The Power Of Geothermal Energy

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By Greg Peel

One minute the price of oil is going to US$200/bbl according to the pundits, the next it is going to US$50/bbl. One minute the Chinese economy is a perpetual motion machine, the next it is as vulnerable as any other. One minute it is imperative that Big Industry pay the cost of reducing carbon emissions, the next it is imperative to provide assistance for Big Industry’s mere survival. One minute the alternative energy sector is the investment of the future, the next it is left stranded at the altar. The fight to prevent climate change? It will have to wait. Keeping jobs at General Motors is more important.

Such is a short, sharp synopsis of about six months in the history of the world.

One by one the effects of the global credit crisis have rolled through each asset class, finally hitting commodities as speculative money rushed back into cash. The world is now teetering on the brink of economic recession and forecast demand for commodities has been slashed. The swiftness of the turnaround has been dramatic. Caught in the deluge have been alternative energy companies – themselves previously in somewhat of a speculative bubble. Alternative energy is more expensive than traditional carbon-based energy. The only way alternative energy sources can be developed and improved is through mandated assistance in the form of penalties imposed on greenhouse gas producing Big Industry. This is the basis of a global “cap and trade” carbon market which is the preferred vehicle for indirectly enforced emission reduction.

When climate change was still arguably the world’s most pressing problem, augmented by the rapidly rising cost of oil and coal, Big Industry was set for a battle for government concessions on the inevitable move towards carbon trading in developed markets. Behind the scenes, Big Industry has long been in preparation for such an event. At least, the smart companies therein have. General Motors is not included in that group. But now the global economic crisis is the perfect smokescreen inside which to argue the folly of pressing ahead with costly emission reduction targets when mere commercial survival is imperative. Think of the profits. Think of the jobs.

When Kevin Rudd took over power in Australia the first thing he did was ratify the Kyoto Protocol. John Howard never would. The next step in the Labor government’s environmental mission was to suggest a starting template for a national carbon trading scheme and put it up for comment, negotiation and tweaking. When the self-interested lobbying began from all sides, no one was surprised. Big Industry wailed in the night, crying poor over lost profits and Australia’s inevitable loss of industry – and jobs – to less carbon-stringent markets. You could have bought the script at a second hand bookstore.

Until November the US administration was never going to ratify the Kyoto Protocol either. George Bush was an oil man, and the best the US could come up with were ill-thought out assistance schemes for alternative energy such as the ethanol debacle, and a plan to drill for more oil farther afield so as not to be so reliant on enemies as a source. But both candidates for the new presidency included policies to address climate change in their campaigns, and the most convincing won. Obama and the Democrats will likely attack the problem in a similar vein to the Rudd government. However both administrations have to make a difficult choice between future needs and immediate needs.

Is it really the right time to be imposing a further cost on Big Industry?

The short answer is: Of course – if climate change predictions are correct. And one does not need to drive home the economically destructive capacity of US$200 oil, even if it may now take a long time to reach such a price. The Europeans are already moving towards Phase III of their emission reduction and carbon trading scheme. The Chinese have woken up to the ramifications of environmental destruction for the sake of rapid economic growth. The two biggest barriers to a global carbon trading scheme – Australia and the US – are now on side. We won’t get a global carbon trading scheme tomorrow, and the wheels will now turn even slower as industry assistance packages move in alongside industry penalties, but if one needs to reassess the direction of the alternative energy market in light of the global economic crisis one need only look to the recent activities of Big Industry itself: Why are the oil and gas companies of the world still paying stiff premiums to access Australia’s coal seam methane reserves?

The world’s big oil and gas companies have lived through several economic cycles over decades of existence. Had they implemented knee-jerk responses to every turn in the cycle, every price movement, every period of economic growth and period of economic contraction as if there were no end in sight, they would not be today’s big oil and gas companies. British gas giant BG set the Australian gas market on fire earlier this year in bidding for Origin Energy. Months later the gas sector has been extensively re-rated as an investment, the value of liquid natural gas reserves has been identified, and the previously ignored value of coal seam methane as a source of natural gas has been established. The big companies are not investing for 2009 and a time of economic recession and low energy demand. They are investing for a future where oil is scarce, coal is expensive, and global carbon trading ensures that cleaner forms of energy are an essential part of everyday life.

The biggest global polluter is the power industry – the producers of electricity. The cheapest from of electricity available is that produced from burning coal. Unlike oil, coal is unquestionably abundant. The only barrier to massive coal production is the infrastructure required to mine it and transport it across the globe. But coal-burning power stations are on the hit-list as the first to go in a global emission reduction plan. The days of the indiscriminate construction of ever more coal-burning power stations are gone. However the world’s demand for power will only increase exponentially as the most populous nations on earth urbanise and industrialise. Economic cycles only serve to ensure that process is not smoothly linear. Despite current economic weakness, the world must still move towards cleaner forms of energy and renewable forms of energy.

