How to Profit From the Geothermal Energy Push

Geothermal energy isn't a new concept in the United States.

It's actually been around for some time, with numerous geothermal power plants in California, Nevada and a few other western states. There are new plants on the drawing board, too. Unfortunately, the recession has stifled the construction progress on many of them.

But all that's about to change. Thanks to a few key technological developments - and a big cash infusion from the government - the stars are aligning to produce the perfect storm for this super-green energy source.

The Benefits of Geothermal Energy

If you're unfamiliar with how geothermal energy is produced, here's a quick-and-simple overview of how the process works:

  • A well is drilled over an underground hydrothermal (hot water or steam) heat source (in the United States, most are located in a few western states).
  • The hot steam or water is piped up from below.
  • That steam spins a turbine, which is connected to an electrical generator.
  • And that generates useable electricity.

Naturally, the benefits of this energy source are very clear. Geothermal power is:

  • Environmentally Friendly : You can't get much greener than geothermal. There's no pollution, no greenhouse emissions and the cooled water is re-injected back to where it came from via a second well.
  • Cheap : Geothermal power plants are cheap, unassuming and relatively simple to maintain. In industry-speak, they're "baseload" sources - in other words, they operate 24 hours a day, 365 days a year.

But there's a key requirement - and it's a big one.

Getting Steamy Isn't Easy

The problem with geothermal power in many cases is that conventional plants have to be constructed over known hydrothermal sources. And those only exist in a few concentrated areas.

However, as with many things these days, new technology is making it possible to overcome obstacles. In this case, even when there isn't any hot water or steam readily available, you can still get some.

Nearly two decades ago, scientists at the Los Alamos National Laboratory in New Mexico determined that the rise in temperature as you descend into the Earth is roughly 125˚F per mile. Drill down two miles or so and you'd have rocks hot enough to produce steam. This is the result of heat from the Earth's molten core radiating up toward the surface.

Accomplishing all this isn't all that simple. Once you inject water into the well, the rock next to the borehole cools. When it cools enough, you don't get any more steam. This seemed like an insurmountable problem - until recently, that is.

A Page From the Natural Gas Playbook

Ten years ago, Marcellus, Barnett and Haynesville were merely considered to be interesting rock formations that contained natural gas in very small pockets.

But that changed when the natural-gas industry successfully commercialized the technique of horizontal drilling and hydraulic fracturing.

This simple process involves drilling a hole down to the shale rock, which contains the natural gas. The drill bit then continues through the rock for as much as several miles. The bit is then withdrawn when the hole is pressurized enough, and the rock is hydraulically fractured. This process releases the gas, which then flows to the surface.

This is what has created boom times for the natural gas industry.

Today, geothermal scientists are experimenting with a modified version of the natural gas technique for geothermal energy - known as an Enhanced Geothermal System (EGS).

Simply put, this technique involves pumping cold water down one well, which the underground rock then heats as the water flows through. The water then returns to the surface via a second well. The rest of the process is the same as conventional geothermal.

So how much power could be generated using this technique?

According to a 2006 report from the Massachusetts Institute of Technology (MIT) and funded by the U.S. Department of Energy, the amount of EGS resources in the United States could provide 140,000 times the total annual energy use in the country.

Using technology available today, MIT scientists further estimated that the total recoverable power from EGS resources could be as much as 12,200 Gigawatts. That's 15 times higher than the largest peak summertime electrical load in the United States.

We're not close to that, yet. But the report further estimated that with a research-and-development investment of $1 billion over 15 years (roughly cost of one coal-fired power plant), 100 Gigawatts of capacity could be in place in the United States by 2050.

So what's the federal government waiting for? This would appear to be a no-brainer in terms of boosting America's natural energy resources and relieving some of our dependence on foreign sources.

Why the Feds are Hot on Geothermal

The geothermal message seems to be getting through to the purse-string pullers. On Feb. 1, the Department of Energy unveiled a $28.4 billion budget request for the 2011 fiscal year (which starts in October). Part of the package includes $2.36 billion for the Office of Energy Efficiency and Renewable Energy - a 5% increase over last year. Even better, the geothermal program will get a 25% increase. There's also money set aside to support an estimated $3 billion to $5 billion in loan guarantees for projects like EGS.

That brings us to the key question: Where's the profit opportunity?

There are plenty of companies in the geothermal space, but one stands out: Ormat Technologies Inc. (NYSE: ORA). With 45 years of experience, it's the leader in the geothermal and recovered-energy power sector.

Ormat Technologies designs and builds geothermal power projects in the United States and around the world. And you can bet that as EGS advances from the R&D phase into widespread commercialization, Ormat will be in the driver's seat.

If you want to get in ahead of the crowd on this burgeoning area, consider adding a few Ormat shares to your energy portfolio.

[Editor's Note: So what sectors are most deserving of your hard-earned investment dollars in 2010 and beyond? As article author David Fessler flatly states: "You cannot have sustained economic growth without cheap, reliable, homegrown sources of energy." That's why he believes the opportunities in the energy and infrastructure areas represent one of the most lucrative investments you can make.

Fessler's got a whole column devoted to energy and infrastructure in The Oxford Club Communique, so to keep up-to-date on these areas - plus all the others that the team covers, along with their stock recommendations. To find out more, just visit this link.]

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