A Geothermal Bankruptcy

I just caught up with last week's bankruptcy filing by Raser Technologies, Inc., a small developer of geothermal power plants. Burdened with excessive debt, Raser is filing for Chapter 11 protection to restructure its liabilities and continue operating under new ownership. In the process the current shareholders will see their much-diminished equity wiped out. This outcome is further evidence of just how challenging it is for small, poorly capitalized companies to exploit what is arguably the best, most reliable renewable energy technology in the world, other than hydropower.

Raser's bankruptcy hardly comes as a surprise. The company has been highly leveraged for a long time, and investors were losing patience with the firm. Last year its stock price fell below the minimum listing requirements of the New York Stock Exchange, and it moved to the over-the-counter market, effectively becoming a "penny stock." In the year prior to delisting, Raser had lost more than 80% of its market capitalization, or about $100 million. With only one operating asset generating cash--a 10 MW plant in Utah built with the help of a $33 million renewable energy grant from the US Treasury--and a number of projects under development consuming cash, Raser was losing the race to bootstrap its way into profitability.

Why is it so hard for start-ups to succeed in this space? It's not an accident that the world's largest geothermal operators are mainly big, well-capitalized firms like Chevron, Calpine, or the Green Power spinoff from Italian utility Enel. (Disclosure: I am a Chevron shareholder.) Geothermal developers face some fundamental challenges that require financial flexibility to manage. First is the capital cost of the assets, compared to other power generation technologies. The last figures I saw suggested that the cost of new geothermal capacity per installed megawatt was up to twice that of a wind farm and 4x that of a natural gas turbine. One reason the cost is so high is that it includes a lot more than the above-ground generating hardware.

Geothermal reservoirs must first be discovered, assessed, and drilled. That's why I've long thought that this technology is a natural for oil and gas companies, since it involves many of the same core skills. Geothermal exploration introduces not just additional cost, compared to wind power development, but also a daunting array of risks, including the possibility that the resource won't turn out to be as large as expected, or that its geology won't permit commercially attractive flow rates of steam and/or hot water. In the worst case, this results in the equivalent of a "dry hole", but even if it merely reduces the amount of power a given well can generate, that has a significant impact on project economics that depend on producing power predictably and reliably for decades. In effect, geothermal has all the up-front risks of oil and gas exploration without the quick payoff of a successful oil or gas well.

Geothermal power provides clean energy production for the power grid on a nearly 24/7 basis, something that neither wind nor solar power can match without energy storage capabilities that remain prohibitively expensive today, in most cases. However, it is both capital-intensive and risky to develop. The handful of publicly traded geothermal companies left after Raser's Chapter 11 filing, including firms such as Ormat Technologies and Magma Energy Corp., are doing yeoman work. However, it's hard to envision geothermal energy achieving its full potential without much greater participation from much larger, better-capitalized firms that could pursue such opportunities on a completely different scale.

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Energy from All Around Us

It's somewhat ironic that the long-awaited approval of the Cape Wind offshore wind project by the Department of Interior (DOI) should come in the same week that the nation's attention is focused on the problems of another, more traditional offshore energy project. Although the renewable electricity from the former scarcely substitutes for petroleum from the latter, Cape Wind is nevertheless emblematic of an intentional shift from energy sourced far away, in places like the deepwater Gulf of Mexico, to energy derived from sources all around us. If Secretary Salazar had turned it down, it would have cast serious doubts on the administration's entire clean energy agenda. However, concurrence with this one project doesn't answer all questions concerning the larger shift, of which it represents just a small component. Similar issues are bound to come up with increasing frequency as the transition to new energy continues.

Cape Wind and the Macondo prospect that the Deepwater Horizon rig was drilling into represent opposite poles of the energy spectrum, and not just because the latter is now leaking oil into the marine environment at a rate that the latest estimate puts at 5,000 barrels per day, much higher than initially thought. Cape Wind would tap into the clean and renewable, but extremely diffuse energy sources that surround us. After taking into account the restrictions imposed by DOI, its 130 turbines would on average generate as much electricity as a gas turbine power plant consuming a quantity of natural gas equivalent to 6,000 bbls/day of oil. In other words, it takes a very large array of offshore wind turbines to match the energy in the oil currently leaking from a single well. Platforms similar to what BP might have been planning to install after successfully completing the exploration of Macondo routinely produce up to 20 times that much oil.

The implications of this huge difference in energy density are clear. Without the energy concentration that nature has embedded in fossil fuels over many millennia, the hardware required to tap natural energy flows in real time becomes vast in extent. Generating 20% of US electricity needs from wind, which some see as just the beginning, will ultimately require more than 8 times as much wind capacity as the 35,000 MW installed as of the end of last year, even if US electricity demand remains static in the interim. Solar power, which last year generated just 0.02% of our electricity, would have to increase by a much larger factor. This is one of many reasons that increased reliance on nuclear power is such an important element of the transition to more sustainable energy sources, because nuclear--and to a lesser extent geothermal power--represents a critical source of highly-concentrated, low-emission energy. The more nuclear in the mix, replacing baseload coal, the less we must rely on distributed energy gathered in our immediate vicinity.