When one thinks of “cleaner” energy, one thinks of natural gas over heavy oil, nuclear energy, and “clean coal”. The natural gas industry is already ramping up. While the price of uranium today might suggest the nuclear push of two years ago is now dead in the water, that is just a smokescreen created by the bursting of a speculative bubble in uranium trading. Those countries accepting of nuclear power are still pushing slowly ahead. As for “clean coal”, to date the concept is still up there with cold fusion. There has been much talk, much government research money invested, but so far no one has been able to turn lead into gold.

One sideline to “clean coal” is coal-to-liquid conversion, and in Australia the flagship of this process – Linc Energy – has seen its share price rocket up from nothing over the last two years. Linc is successfully converting coal to gas underground – thus containing emissions – and then converting that gas to a form of diesel much cleaner than its crude oil-based counterpart. The company has successfully built a prototype plant and the world is watching.

When one thinks of “renewable energy”, one immediately thinks solar and wind. These two industries have been the forerunners in a speculative bubble that formed in the alternative energy sector right up until the oil price tipped over and the coal price peaked. While each offer power delivered purely by nature in an unending source, neither can produce necessary “baseload” power – the sort of reliable power source required to continuously power a city. Enough solar panels and wind farms together could produce baseload power, but the cost is prohibitive. It is one thing to decree that no more coal-fired plants can be built. It is another to expect consumers and industry to pay a large premium for clean power.

To solar and wind, one can also add hydro, biofuels, tidal and a myriad of other prospective renewable energy sources. The barrier to the development and efficiency improvement of all sources is simple cost. Such sources cannot compete with coal in a world where emissions are disregarded. The only way they can compete with coal in today’s world is with mandated indirect government assistance through schemes such as carbon “cap and trade”. The world needs to ease itself away from the profligate consumption of fossil fuels, and while the economic crisis will likely slow the process despite ever more urgent protest from the scientific community, the process itself will continue. The governments of the world know this has to be done. And Big Industry is already moving in that direction, working towards a future beyond simple economic cycles.

Thus despite stock market fluctuations, alternative and renewable energy industries are not dead. However, more than ever potential alternatives must offer the sort of commercial efficiencies required in the drawn-out process of supplementing existing baseload power. Most renewable energy sources come with drawbacks – the sun doesn’t always shine, the wind doesn’t always blow, it doesn’t always rain and as for biofuels – we have now experienced the folly of taking food from the mouths of babes.

There is one renewable source which is nevertheless more reliable than others. It is geothermal energy. While the sun may not always shine it will always rise again tomorrow. Just as reliable is the fact that deep beneath the earth’s surface lies the greatest perpetual (at least for a few billion years yet) energy source of all – the planet’s own furnace. And as the citizens of Pompeii once found out to their detriment, in parts of the world the earth’s furnace reaches very close to the surface.

The principal of geothermal energy is simple. Water pumped below the earth’s surface and back again will return hot – very hot. And heat is energy, and that energy can be converted into electricity. And that energy does not deplete.

The most obvious places on earth at which to tap geothermal energy are near existing volcanoes, which themselves exist at the meeting of continental plates. Here the superheated molten magma of the earth’s furnace is reachable rather close to the surface. Water passed into or near magma and out again is heated to very high temperatures and thus allows for power generation. The bulk of the world’s existing geothermal energy industry is located at such sites, in places such as Iceland, California, Chile, Japan, the Philippines and New Zealand. While this is a boon for those living on the fault lines, it’s not a lot of help to those living more safely inside the continental plates. Were volcanoes to provide the world’s only source of geothermal energy, then it would be a very small industry indeed.

However, one need not tap directly into magma to achieve superheating. The deeper one drills into the earth’s crust, the hotter the rock layers become, trapping heat from the magma further below. Thus it is possible to source geothermal energy from “hot rocks”. Granite is a great heat sink, and hot granite close to the surface is fractured allowing for a water reservoir and flow system to be created within the rock and geothermal energy thus sourced. This is known as “hot fractured rock” energy and the granite will often also exhibit an element of (safe) radioactive decay which adds to the energy source.

The easiest rock to drill into nevertheless is your simple sedimentary rock – rock that is formed by the erosion of older rocks into a form of compressed sand. It is within the porous confines of sedimentary rock that decaying vegetation was once trapped and heavily compressed, thus forming today’s fossil fuels.

