least 20 GW, which could cover 5% of all US power needs. Longer-term possibilities are expected to be well over 100 GW.
Leading the Way
Geothermal power plant operations began in the US in 1960, when Pacific Gas and Electric began operations at the Geysers field in California. As California celebrates 50 years of geothermal production it is still the state with the highest online capacity of geothermal power at around 2605 MW.
In Nevada, three new geothermal plants came online in 2009. The state has 21 operating geothermal power plants and a total operating capacity of 448.4 MW, which is rapidly increasing its notoriety as a key international player. Approximately 255,000 acres of land in Nevada, California and Utah were dispersed for the purposes of geothermal energy exploration at a 2009 Bureau of Land Management lease sale, generating US$9 million in total revenue.
According to a report published in January by the Geothermal Energy Association (GEA), geothermal energy accounted for 4% of renewable energy-based electricity consumption in the US in 2007.
The report commented: “As of September 2009, geothermal electric power generation is occurring in 8 US states: Alaska, California, Hawaii, Idaho, Nevada, New Mexico, Utah, and Wyoming. Other states, such as Oregon, Colorado, Florida, Louisiana, and Mississippi are soon to be added to the list. As of October 2009, the US has a total installed capacity of 3152.72 MW.”
The US has historically seen large-scale geothermal operations in the Western states, as resources with higher temperatures are more accessible. But as technology develops varieties of both proven and demonstrative models, the power to harness the Earth’s heat is spreading. Direct use applications and geothermal ground source heat pumps currently have installations in nearly every state.
Fueled by Funding Boosts
Despite the recession, geothermal energy employers added 750 full-time jobs and 2827 construction-related jobs in 2009 due to around US$800 million worth of technological investment.
The 2009 American Recovery and Reinvestment Act (ARRA) sets aside up to US$338m for 123 projects in 39 states that will explore and develop new geothermal fields and research advanced geothermal technologies.
Recipients include private industry, academic institutions, tribal entities, local government and the DoE’s National Laboratories. When complete, these projects will represent a total of US$691m invested in new geothermal technology and applications.
In addition, the DoE recently opened its loan program for innovative geothermal technologies and Congress has created a new DoE loan guarantee program for renewable projects using commercial technology. Last year, the two largest geothermal producers – California and Nevada – each raised their renewable standards to 33% by 2020 and 25% by 2025 respectively.
Emerging Technologies
Common types of geothermal energy plants currently in use are flash power plants, dry steam power plants, binary power plants and flash/binary combined power plants. The technology is constantly developing, however, and some of the latest developments are described below:
Enhanced Geothermal Systems (EGS)
EGS commonly refers to a resource that requires artificial stimulation. This technology enables the production of geothermal energy in places where heat is attainable but water and interconnected open volume for water movement may need to be introduced. The potential reservoir is enhanced by fracturing the hot rock, pumping water into and out of the area now suitable for water flow, and then directing the hot water to a geothermal power plant.
EGS is still a young technology that is unproven in some respects but several R&D and demonstration projects are underway. The DoE has invested more than US$5 million in a project designed to demonstrate the commercial potential of EGS in the US. The project could add up to 5 MW to the Desert Peak geothermal power plant in Nevada.
The US has taken major steps towards advancing geothermal energy in general by investing in EGS and the DoE estimates that it will be in commercial production by 2015. New EGS systems will allow geothermal power to expand its effective range across the nation.
Geopressured-Geothermal Resources
These are deep reservoirs of high-pressured hot water containing dissolved methane. The Northern Gulf of Mexico is said to contain the most significant resources – particularly in Texas and Louisiana – both off shore and onshore.
The US Geological Survey estimates that thousands of potential megawatts of geothermal energy could be generated, as well as 1,000 trillion cubic feet of potentially recoverable gas.
One project within the Sweet Lake oil and gas field in Louisiana received US$5 million to demonstrate the commercial feasibility of geopressured-geothermal power development. It is one of several geothermal projects funded by the ARRA located in a state that does not yet have geothermal power and is in a region not commonly thought of as geothermally productive.
If successful, it will be the first economically viable demonstration of the technology. The presence of the system was confirmed in the 1980s as part of the DoE’s Gulf Coast Geopressured-Geothermal Program.
Oil and Gas Co-Production
Fluids have been found in oil and gas production fields which have the potential to be used for geothermal production. Southern Methodist University’s geothermal energy program has identified thousands of megawatts of potential energy production from such co-production. Benefits from this would include the ability to use existing wells with known geothermal and hydrocarbon potential, and the potential to benefit from revenues for both geothermal and natural gas projects.
Geothermal co-production demonstrations are underway at Jay Oil Field in Florida, Rocky Mountain Oil Test Center in Wyoming, GCGE Oil Co-production in Mississippi, GCGE Natural Gas Co-production in Louisiana and Florida Canyon Mine in Nevada.
