Enough to Make an Oilman Jealous

GRAB YOUR HARD HATS AND LACE UP your steel-toed boots, dear readers, because today we are going back out to the drilling rigs and construction sheds in search of a remarkable investment opportunity. But we are not drilling for oil or natural gas. Instead we’re talking about one of the cleanest, most abundant sources of energy on the planet.

A Heat-Seeking Energy Investment

What makes an energy source useful and valuable? One way to answer that question is to think in terms of thermodynamics and to look at how the potential energy of any substance is converted to heat energy. Ask yourself, for example, what is coal? First and foremost, coal is the carbonized remnants of ancient plant matter, stored up in the geologic column. Why is coal useful? It is, as the old saying goes, “the rock that burns.” One coal miner of my acquaintance calls coal a “portable climate.” Among other things, it offers the user the ability to release stored-up heat energy, and thus bring rapid warmth into a cold world. Yes, and so much more.

Consider what happens when you are driving a car and burning gasoline. What is it that you really want from your fuel supply? Do you care that gasoline comes from refined crude oil? Or are you more concerned with the fact that the gasoline combusts in the cylinders of your engine, via rapid, explosive release of heat when the gasoline is sparked? You probably learned in drivers’ education class that the basic four-stroke internal-combustion engine follows a cycle of intake, compression, power stroke, and exhaust.

When the gasoline combusts and explodes, it releases heat energy, which causes combustion gases to expand and push the power stroke. The power stroke, in connection with the well-timed power strokes of the other cylinders, turns the crankshaft. This is what allows you and your vehicle to move along. So gasoline is also, in essence, a form of stored heat.

Or consider nuclear power. What is the basic principle behind this particular energy source? Radioactive rods in a nuclear pile decay and give off heat, which in turn is used to raise the temperature of water or some other substance in a liquid phase. When the liquid phase gets hot enough, it vaporizes and its expansion turns a turbine. The turbine generates electricity. This is the case for almost all nuclear power plants in the world, whether on land or inside the confined hull of a submarine.

So the bottom line is that when we are looking for energy sources, we are basically looking for ways of obtaining heat energy in some form or another.

Geothermal Energy — The New Way to Invest in Heat

Geothermal energy is heat (the “thermal” part of the word) derived from the Earth (the “geo” part). It is the energy contained in the hot rocks, and the hot fluids that fill the fractures and pores within the rocks, of the Earth’s crust. Under the right conditions, geothermal energy can be utilized to generate electricity, and this is why we are interested.

According to thermodynamic calculations performed by many bleary-eyed graduate students over the decades, if the Earth had simply “cooled” from a molten state, it would have become a completely solid mass of iron and rock within a few hundred million years of its formation. But the Earth has been an active, dynamic planet for nearly 4.5 billion years, so something must be going on deep inside to keep the planet hot. The current belief is that the source of heat energy within the Earth is long-term radioactive decay occurring within the crust and mantle.

The uses to which these geothermal resources can be put are controlled by temperature. The highest-temperature resources are generally used only for electric power generation. Current U.S. geothermal electric power generation totals approximately 2,800 megawatts (MW), or about the same as five large nuclear power plants. Uses for low- and moderate- temperature resources can be divided into two categories: Direct use and ground-source heat pumps. I am not going to say that geothermal energy is infinite in scale, but the heat sources within the Earth are immense, and a well-managed program has the potential to be operational for many decades, if not centuries.

The Pros and Cons of Geothermal Power

Now that we have looked at the basic engineering of geothermal power, let’s look at the business and policy side of things. First, you should understand that extracting the Earth’s heat and selling geothermal power is subject to the same regulatory structures as almost all other energy-generation and transmission entities in the country.

Also, geothermal energy is capital-intensive; hence, it takes time to pay off any major investment. At the same time, geothermal power competes against the rest of the electrical grid. This means that the cost basis for a geothermal power plant has to be competitive against plants that produce electricity by burning coal, natural gas, or even oil, as well as the recently growing solar thermal energy industry.

There is plenty of good news for geothermal energy, though. Once a plant is up and running, geothermal power is quite reliable. Geothermal plants offer a continuously available (24/7) power source, with historic reliabilities in excess of 90%, which is comparable to the reliability of many nuclear plants. Compare this with wind-generated power at 25-40% reliability (the wind does not always blow when you need it), or solar-generated power at 22-35% reliability (the sun sets each night, among other drawbacks). Reliability is a critical issue in terms of operations, because plant owners usually bear the risk of getting charged back by utility customers for what is called shortfall energy. This means the power that a utility purchases on the market if the main source is not operating up to capacity.

There is more good news for geothermal, in the form of policy support. Geothermal energy does not deplete like an oil or natural gas deposit. Many hot springs of the world have been bubbling warm water or steam since prehistoric times. So geothermal power is considered a renewable form of energy production, and in our own era, it benefits from the renewable energy “production tax credit.” The production tax credit, plus five-year depreciation schedules, means that there is an effective U.S. government subsidy of over 63% of the capital cost of renewable energy projects. (Think of it as spending dollars that cost only 37 cents.) So right away, renewable energy projects, and geothermal projects in particular, are beneficiaries of significant investment tax breaks that would make any oilman jealous.

If you scan the market, you’ll be hard pressed to find pure-play geothermal companies. But as the technology takes hold, more and more of the companies will pop up on your radar.

Until we meet again…
Byron W. King

November 12, 2007