New US Push into Geothermal Energy Possible, But Not Likely (CVX, CPN, GOOG, ORA, GE, OGFGF)

The first large-scale geothermal electricity generating plant in the US was developed in the 1960s in northern California. Unocal, now part of Chevron Corp. (NYSE: CVX), did the initial work and the complex, known as The Geysers, is now mostly owned and operated by Calpine Corp. (NYSE: CPN). Calpine generates about 725 megawatts at the plant, around half the total generation capacity.

A new report funded by a grant from Google, Inc. (NASDAQ: GOOG) from Southern Methodist University researchers estimates that the potential for geothermal electricity generation in the US is about 3 million megawatts. In addition to Chevron, which is the world’s largest supplier of geothermal energy, companies like Ormat Technologies, Inc. (NYSE: ORA), and smaller rivals are developing more geothermal generation but very slowly.

Following last spring’s earthquake in Japan, there was discussion of replacing some of that country’s nuclear generating capacity with geothermal. The difficulties, though, are long lead times and expensive construction costs. A hypothetical 1,000 megawatt plant would take up to 7 years to build at a cost of about $3.5 billion. That’s more than double the cost of an equally sized wind farm, and the lead time for a wind farm is also much shorter. Compared with a new nuclear generating plant, the time frame to build a new geothermal plant is much shorter and the price is much lower.

The accompanying map shows the locations with the best potential for geothermal development in the US. The best places include Yellowstone National Park, the area around the Grand Canyon, and southern California, where what’s left of the Colorado River empties in the Gulf of California. Most other high-potential locations include places where lots of people don’t live. That increases the cost even more for transmission lines to get the power to where it can be used.

A further problem for geothermal developers in the US is difficulty in getting financing for the high-cost projects. Virtually all of Chevron’s investment in geothermal is in Indonesia, where it may soon face competition from General Electric Co. (NYSE: GE) and other turbine makers, mainly from Japan. Australia’s Origin Energy Ltd. (OTC: OGFGF) is already developing a plant in Sumatra in a joint venture with India’s Tata Corp. Small US firms have a difficult time convincing lenders of their creditworthiness and often can’t get financing at reasonable interest rates.

The SMU research is interesting and valuable. Whether it is actionable or not is the issue. Compared with solar PV and wind power developments, geothermal remains uncompetitive in the US except for deep-pocketed companies like Chevron and GE — and they are looking outside the US to build new projects.

Paul Ausick