Geothermal energy gets cash but hits roadblocks

LONDON/SAN FRANCISCO Tue Feb 23, 2010 2:50pm EST

Steam rises during a test from a well at the Coso geothermal field at the China Lake Naval Air Weapons Station in China Lake, California July 31, 2008. REUTERS/Fred Prouser

Steam rises during a test from a well at the Coso geothermal field at the China Lake Naval Air Weapons Station in China Lake, California July 31, 2008.

Credit: Reuters/Fred Prouser

LONDON/SAN FRANCISCO (Reuters) - Technology to generate energy by harnessing the earth's inner heat is finally getting respect and looks on track to test ways to expand the industry, thanks to new U.S. government funding.

But steep startup costs and financing remain barriers, and new geothermal technology to pump cold water into hot rock also has sparked worries about the risk of manmade earthquakes, dimming prospects for near-term expansion.

Geothermal energy surged in the United States last year with a 46 percent jump in planned low-carbon power plants that produce electricity by using steam from the earth's core to spin turbines, according to the Washington D.C.-based Geothermal Energy Association.

Geothermal, still seen as a distant also-ran to wind and solar in the clean energy race, got $338 million in federal stimulus money for new technology tests at 123 projects.

"For once geothermal got the big money," said Karin Berry, principal at Pave Energy Finance at a recent GreenPower conference in San Francisco.

Geothermal plants offer steady, clean power when the wind stops blowing and the sun goes down -- but multimillion-dollar drilling costs and risks of cold holes temper enthusiasm.

"Clearly investors want growth, which the geothermal sector does provide. They want visibility, which the sector provides less of," Partho Sanyal, director of energy and power investment banking at BofA-Merrill Lynch told the GreenPower conference.

Investors in Canada, a natural resources hub, understand risk related to natural resources, industry officials said.

Magma Energy Corp raised C$100 million, and a similar amount went to Ram Power Group, created last year when three Canadian companies and one U.S. company merged.

FEAR OF EARTHQUAKES

The sector boasts new technology that pumps cold water underground to heat, instead of relying on deep natural reservoirs of hot water. This has inspired hopes of industry expansion, along with new worries that the shock of cold water hitting hot stone could induce an earthquake.

The U.S. Energy Department said its new policy for such enhanced geothermal system (EGS) projects will require drillers to monitor ground-motion sensors and estimate the probability and potential size of man-made earthquakes, also known as induced seismicity.

The DOE policy, detailed in a December 30, 2009 letter, comes after California's AltaRock Energy Inc. shuttered an EGS project in that state due to technical problems and in the face of community opposition.

EGS fractures hot rocks between two or more drill holes up to 5 kilometers deep. Cold water pumped down one hole heats up as it passes through the cracks to the second hole, from which it emerges hot, and ready to generate electricity.

An EGS project in Switzerland was suspended in 2007 and blamed for a 3.4 magnitude earthquake felt in nearby Basel, causing 9 million Swiss francs ($8.4 million) in damage.

Seismic risk experts SERIANEX said the project could have caused up to 170 more earthquakes in the region over the project's 30-year time span, with a 15 percent chance of a quake causing over 600 million Swiss francs in damage.

"The tremors that we triggered during our reservoir stimulation are a setback for the development of EGS," said the project's head geologist and CEO of Geothermal Explorers Markus Haring on his company's website.

U.S. geothermal executives at the GreenPower conference dismissed any notion that earthquakes would bury the industry.

Conventional geothermal does not pump down cold water to heat it. Altarock President Susan Petty said the Swiss example was a lesson in what EGS should and could avoid: shallow projects and drilling into major faults or near cities.

STEEP START-UP COSTS

A geothermal plant can produce cheap energy by most standards, but start-up costs are steep, and it takes time to get a plant going.

"(Conventional) geothermal energy remains the lowest cost form of renewable energy," said analysts Bloomberg New Energy Finance. "Under ideal conditions, geothermal could produce energy at rates competitive with coal," it said.

But ideal conditions include easy access to financing.

"Geothermal development, in the best of markets, is often an inherently risky investment, especially upfront," said research associate Dan Jennejohn of the Geothermal Energy Association.

"A developer usually had to fund about 30 percent of a steam field's development before a lender would provide financing. In the current economic climate, risk-averse lenders are now requiring that 70 percent of the field is developed."

Projects face a so-called "valley of death" of funding for commercial-scale expansion after exploration work.

Evergreen Clean Energy LLC is raising funds for New York Stock Exchange-listed Raser Technologies Inc.

Evergreen aims to move in with project financing after a successful test hole has been drilled. That will provide enough data to give a good evaluation of risks, even if the market treats the stage as a blind search for hot rock.

"We do all that we can to de-risk the project," said Evergreen Principal Mark Burdge. "We're not wild catters."

(Reporting by Michael Szabo in London and Peter Henderson in San Francisco; Editing by David Gregorio)

($1=1.068 Swiss Franc)

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