Policymakers must make more effort to de-risk geothermal exploration for investors and companies, said a vice-president at a leading US generation and utility company.
Jonathan Weisgall, VP of legislative and regulatory affairs at MidAmerican Energy Holdings Company, said: “We need to de-risk this industry. The tech costs have to come down for investors too, and all the time there is the spectre of low natural gas prices. But above all we need regulatory certainty.”
The Energy Policy Act of 2005 extended the Production Tax Credit (PTC) to geothermal power projects after successfully kickstarting the US wind industry. Installed capacity for geothermal is around 10.7GW globally, approximately 3,000MW of which is located in the US. Last year, 123 projects were under development in the US and will receive the PTC if placed in service by the end of 2013.
Expiring tax credits present a huge threat to renewable energy projects, read more about the debate over the credits here on Breaking Energy.
Geothermal developers in the US also received $262.9m in 1603 cash grants through the American Recovery and Reinvestment Act of 2009. A total of 148 projects were funded with $368.2m under ARRA, adding 400 MW of new hydrothermal resources by 2014, according to the Department of Energy. Ormat Geothermal Project in Nevada was awarded $350m under the DoE’s 1705 loans program.
Weisgall told the Geothermal Energy Finance and Development Forum in San Francisco that tax incentives were the main driver in the geothermal industry. But he said the Production Tax Credit, which expires for the sector at the end of next year, did not operate on sufficiently long enough time scales for this particular technology.
Above all we need regulatory certainty”
“Tax incentives work on too short time scale for geothermal which takes around four to eight years to develop. The PTC for geothermal expires at the end of 2013 – what happens in wind will be the canary in the coal mine for geothermal. We are trying to get an extension and achieve parity with solar tax credit, which goes through to 2016. But we haven’t seen a single bill in Congress to introduce a clean energy standard since the president mentioned it in his state of the union address last year.”
Technology was also a barrier to investor expectations as seismic surveying used in the oil and gas industry was not always transferable to geothermal resources that were often variable with complex geology and chemistry to consider.
Gevan Reeves, a director at Calpine Energy, owner of Geysers in California, said: “Geothermal is a significant endeavor just in the exploratory phase. There’s still uncertainty over resource and how it will behave over time and you continually try to refine that as you get closer to your permitting and contract phase.
“On the cost of production vis a vis the other renewable technologies there is a very long lead time, long construction. Just to order a steam turbine takes 18 months … we also have the shortest expiration of the federal cash grant funding in 2013 compared with 2016 for the [solar] investment tax credit (ITC). And recent rounds of utility procurement have been largely weighted toward PV.”
Karl Gawell, executive director of the Geothermal Energy Association, said: “The geology resources are more complicated the technologies we have in order to see the reservoir from the surface without drilling have much higher degrees of uncertainty. We’ve seen the first new investment by federal government in 2008-2009 – first time in 30 years, which is what happened with oil and gas. But that investment was made in the 1920s. But when you find oil and gas you know how much your product is worth. If we’ve got a four year lead time and you don’t know whether you’ve got a project that’s going to be economically viable for another four to five years.”
Mining The Brine
But unlike other renewables, geothermal offers potentially lucrative co-benefits such as the extraction of high value minerals like lithium, manganese and zinc from hydrothermal brine.
Simbol Materials is a Californian startup that has established a demonstration plant in Salton Sea, where there are 10 generating plants operated by Calenergy, which is 50% owned by MidAmerican Energy, part of the Warren Buffet-owned Berkshire Hathaway.
Weisgall said that a previous attempt to extract zinc from geothermal waters at Salton Sea had cost his company “a couple of hundred million”.
But Luka Erceg, who founded Simbol Materials after 12 years in the oil and gas industry, said he had no illusions about the difficulties in the geothermal industry:
“Many oil and gas wells are not the depth of geothermal wells. They are far shallower, far smaller. Most oil and gas wells produce the lifetime of their production the first 18-24 months – when you look at the economics you can afford to hit five dry holes. The payback is so rapid because the price of oil is far superior. When you compare it with geothermal which is de facto the best renewable energy source we have, you have long payback times and low double digit returns in terms of the investments over 25 years whereas oil and gas is measured over five to seven.”
Stephan Jacob, an underwriter at reinsurance company, Munich Re, said that geothermal was one of the most difficult renewable technologies to finance because of exploration risk for investors. Insurance should protect against lost investments if wells are dry or below expectations and factor in variables such as thermal output, flow rate, draw down, reservoir temperature, he said.
Mixed Message In Support
The US annual budget for geothermal R&D peaked in the late 1970s, but the resurgence in interest in geothermal has not kept pace with other renewable technologies such as solar.
The Obama administration reinvigorated support for geothermal through the Geothermal Technologies Program with $43 million in 2010, more than half of which was used on R&D in the emerging field of Enhanced Geothermal Systems.
Drilling, testing and exploration account for 50% of project costs, and the average cost of drilling a 5,000 to 8,000 ft exploration or production well could cost $4 million because the harder rock make it more difficult to drill through.
It’s not like a wind farm: It’s baseload
But despite barriers and the development of geothermal being “more art than science” Weisgall insists that the technology has potential. “When you’ve got geothermal and all that power coming it’s like a coal or nuclear plant, it’s not like a wind farm. It’s baseload.”
“If California loads up on all of these intermittent load sources the renewable integration costs are going to be serious.
“At some point, the separate values of these renewable resources will have to be recognised by policy makers.”
Photo Caption: Workers drill near a geothermal energy plant to tap deep underground heat from the southern San Andreas Fault rift zone near the Salton Sea near Calipatria, California.