Geothermal Grows 26% in 2009
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The US geothermal power industry continued strong growth in 2009, according to a new report by the Geothermal Energy Association (GEA).
The April 2010 US Geothermal Power Production and Development Update showed 26% growth in new projects under development in the USA in the past year, with 188 projects underway in 15 states – which could produce as much as 7,875 MW of new electric power. When completed, these projects will add over 7 GW of base-load power capacity.
“Geothermal power can be a critical part of the answer to global warming,” said the GEA’s executive director, Karl Gawell. “For example, California could achieve its 2020 goal for global warming emissions reductions just by keeping energy demand level and replacing its coal-fired generation with geothermal.”
Nevada continued to be the leading state for new geothermal energy, with over 3 GW under development. The fastest growing geothermal power states were Utah which quadrupled its geothermal power under development, New Mexico which tripled, Idaho which doubled, and Oregon which reported a 50% increase. In addition, Louisiana, Mississippi and Texas all reported their first geothermal projects compared with a year earlier.
“These geothermal power projects will create substantial sources of new employment across the country,” said GEA Executive Director Karl Gawell. “Not only are we seeing more and more development and hiring in places with a long history of geothermal like Nevada and California, but for the first time these jobs are being created in the Gulf Coast, in states such as Louisiana and Mississippi. Along with a huge number of new construction jobs, geothermal power also creates many permanent positions that can never be outsourced.
Together, the direct, indirect and induced employment created by these projects is estimated by the GEA to be 29,750 permanent jobs and 112,000 person-years of construction and manufacturing employment.”
According to the GEA, the projects under development will represent capital investment of more than US$35 billion when completed. New geothermal power projects are in progress in 15 states from the Pacific to the Gulf Coast.
GEA identified new projects in Alaska, Arizona, California, Colorado, Hawaii, Idaho, Louisiana, Mississippi, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming.
In addition to large utility scale power projects, the survey continued to show expanding interest in small power systems (under 1MW) with projects in Mississippi, Louisiana, Texas, Oregon and Wyoming. “The federal stimulus, tax incentives, and strong state renewable standards continue to fuel the growth in geothermal power,” said Gawell. “Many geothermal developers are building several projects in the US, and the cash grant provides them an effective incentive that quickly reduces their debt – an important fact in the present economic recession.”
GEA noted that all of the geothermal power projects coming on line in 2009 utilized the new federal tax grant provisions authorized in the stimulus bill. In addition, four of the top five states with geothermal power under development have substantial renewable standards. Those states in order of geothermal development and their state renewable requirement are: Nevada (25%), California (33%), Utah (20%), Idaho (none), and Oregon (25%). The report also documents federal stimulus funding in the geothermal industry, which will result in over US$600 million of research into new technology at 135 projects in 25 states over the next two years.
“Stimulus funding will support geothermal development in states where geothermal technology presents vast new opportunities,” notes Dan Jennejohn – the author of the report.
DoE stimulus funding has been targeted to support the development of enhanced geothermal systems technology, new drilling and exploration techniques, geothermal power production from oil and gas wells, and other industry needs.
“In our survey last fall, we were concerned that the progress of new projects appeared to be stalling due to financing and permitting problems,” Jennejohn noted. “Now, along with a number of new projects, we are seeing projects continue rapid development, indicating that growth is returning across the industry.”
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A Century of Geothermal Energy
Aside from large-scale electricity production, the US also uses geothermal energy through direct-use applications and ground source heat pumps.
Klamath Falls in Oregon is one example of a thriving geothermal epicenter that uses these pumps. Geothermal resources have been used there since the turn of the century for space heating as well as for heating homes, schools, businesses, swimming pools and for snow melt systems for sidewalks and highway.
The Oregon Institute of Technology, located in the city, was constructed with a mind to the region’s natural resources and has been heated by geothermal energy since 1964. All the heating needs of the university’s 11-building campus are supplied by three geothermal wells.
Ground source heat pumps pull heat from the earth through a continuous loop and through a conventional duct system. For cooling purposes, the system extracts heat from the building and moves it out.
According to a report from the Energy Information Administration published in February, geothermal heat pump shipments increased in the US by 36% to 86,396 units in 2007. Geothermal heat pumps tend to have a higher initial cost than traditional heating and cooling systems but long-term use promises savings in cost and efficiency.
Ideas for the Future
Industry members, government officials, investors and academic institutions are working together to educate people about this geothermal energy. The World Geothermal Congress – held every five years – took place in April this year in Indonesia. It led a global exchange of ideas on technical and financing aspects of this renewable energy source as well as policy and international political issues. Participants from 80 countries took part, with 800 presentations highlighting developments in worldwide geothermal energy use.
The GEA Energy Expo and Geothermal Resources Council’s annual meetings are the largest annual events in the international geothermal calendar.