Sedimentary rock thus provides two major advantages for geothermal energy production over volcanic rock (not counting the danger factor inherent in volcanoes) and granite. Firstly, ever since electricity and the combustion engine were invented prospectors have scoured the world’s sedimentary deposits for reserves of fossil fuels. There are not many rocks left that haven’t been drilled, assessed, mapped and – if fortunate – exploited. For those looking for a prospective site for a sedimentary geothermal energy plant, all the time-consuming and costly grunt-work has already been done.

Secondly, as sedimentary rock is porous it also traps water. Hence in order to harness the energy from hot sedimentary rock one does not need to bring in one’s own water for the circuit – it’s already there. Simply bring the hot water to the surface, extract the heat, and send the cool water back down to start again. Such a system is as close to a perpetual motion machine as one can invent. And there are no inputs.

The downside of geothermal energy is, however, that the farther below the earth’s surface the hot rocks are, the more heat will be lost on the trip to the surface. Thus in order to compete with the heat generated by coal burnt at the surface, the hot rock must be close. Sedimentary rock does not retain heat as well as other rocks, and so this element becomes more critical. Another problem – one which rather spoils the perpetual motion machine concept – is that water brought from below the surface is highly corrosive. Those pipes will not last forever.

The trick in sedimentary geothermal, therefore, is to find a sedimentary basin in which the magma below is close enough to ensure the least drill depths and the greatest heat retention. We already know where those are because years of fossil fuel exploration has already identified them. The most suitable are the Salton Sea in California, the Paris Basin in France, the Molasse Basin in Germany, and the Otway and Great Artesian Basins in Australia. The latter is one of the largest sedimentary basins on earth, and home to Australia’s one and only operating geothermal plant at Birdsville. The Californian and French basins currently provide local power, but the global centre of geothermal development is in Germany.

The reason the Molasse basin is the world’s geothermal “hotspot” is because of the German government’s enthusiastic support of renewable energy. Germany is Europe’s industrial engine, yet the country is largely devoid of its own fossil fuel sources. One may recall that one reason Hitler lost the War is because he ran out of petrol, and had to stretch his resources far and wide in an attempt to secure a source. It also means the Germans have spent plenty of time looking for oil, and thus know the Molasse Basin back to front. It may not hold commercial oil reserves, but it is an ideal source of geothermal energy. And the German government is right behind it.

The Australian government is similarly enthusiastic about renewable energy, and it so happens the Otway Basin in Victoria is a strikingly similar sedimentary system to Molasse. Otway has also been extensively drilled to date being, as it is, a globally significant source of natural gas.

Yet despite all the excitement, one unavoidable fact remains. While geothermal energy sounds like a simple source of abundant energy, it is still costlier to generate electricity using the earth’s own power source than it is to dig up coal and burn it. Without government incentive, the geothermal industry would never get off the ground – or under it.

Which brings us back to the idea of carbon trading. The principle of carbon trading is to put a cost on greenhouse gas emission by limiting the amount of greenhouse gases – or carbon equivalent – an industry can generate, via government mandate. Faced with such limits, a carbon emitting industry can either (a) reduce production full stop; (b) reduce emissions through production efficiencies; or (c) offset emissions by the generation or acquisition of “carbon credits”. Carbon credits are created by investing in either emission reduction, zero emission or negative emission. Natural gas (cleaner than oil or coal) would fall into the first category, renewable energy such as solar, wind or geothermal into the second, and “carbon sinks” such as purpose-planted forests into the third.

Under the system, an aluminium smelter (the greatest industrial consumer of electricity), for example, could buy carbon credits from the market to achieve emission reduction on a net basis, rather than actually reducing emissions itself. The value of the carbon credit will be determined by just how stringent government emission reduction targets are, and the money generated from carbon credits will ensure that the costs of alternative energy sources are brought into line with existing sources. Carbon credits make alternative energy commercially viable.

But the carbon credit system is not the only government-mandated emission reduction model. Another is the “feed-in tariff”. A carbon credit system will only work if the resultant credits are sufficiently valued by the market. Get the system wrong and their value collapses. Such price collapses have been experienced in Europe and more recently in New South Wales. It is not easy to turn a hundred years of industry around on a dime with the perfect model. A tariff is a more straightforward charge placed on industry.

The way a feed-in tariff works is that the government dictates that an energy consumer must buy a proportion of its required energy from an alternative (clean) source and pay a premium for it. Alternative energy already costs more, so the ongoing development of alternative energy sources requires that such tariffs are set at a premium to that already higher cost. While this is an indirect way of ensuring the big polluters are the ones who pay for alternative energy development and greenhouse emission reduction, it is a more direct model than carbon credits, which are susceptible to the vagaries of the marketplace.

