Geothermal energy heats up

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A Vulcan Power plant in Nevada

Renewable energy investment in Oregon, once centered mostly around solar and wind, is showing signs of moving deep underground.

Private equity and federal stimulus money are fueling a growing number of projects in Western states, particularly as new technology lessens investor’s risk of exploratory drilling striking out instead of striking steam.

Oregon ended 2009 ranked third in total U.S. geothermal capacity under development, with 13 projects at various stages of development that together could yield 370 megawatts, according to a January report by the Geothermal Energy Association, a Washington, D.C., trade group. That’s roughly enough to power 370,000 homes.

An example of private equity investment is the January announcement by Vulcan Power Co., a Bend-based firm developing geothermal energy projects in Nevada, that it received a $108 million investment from Denham Capital, a Boston-based private equity firm. The deal brings Vulcan’s total outside investment to more than $200 million in the past three years, including a previous $58 million from Denham and $35 million from Bank of America Merrill Lynch.

On the stimulus side, the U.S. Department of Energy last year supplied more than $40 million in stimulus money to nearly $120 million worth of Oregon geothermal projects marking a year of unprecedented growth in the state’s fast-rising geothermal space.

John Lund, director of the Geo-Heat Center at the Oregon Institute of Technology in Klamath Falls, said last year’s federal American Recovery and Reinvestment Act carved out close to $400 million for geothermal energy technologies around the country.

“There’s money out there,” Lund said.

Geothermal energy is produced when extreme underground temperatures heat water to produce steam, much like a conventional boiler.

It becomes renewable when production facilities, which run the steam through a turbine, reinject the water back into the ground so it can reheat.

Investors and developers alike say geothermal is appealing because it can serve as a renewable source of reliable, uninterrupted power. That compares to intermittent renewable sources such as solar and wind energy.

Geothermal is particularly appealing to equity investors with a history in the more traditional energy markets.

OIT will next week celebrate the opening of a combined heat and power plant on its campus — a first of its kind in Oregon.

Scott Mackin, a partner at Denham Capital, said the private equity firm has significant experience in oil and gas development. Geothermal — with its reliance upon drilling and evaluating underground resources — bears similarities.

Technological advancements have made it easier for developers to find the underground resources, reducing the risk of investment.

“The availability of private equity to invest in geothermal has picked up because folks have become more comfortable to that drilling risk,” said Bob Warburton, the acting CEO of Vulcan.

“You see a lot of the same players willing to risk on oil and gas taking the risk on geothermal.”

Vulcan was founded in Bend in 1991 and spent the majority of its early years accumulating land leases. Today it holds leases on 170,000 acres in Nevada, Oregon and California.

But for now the company’s focus is on Nevada, where it is working to develop five 60-megawatt projects that could cost around $200 million each to complete, Warburton said.

Vulcan has conducted drilling on two sites so far, finding usable underground water resources in both. The Denham investment will be used to continue drilling, while also serving as equity for Vulcan as it approaches banks in the next year about construction financing.

Warburton said Vulcan hopes to bring its first power plants online by the first quarter of 2012, with the remaining four to be completed through 2013.

Meanwhile, developments in Oregon continue to progress.

The largest federal stimulus grant, nearly $25 million, went to Sausalito, Calif.-based AltaRock Energy Inc. for an $86 million project at the Newberry National Volcanic Monument near Bend.

The project is a partnership with Davenport Power LLC, a Connecticut-based private equity firm. Davenport drilled two wells at Newberry that, while extremely hot, didn’t find underground water resources.

AltaRock was brought into the project in late 2008 to explore an “enhanced geothermal system” that calls for injecting pressurized water into the dry wells.

While controversial — a New York Times report last fall said the process, employed by a different developer, set-off earthquakes in Switzerland — the technology has some high-profile backers. Google, for example, has invested more than $7 million in the technology, including $4.25 million in AltaRock.

Don O’Shei, AltaRock’s CEO, counters criticism by noting that enhanced geothermal isn’t unlike other technologies that pump water or gas under ground, such as carbon sequestration or coal-bed methane exploration. He said the key to avoiding seismic activity is to avoid drilling into fault lines and to employ a monitoring system to track underground activity.

O’Shei said the company is now working to obtain permits from the federal Bureau of Land Management and Department of Energy before it can begin work on the Newberry wells.

Elsewhere, Boise, Idaho-based U.S. Geothermal Inc. is making progress on its own $121 million, 22-megawatt project at the Neal Hot Springs near Ontario in eastern Oregon.

Within the next two months, the company expects to receive approval from regulators in Idaho on an agreement to sell the output of its plants to Idaho Power under a 25-year agreement, said Chief Operating Officer Doug Glaspey.

U.S. Geothermal, which has already drilled two production wells, hopes to get its projects operating by the second quarter of 2012.

To help get there, the publicly held company is applying for a federal loan that would cover up to 80 percent of the costs.

The company has already spent $5.6 million on the project and expects it will have to cover at least 30 percent, or about $36 million, of the remaining cost should it receive the federal loan.

Glaspey said U.S. Geothermal typically raises money through equity placements, though the company hopes to make use of energy tax credits made available through the stimulus bill.

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