In any case, in order to obtain a much larger portion of our energy diet from sources like onshore and offshore wind and solar power, projects like Cape Wind must go from being rarities to ubiquitous features of our seascapes and landscapes. The opposition to Cape Wind that has delayed this project for years is focused on a central dilemma of that shift: Many of the same underlying trends that lead us to want to harness clean energy from wind, sunlight and geothermal heat have also increased our focus on the broadly-defined environmental impacts of doing so.

Our grandparents wouldn't have blinked at putting up tens of thousands of wind turbines, let alone the few hundred slated for Nantucket Sound. They'd have thought of them as signs of progress, just as they viewed oil derricks and power lines. It's incumbent on us to balance our more modern sensibilities related to the "viewscape" with fundamental environmental challenges of climate change and sustainability, as well as the need to sustain the energy supplies our civilization requires. Approving Cape Wind--whether it eventually gets built or not--is entirely consistent with those imperatives.

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2010 and Beyond

The start of my seventh year of blogging on energy and its related environmental concerns coincides with the start of a new decade, unless you're of the traditional school that believes the twenty-teens don't really begin until next January 1. Over the holidays I was struck by the number of retrospectives focused on the amply eventful, but profoundly disappointing decade that was ending. Having spent several years reassuring my readers that we weren't reliving the 1970s, in retrospect I'm not so sure. Yet as bad as the '70s were on so many levels, they gave birth to the '80s, which brought revitalization and tremendous technological developments, and culminated in the end of a Cold War that most of us had considered perpetual. There's cause for guarded optimism about the decade ahead, particularly for energy, which is still in the early stages of a massive transformation. The 'Teens will test the capacity of current energy systems to support a return to rapid economic growth and of new energy technologies to go from niche to mainstream.

I could fill the rest of this posting with grandiose predictions about the next ten years, but instead I want to focus on two stories that could provide early clues about energy in the crucial 2010-2020 period. The first almost escaped notice in the energy retrospectives I read last week. Many of them, including one in the Wall St. Journal, attributed the recovery of oil prices in 2009 mainly to the stabilization of the financial system, yet scarcely mentioned the essential role of OPEC's self-restraint. According to the figures in the latest public version of the International Energy Agency's Oil Market Report, between May 2008 and February 2009 OPEC reduced its output by more than 10%, taking well over 3 million barrels per day (MBD) off the market in response to a 3% drop in global oil demand. Despite the usual cheating on its official quotas, its members have avoided the competition for shares of a shrinking market that crashed oil prices from the $30s to $11/bbl in the mid-1980s and set up a decade of low oil prices.

In the process, OPEC's spare production capacity has expanded from less than 2 MBD to roughly 6 MBD. That's quite a buffer against a big price spike as the economy recovers, though it's also the reason oil isn't drastically cheaper than it is today. While we can't know precisely what would have happened if, for example, Saudi Arabia had tried to squeeze the output of its new, Texas-sized Khurais field into the market on top of its existing sales, it's a good bet that oil wouldn't be trading anywhere near its current $81/bbl. The reason this is relevant for the decade ahead is that OPEC could be forced to accommodate even bigger increases from the production agreements recently signed in Iraq, along with more reliable output from Nigeria, if that country's ceasefire with rebels in the Niger Delta leads to a lasting resolution of the problems there. With many of the world's best onshore oil prospects currently off-limits for anyone else to develop, OPEC's members and their continued cohesion hold one of the main keys to oil prices in this decade.

Meanwhile the growth of renewable energy faces a number of important tests as it expands beyond the scale at which it can be tucked safely out of sight and out of mind. We've already seen large solar projects in California's Mojave Desert--one of the most reliably sunny spots on the planet--canceled or relocated to accommodate concerns about wilderness preservation, and now I read that the long-suffering developers of the Cape Wind project off Cape Cod are at risk of having the project's location declared a Historic Site by the National Park Service. With all due respect to the local tribes that apparently consider Nantucket Sound to be sacred, it's worth recalling some of the other history of the region that ought to bear on such a finding. In its heyday Nantucket Island was the center of the global whaling industry, made possible by a fleet of tall-masted sailing ships that used wind power to harvest a key energy resource of the time, from the slaughter of whales for their oil. It's hard to think of a better way to recognize that history--and in a more environmentally-sound 21st century way--than by putting up offshore wind turbines to harness the wind for direct energy production.

And while the permitting for America's first offshore wind farm drags on interminably, the UK government is expected to announce the results of its Third Round of offshore wind bids this week. The new installations would add 25,000 MW of new capacity to a base of offshore UK wind farms in operation or under construction that is already about four times larger than that contemplated for Nantucket Sound.

Oil prices and the expansion of renewables are only two of many factors that will determine the shape of the world's energy economy in 2020, though they rank high on my list of things to watch as the decade begins. Tight oil supplies and high prices would do a lot to promote energy efficiency and new vehicle technologies, while lower, more stable prices might result in a return to the complacency we saw in the late 1980s and '90s. And although renewable power sources are hardly the only means for reducing greenhouse gas emissions and rendering our steadily-growing energy use more sustainable, much depends on the capability of wind, solar and geothermal power to continue their recent impressive expansion. That's true whether you are banking on cleantech and "green jobs" to turn around the US economy or merely interested in the size of the potential opportunity for our suddenly-ample natural gas supplies. I look forward to sharing my observations about these and other trends in the months and years ahead.

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