Finally, Geothermal Breaks Through

The geothermal industry may finally be ready for growth, breaking out of its old habits and the limitations placed on it by the U.S. government, according to speakers at yesterday’s International Geothermal Finance Forum in New York.

“I’m very optimistic,” Karl Gawell, executive director of the Geothermal Energy Association, said in his closing remarks. “This is a really critical time. We’re on the cusp for this industry and if we look both the U.S and internationally, I think both are pretty positive.”

That’s good news for an industry that has long seemed stuck in neutral. The largest bottleneck to further growth has been finding top-quality geothermal resources, said Trent Phillip, managing partner of Ambata Capital Partners, which is an investor in Reykjavik Geothermal.

The good news is that many of the best sites for geothermal are still untapped. The bad news is that many of those sites sit in Central America, East Africa and Southeast Asia, in countries that American investors tend to avoid.  This was supported by industry data.

“Only six percent of the estimated global geothermal resource is currently online,” Mark Taylor, head of geothermal and CCS research for Bloomberg New Energy Finance, said in a press release from the Geothermal Energy Association. “By 2030, we expect 28 to 29 GW to come online. There are a lot of places in the world geothermal has not been tapped.”

The next biggest problem is bankability, which involves finding funding to develop a potential project through the phase of drilling expensive test wells.

“Looking at the risk of getting to the initial testing and the test drilling has held back geothermal development,” Phillip said.

That risk may be coming down thanks to new software that does a much better job of pinpointing the best paths for new wells before drilling starts. One new application has a 100-percent success rate so far of finding productive geothermal resources, said Halley Dickey, director geothermal business development at TAS Energy.

Additional improvements are coming to the world of tax credits. It’s hard to overstate the value of the decision by Congress this year to extend to geothermal the same tax credits that the wind energy has enjoyed since 1992, Gawell said. Under the previous credit scheme, geothermal projects only had one to three years to finalize construction, and only qualified for tax credits after they were producing electricity. This placed project developers and finders under enormous pressure to rush testing and build productive wells quickly.

Now, any geothermal project that’s under construction qualifies for the credit. Even as the industry awaits final rules on exactly what qualifies as construction, the net impact is likely to be important.

“This change this year is big,” Gawell said.

The change appears to have staying power at least through 2014, and possibly longer, since the main route to changing the credits appears to be an elusive grand bargain between President Obama and Congressional Republicans on corporate tax reform, said Keith Martin, partner of Chadbourne & Parke LLP. Tax equity still remains difficult to raise due to a number of well-publicized project failures, a limited number of big investors such as Chevron and JPMorgan, and two depreciation-only deals this year that required financing at 20 percent or above to complete.

All of that could change rapidly if renewable energy industries succeed in winning favorable tax structures such as Master Limited Partnerships and REITs.

“The idea is to take operating assets and put them under some sort of publicly traded vehicle,” Martin said.

All of which could put geothermal on a stable upward track that it has not enjoyed in decades.

“Our assumption is for the next two or three years in geothermal, projects will be benefiting form the tax credit because of what they did last year,” Gawell said.




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