Eco Investor Guide

Deep below the surface of several western states, companies are drilling wells to reach hot rock. By connecting these wells to fractured rock which water can flow through, it creates a heat-exchanger that  produces hot water or steam to run electric generators at the surface.

This new technology, borrowed from natural gas drilling techniques, is called Enhanced Geothermal System (EGS), and has much greater potential because the area of traditional geothermal is limited to a few areas in the West. This technique is different than the older geothermal technology used by companies like Calpine (CPN), which uses underground superheated steam to power generators.

With geothermal, no other fuel is needed to create electricity, and the process allows a continuous source of power day and night, unlike other renewable energies like solar and wind. As a renewable energy, geothermal seems like an obvious choice to focus on.

A comprehensive 2006 MIT-led study of the potential for EGS energy within the United States found a capacity of more than 100,000 MWe from EGS could be achieved within 50 years with a modest, multiyear federal investment for research and development.

However, cheap energy prices over the past thirty years have kept geothermal research on the back burner so to speak. This may be changing.

President Obama’s Recovery Act committed $350 million on new investment in geothermal, dwarfing previous government commitments. And, the Department of Energy has requested a budget of $2.4 billion for renewable energy for 2011, with a 25% increase for its geothermal program.

Companies like Raser Technolgies (RZ) and Ormat Technologies (ORA) are breaking new ground on EGS technology and could stand to benefit from the renewed interest and government dollars.

Ormat owns approximately 392 MW of geothermal and recovered energy-based power generating capacity in the U.S., with 64 MW of additional geothermal under construction and approximately 156 MW of geothermal under various development and exploration stages. Yesterday Ormat announced results for the fourth quarter and full year ended, stating that revenues increased 20.4% for the year to $415.2 million, and  total generation increased by 14% to 3.4 million MWh during 2009.

Rival company Raser, while its stock price has lost significant ground, has focused its research on utilizing lower temperature geothermal sources. Because of this, the company has scooped up a significant amount of rights to land that other developers were not as interested in. Last week the U.S. Treasury approved its $32.99 million renewable energy grant application for the company’s Thermo No. 1 geothermal power plant. The grant was a provided by the renewable energy program created by the Recovery Act mentioned above.

Calpine, along with its natural gas and other business segments, operates 15 geothermal power plants at The Geysers region of Northern California, generating up to 725 megawatts of power or about 40 percent of the geothermal energy in the United States.

There are some problems and risks with geothermal which potential investors should understand, including questions about groundwater contamination with some technologies that use boron or mercury in the process. As well, some methods of geothermal have caused small earthquakes in other countries. A project by AltaRock Energy was shutdown last year in Northern California over such concerns. Finally, the cost and technology improvements that are needed to make new geothermal energy technologies competitive may not be achievable in the short term.

Disclosure: None