Best Investments: Geothermal stocks overview

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Geothermal Stocks Overview | Alternative Energy Stocks

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Geothermal Stocks Overview Tom Konrad CFA

Geothermal power generation has several advantages over higher profilealternative energy such as wind and solar, but gets much lessattention.

Part of the lack of recognition for Geothermal power arises from aconfusion with the technology variously called Geoexchange, GroundSource Heat Pump, or Geothermal Heat Pumps. Geoexchange uses thenear constant temperature of the soil a few feet to a few hundred feetbelow the ground to heat and cool a building. According to theEnvironmental Protection Agency, Geoexchange is the most efficient wayto heat and cool a building, and is a very interesting energyefficiency technology (andinvestment opportunity) in its own right, but it has little incommon with Geothermal power.

In contrast, Geothermal power involves using much higher temperatureheat from hot springs or wells much deeper into the earth to generateelectric power. Unlike Geoexchange, current Geothermal powertechnology requires an existing geothermal resource where naturalgeologic forces have brought an unusual amount of hot liquids intopermeable formations relatively near the Earth's crust. There iscurrently a great deal ofresearch going into Enhanced Geothermal Systems (EGS) which usemodern drilling and fracking technology to recreate the naturalconditions that make Geothermal power generation possible, but EGStechnology needs more development to become commercially competitive.

In contrast, Geothermal Power with a good resource can produceelectricity for pennies per kWh. Electricity from one of theworld's best geothermal resources, The Geysers in Northern California,is sold for3 to 3.5 cents per kWh, although many the lower grade resourcesbeing exploited today need prices between six and twelve cents,depending on who you ask. These prices are comparable to naturalgas fired generation and wind, and are considerably less expensive thansolar photovoltaic. Unlike natural gas, the operating costs ofrunning geothermal plants are very low, and they produce minimalemissions of any kind. Unlike wind, geothermal power is availablein all weather conditions, and geothermal plants generally run morethan 95% of the time, which makes them more reliable even than coalpower plants, which typically only produce power 80-90% of thetime.

Geothermal Power also has a small footprint, requiring only 7.5km2 per TW*hr/year, less than Coal (9.7 km2 perTW*hr/year), Natural Gas (18.6 km2 per TW*hr/year) and allother Renewable Electricity generation technologies. This smallfootprint and lack of emissions mean that geothermal power plants caneven be located inside cities without disturbing the neighbors... ifthere is a geothermal resource available.

All these factors mean that a good Geothermal resource located neartransmission can be very valuable to a company that can tap it. Unlike wind and sun, such geothermal resources are as rare as they arevaluable, since they only occur in areas with tectonic or volcanicactivity. This rarity is one of the factors keeping geothermal arelatively undiscovered technology among investors interested inrenewable energy, but it also means that the rights to develop theseresources are valuable, in much the same way as a good mineral depositis valuable to a mining company.

Perhaps most importantly, Geothermal power enjoys support from bothRepublicanand Democrats, with the recently proposed GeothermalInvestmentAct of 2010 receiving bipartisan support. Perhapsone factor in this support is that relatively small size of theindustry means that government incentives can make a large differencefor the industry with only a tiny budgetary impact.

Hereisa previous article where I take a deeper look at the business ofgeothermal power.

Geothermal Stocks

Geothermal stocks fall neatly into two categories: Large cap companiesand junior exploration and development companies. The large-capcompanies are:

Ormat (NYSE: ORA):Ormatis the leading vertically integrated geothermal power giant, involvedin exploration, development, power production and maintenance both forthemselves and as a contractor almost everywhere geothermal resourcesare found in the world. Ormat is as close as you can get to aone-stop shop for exposure to the geothermal power sector.
Calpine (NYSE:CPN):Calpineis the largest independent power producer (IPP), owning 19 of 21generation stations in the world-class Geysers geothermal field near SantaRosa, CA. Despite producing one-fourth of the non-hydro renewablepower produced in California, Calpine should not be analyzed as arenewable energy IPP, since renewable generation accounts for less than3% of total generation capacity. The vast majority of Calpine'scapacity comes from natural gas fired units, so investors in Calpineare really getting a natural gas IPP with some expertise in geothermalpower production. In the context of this article, Calpineis most interesting as a possible acquirer of the smallgeothermalexploration and production companies, as it acquireditsinterest The Geysers in 1999 and 2000.United Technologies (NYSE:UTX):LikeCalpine, UnitedTechnologies is a diversified industrial giant included herebecause of the modular PureCycle geothermal and heat recovery enginefrom its Pratt&Whitneyunit. While not a significant contributor to the results of agiant corporation like United Technologies, PureCycle might open uplow temperature geothermal resources that cannot produce enough powerto justify the cost of a custom Ormat Power Converter, but may beproductive enough for an off-the-shelf generator such as PureCycle.Junior Geothermal Exploration andDevelopment Companies

None of these companies are currently profitable, but all owngeothermal resources in various stages of development, includingproducing plants. With substantially all the cost of geothermaldevelopment coming up-front, investors in these companies need toconsider the availability of funding for development as well as theriskiness and time line for developing each company's geothermalassets. There has been a recent trend of consolidation in theindustry which is likely to continue in the current difficult financingenvironment, despite growing governmentsupportfor geothermal.

These small micro cap companies include:
MagmaEnergyCorp. (Toronto: MXY.TO/Pink Sheets: MGMXF). Magma Energyhas three operating geothermal plants in Nevada and Iceland, and isalso developing several prospects.
NevadaGeothermalPower (Toronto Venture:NGP.V/OTC BB: NGLPF.OB). Nevada Geothermalis developing five projects totaling over 200MW in the Western UnitedStates, and brought on-line its 49.5MW Faulkner-1 plant in late 2009.
RamPowerCorp. (Toronto:RPG.TO/ RAMPF.PK). Ram Power was formed by buying upseveral smaller geothermal developers (PolarisGeothermal, WesternGeoPower Corp, GTO Resources, and the recently acquired SierraGeothermal Power.) Ram currently owns an operating 10MW plant andhundreds of MW of development prospects.
RaserTechnologies(NYSE:RZ). RaserTechnologies owns one of the largest portfolios of low-temperaturegeothermal development projects which it intends to develop using thePureCycle energy converters mentioned above. However, powerproduction at Raser's first 10MW Hatch power plant initially fell shortof expectations, and Raser needs significant additional funding toexecute on its business plan.USGeothermal (AMEX:HTM). US Geothermal currently has about 11 MW ofoperating capacity at two power plants, with plans to quickly developseveral times that in the next few years to take advantage of currentUS federal incentives.If you know of any other geothermal stocks missing from this list,please let me know in the comments. I plan to take a closer lookat each of the exploration and development companies in coming weeks,and I'll add your suggestions to the list.

DISCLOSURE: Long HTM, NGLPF.OB.

DISCLAIMER: The information andtrades provided here are for informational purposes only and are not asolicitation to buy or sell any of these securities. Investing involvessubstantial risk and you should evaluate your own risk levels beforeyou make any investment. Past results are not an indication of futureperformance. Please take the time to read the full disclaimer here.
Posted by Tom Konrad on October 11, 2010 11:19 PM | Geothermal Stocks Overview

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