The 2009 event saw around 2300 attendees and 120 exhibitors (a rise on the previous year) including individuals, new start-ups and well-established companies. Visitors came from across the US and as far afield as Iceland, Turkey and Chile. This year’s Expo takes place in October in California.
As countries around the world look for ways to create jobs, support the effort to slow climate change and enhance national security through developing their own renewable resources, geothermal is set to become a key part of energy agendas. New technology advances are likely to expand the recognized power potential of geothermal resource and the US continues to lead the way in understanding and developing this long-utilized resource.
The Investor’s Story – What Makes a Good Geothermal Project?
by Kevin Murphy and Matthew Tilbrook, Turquoise International
Turquoise International specializes in corporate finance for energy and the environment, and one significant recent project involved raising €19m for a geothermal venture in Germany.
So in order to be financed, what strengths do geothermal projects need to demonstrate?
Input Supply
Geothermal projects need access to a supply of water at the highest temperature possible, with good flow rates to enable electricity generation at a combined heat and power (CHP) plant.
A significant challenge associated with sedimentary geothermal is that companies must drill down to 4000m or more to access the water. Furthermore, there is no certainty that water supplies will be found at sufficient temperature and pressure until drilling has been completed.
A history of successful drilling in an area can add significantly to the value and ability to finance a new geothermal project. For example, Southern Germany has a history of drilling for oil and gas, followed in recent decades by drilling to exploit aquifers of the Malm limestone layer. This has made the area a very desirable one for exploitation of geothermal energy with a good record of successful drilling.
Furthermore, should the flows realized not be of sufficient pressure, there are standard methods of enhancing these by either lateral drilling or acid enhancement. The existence of a drilling history in an area could also facilitate commercial insurance packages that protect individual projects if flow rates and temperature of the water obtained are too low. This in turn helps the individual projects win funding.
Output Offtake
For start-up projects, offtake arrangements to guarantee a defined revenue stream are vital for raising debt funding. The German government has provided a feed-in tariff (FiT) under the Renewable Energy Sources Act (EEG) that was updated in 2008, which provides tariffs for a period of 20 years. The key pricing element for geothermal projects in Germany is a tariff of €200/MWh for projects established before 2015.
An additional heat bonus of €30/MWh for combined heat and power projects is available where thermal load reaches a defined percentage of project size. These tariffs have been successful in boosting geothermal project development in southern Germany, with 8 projects in operation and another 8 in the drilling stages.
Robust and Proven Technology
In terms of CHP plant technology, there are now standard binary systems that have been successfully proven. Supply and construction under a standard engineering, procurement and construction (EPC) contract by a leading supplier further reduces risk and improves bankability.
While drilling technology is a well-established area with many experienced contractors, fixed price contracts are not typically available and close management control of the program is crucial. There is no doubt that the drilling element of a geothermal project carries the greatest risk. Use of 3D seismic ensures drilling is targeted to the optimum geological structures.
In Germany, the government has recognized this risk element and has demonstrated strong support for the sector by offering a drilling support package administered through KfW bank. A loan scheme has been implemented whereby 80% of the drilling costs are covered in the case of non-productivity. In addition, a grant of up to €1.25m per well is available against drilling cost overruns.
Compulsory Permits and Licenses
As with any project, access to permitted sites is essential. Permits are required for site access, drilling and construction, as well as other operations, and not all of these can be acquired in advance. In Germany, the process of acquiring permits is relatively straightforward with defined timescales from the local government (Bergamt) which effectively provides a ‘one-stop shop’ for companies. This will give comfort to lenders that timescales will not slip because the project has to wait for planning permission.
A Strong Management Team
Investors must have confidence that the management team is able to deliver, and personnel with a good track record in the geothermal sector are essential. The team does not have to be large provided it can demonstrate access to experienced advisors for areas in which it has less experience. A very detailed project execution plan with prudent and robust costing is a significant help in gaining investor confidence.
With regard to the critically important water-flow rate and temperature projections, the team needs to be conservative and analyze figures from comparable projects so that investors can see upside potential. Being realistic about the risks of the project and being able to demonstrate appropriate risk mitigation factors to address most concerns further helps investors gain confidence in the team.
Finally the team has to recognize the importance of involving and informing the local community to ensure they understand potential benefits and are not unnecessarily worried by any misunderstandings (“drilling leads to earth quakes” is a common one), in order to minimize the risk of opposition to the project.
The key attributes described above are equally applicable to projects across the renewable energy industry and are relevant for obtaining debt and equity funding. Not all governments are as helpful as Germany in support of geothermal and other low carbon projects and technologies, but this does not mean that projects elsewhere are not financeable.
It does mean, however, that the ratio of debt to equity will probably need to be significantly lower and the upside to investors could therefore be more limited. This can be reasonably estimated at the outset with realistic and detailed financial modeling of the proposed venture.