The German government is a staunch supporter and enforcer of feed-in tariffs via its Renewable Energies Law (EEG). This law ensures that energy from renewable sources is set at a price equivalent to seven times the current cost of wholesale electricity in Australia and local wholesale consumers must buy a proportion of it. The law has already inspired significant investment in solar and wind power in Germany, and geothermal is now catching up. Feed-in tariffs do not replace carbon credits, they merely compliment them. Mandatory renewable energy targets are part of the broad intention of emission reduction of which carbon trading schemes are also a part.

And such is the case in Australia, which has plans for both an Emission Trading Scheme and a Mandatory Renewable Energy Target on the table. The ETS is slated to commence in 2010 and the MRET has been so far set at 20% by 2020 for industry. The MRET will operate on feed-in tariffs, with the first already under wobbly operation at a household level in the form of premiums paid for household excess solar energy fed back into the grid.

Australia has great potential as a geothermal energy generator. While geothermal energy will not need to rely on a specific level of carbon credit pricing to be commercial, it will rely on the receipt of feed-in tariffs. While the Australian government is no doubt in for a staunch battle before its final carbon reduction laws are set, its intent is still clear. The government is determined to push forward despite the global economic crisis.

An opportunity thus exists for investors to participate in the growth of the Australian geothermal energy industry. Dr Mark Elliot believes geothermal could be “the next coal seam methane”.

There are currently eleven listed stocks in the “geothermal space”, outside those larger energy companies with complimentary geothermal interests. One such company is Hot Rock Ltd ((HRL)), of which Dr Mark Elliot is the managing director. FNArena met with Dr Elliot recently, fresh from an institutional road show.

Hot Rock is not the largest company in the geothermal space, that tag goes to Geodynamics ((GDY)) and then Petratherm ((PTR)) which are both involved in geothermal energy derived from “hot fractured rocks”. Dr Elliot espouses the virtues of sedimentary geothermal which has the capacity to reliably achieve higher flow rates than HFR. Clearly both forms have their advantages and disadvantages, and FNArena is not here to pursue that argument, merely inform.

Only two of the eleven listed companies are involved in sedimentary geothermal, the other being Panax ((PAX)), formerly Uranoz, which up until December 2007 was a uranium explorer but turned to geothermal. Hot Rock was listed in November 2007.

Hot Rock owns 18,250sqkm of the Otway Basin – the largest single sedimentary geothermal resource in the country. The company has acquired an extensive database of previous geological investigation of the area, meaning it can fast-track to production. Surrounding the Hot Rock plot is all the other industry and infrastructure of the Otway, which is a very busy and energy-consuming mining area indeed. One important point to note is that Hot Rock has the capacity to generate much sought after “baseload” power in the Otway.

Hot Rock also owns options to acquire 100% of Bernried Erdwarme AG and having completed due diligence will do so in December 2008. Bernried is a German geothermal specialist with access to 136sqkm of the Molasse basin – one of the larger claims – which lies in the midst of ten other active geothermal developments. In acquiring Bernried, Hot Rock also acquires extensive German experience in geothermal energy. German engineering giant Siemens is also global leader in geothermal power plant technology.

And those power plants are nothing if not innocuous. The process of extracting geothermal energy is merely one of heat transfer, such that the whole water flow system occurs in a closed circuit loop. The heated water is pumped up from below the surface, its heat extracted for electricity production, and then the cool water returns from whence it came to be heated once more. There is no discharge. From the surface a geothermal power plant just looks like any old building. It’s a bit of a change from the carbon-spewing coal-fired plants of the Hunter or Latrobe valleys.

In August, the Australian government launched the Geothermal Drilling Program. This is part of Renewable Energy Fund. The GDP will provide dollar for dollar matching funding (up to a maximum of $7 million) for proof of concept geothermal projects in Australia. Hot Rock is projecting an annual revenue of over $200m by 2012. Its projects feature long lives, low operating costs and zero carbon emissions.

 The revenue projections are based on the current tariff system. Power acquired by electricity wholesalers from traditional sources is charged out at between $40 and $60 per megawatt. Thanks to the government’s Renewable Energy Certificates, power from sources such as solar, wind and geothermal are charged out at a $50-65/MW premuim to the base price. The MRET then ensures that wholesalers must acquire a proportion of their power from such sources, of which Hot Rock is one. The company thus assumes a sale price of $110/MW in its numbers. Any value placed on carbon credits in the future will be a bonus for Hot Rock, but will not affect commerical viability if too low.

There is always a risk that the current tariff system will be tampered with by this or any other government in the years ahead, however one presumes abolition is not a serious option. The current Opposition campaigned on a far more green-friendly ticket than the previous government.

Hot Rock already has joint venture interest for its projects in Germany and suggests the large scale of the company’s projects in Australia will attract interest from investors.

Hot Rock is capitalised at around $6m and currently trades at around 10c.

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