Geothermal Elbowing Its Way Into the Mainstream

By Dave Forest of OilPrice.com Jun 15, 2010 11:00 am

Ormat Technologies announced it will accelerate work on geothermal leases in Alaska while US Geothermal secured $102 million loan to build power plant.

Editor’s Note: This article was written by Dave Forest for OilPrice.com, which offers free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics.

Geothermal energy looks to be approaching a rolling boil, as I've mentioned a few times before.

A few more positive indicators on the sector presented themselves over the past week.

First came news last week that the state of Alaska will reduce royalty rates for geothermal projects on state lands. Previously, state geothermal royalties had been set at a towering 10% to 15% of gross revenues. Under the new legislation, this will fall to 1.75% during the first 10 years of income-generating production. After 10 years, the rate increases modestly to 3.5%.

This is a major boost for Alaskan geothermal. A 10% royalty is hefty, even for more established industries like oil and gas. It would push most geothermal projects to the brink of viability.

More importantly, the rate change is a sign that things are happening in the sector. The Alaskan government didn't decide on the shift out of the blue. They're seeing increased geothermal activity, which necessitated the policy re-think.

Case in point being geothermal major Ormat Technologies (ORA), which announced last week that it will accelerate work on its Mount Spurr geothermal leases in Alaska. The project will likely see drilling of the first test wells this year.

We also got another signal last week that geothermal is elbowing its way into the mainstream. The US Department of Energy announced it will provide developer US Geothermal (HTM) with a $102 million loan to help construct a 22 MW power plant at the company's Neal Hot Springs project in Oregon.

This is a groundbreaking move from the DOE. And a potential game-changer for the industry.

One of the big challenges for junior geothermal players is the leap from exploration to production. Building a power plant is a big expense, requiring significant debt financing. However, most small geothermal players have few assets to finance against, other than some holes in the ground and a bunch of temperature data.

As such, these companies have historically been mauled on rates for their project debt. They've often been forced to go to non-traditional funding sources, which charge interest rates ranging up to 15%. A serious cost of capital.

DOE loans like the one to US Geothermal will carry ultra-low interest rates, giving qualifying project developers a big leg up in making the jump to production.

Revolutions never happen overnight. They build over years, with the signals going from subtle to strong. Judging from the geothermal news lately, we're getting toward the latter.