Friday, November 26, 2010

Steamin' It Up

The discussion of geothermal power continues with a look at operating technologies. There are three plant types used to extract energy from hydrothermal fluids - as the geothermal guys and gals like to call it. The key is whether it is actually steam or simply very hot water. A review of the technologies provide some hints for investors on the future of the geothermal energy sector.

Dry steam-type power plants were the first used in the geothermal sector at sites near gaps in the tectonic plates where the wells tapped into steam from reservoirs below the surface. Calpine, Inc. (CPN: NYSE) uses dry steam technologies at The Geysers in California, which is among the most developed geothermal power sources in the world. Chevron’s (CVX: NYSE) partnership with Texaco, Amoseas Indonesia, taking advantage of an old volcano near Bandung, West Java with dry steam power plants.

Dry steam-type plants are relatively friendly to the environment, emitting only excess steam and minor amounts of gases such as carbon dioxide, hydrogen sulfide, methane and ammonia. According to the International Geothermal Association, existing geothermal plants emit an average of 269 pounds of carbon dioxide per megawatt-hour of electricity produced. To put that in perspective, the U.S. Department of Energy estimates geothermal power plants emit 97% less acid raid-causing sulfur compounds than fossil fuel plants. Another plus among cost and emissions factors is that, since the steam is piped directly to the turbine, no other production fuel source is needed to jump start electricity production.

As the years have gone by flash steam-type plants have become more prolific. These plants can work with water at temperatures above 360 degrees Fahrenheit (182 degrees on the Celsius scale). Operators boost the energy generated by the hot water by using pressure differentials to cause the hot water to rapidly vaporize or “flash.” The vapor is what drives the turbine and that in turn the generator. If the water is not “flashed” on the first round it can be recycled for a second “flash” attempt.

Iceland’s very first geothermal plant, the Bjarnarflag Geothermal Plant, is a flash steam-type plant. Still “steamin’ it up,” Bjarnarflag is owned by Iceland’s national electric utility, Landsvirkjun. Caithness Energy, LLC (private) based in New York is operating a flash steam-type plant at its Navy I geothermal power plant in the Coso field in the Mojave Desert of California. (Investors attempting to track down the Coso field sites may note that Caithness acquired the Coso plants from CalEnergy in 1999 and subsequently spun them out to a special-purpose entity called Coso Geothermal Power Holdings, also private.)

The third type of geothermal power plant features “binary cycle” technologies. These plants can be used in locations where the hydrothermal fluids are at more moderate temperatures - less than 400 degrees Fahrenheit! Fluids are routed along two paths, one at lower temperatures than the other. Heat from the hotter hydrothermal fluid is used to vaporize or “flash” the second cooler fluid. The vapor flash then drives the turbines. A big plus for the binary cycle-type plants is that no air emissions or liquids are discharged.

U.S. Geothermal, Inc. (HTM: NYSE AMEX, GTH: TSX) is using isobutene as the binary fluid in a 7 MW demonstration plant at its Raft River project in southern Idaho. There are already at least a dozen binary cycle type geothermal power plants in the U.S., but USG expects its Raft River project to be the first commercial scale power plant. USG claims the geothermal reservoir on which Raft River sits is capable of producing up to 110 MW of power.

Expect to hear more about binary cycle power plants in the geothermal discussion. A review of geothermal sources in the U.S. alone suggests that geothermal power need not be confined to the Rocky Mountain region. Significant geothermal resources are available throughout the U.S. at temperatures below 200 degrees Fahrenheit. The binary cycle technology along with advances in drilling techniques and equipment may make it possible for developers to branch out from the usual geographies in mountain regions.

Since US Geothermal has yet to produce profit, the merit of a stake in HTM shares is largely a play on management’s ability to execute. Two years ago USG bought the San Emidio binary cycle plant in Nevada. While the plant has a modest 3.6 MW net capacity, the operating experience may put U.S. NV Energy (NVE: NYSE) is locked into a power purchase agreement through 2017. This operating experience along with adding the Raft River notch to its belt could put USG into a good position to lead development of geothermal power at those relatively lower temperature sites.

U.S. Geothermal filed a shelf registration statement with the SEC earlier this week to sell up to $50 million in equity securities. If executed, the capital raise would be used for working capital, capital expenditures and/or acquisitions. A pay down of debt is also possible, although that will be require only about $6.7 million, the total debt at the end of September 2010. Even though San Emidio generates approximately $2.6 million in revenue per year, USG still operates at a loss and is burning an estimated $3.4 million per year in cash. Cash at the end of September 2010 was $10.8 million, suggesting that the company has sufficient resources to support operations for three years, all else being equal, but not enough to make opportunistic acquisitions or invest in a significant new project.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. CPN and USG are included in the Geothermal Group of Crystal Equity Research’s Earth, Wind and Fire Index. While Chevron is a major player in the geothermal industry, its valuation is only tangentially impacted by its geothermal interests. Thus we do not include CVX in this group.

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