Thursday, May 05, 2011

A Geothermal Bankruptcy

I just caught up with last week's bankruptcy filing by Raser Technologies, Inc., a small developer of geothermal power plants. Burdened with excessive debt, Raser is filing for Chapter 11 protection to restructure its liabilities and continue operating under new ownership. In the process the current shareholders will see their much-diminished equity wiped out. This outcome is further evidence of just how challenging it is for small, poorly capitalized companies to exploit what is arguably the best, most reliable renewable energy technology in the world, other than hydropower.

Raser's bankruptcy hardly comes as a surprise. The company has been highly leveraged for a long time, and investors were losing patience with the firm. Last year its stock price fell below the minimum listing requirements of the New York Stock Exchange, and it moved to the over-the-counter market, effectively becoming a "penny stock." In the year prior to delisting, Raser had lost more than 80% of its market capitalization, or about $100 million. With only one operating asset generating cash--a 10 MW plant in Utah built with the help of a $33 million renewable energy grant from the US Treasury--and a number of projects under development consuming cash, Raser was losing the race to bootstrap its way into profitability.

Why is it so hard for start-ups to succeed in this space? It's not an accident that the world's largest geothermal operators are mainly big, well-capitalized firms like Chevron, Calpine, or the Green Power spinoff from Italian utility Enel. (Disclosure: I am a Chevron shareholder.) Geothermal developers face some fundamental challenges that require financial flexibility to manage. First is the capital cost of the assets, compared to other power generation technologies. The last figures I saw suggested that the cost of new geothermal capacity per installed megawatt was up to twice that of a wind farm and 4x that of a natural gas turbine. One reason the cost is so high is that it includes a lot more than the above-ground generating hardware.

Geothermal reservoirs must first be discovered, assessed, and drilled. That's why I've long thought that this technology is a natural for oil and gas companies, since it involves many of the same core skills. Geothermal exploration introduces not just additional cost, compared to wind power development, but also a daunting array of risks, including the possibility that the resource won't turn out to be as large as expected, or that its geology won't permit commercially attractive flow rates of steam and/or hot water. In the worst case, this results in the equivalent of a "dry hole", but even if it merely reduces the amount of power a given well can generate, that has a significant impact on project economics that depend on producing power predictably and reliably for decades. In effect, geothermal has all the up-front risks of oil and gas exploration without the quick payoff of a successful oil or gas well.

Geothermal power provides clean energy production for the power grid on a nearly 24/7 basis, something that neither wind nor solar power can match without energy storage capabilities that remain prohibitively expensive today, in most cases. However, it is both capital-intensive and risky to develop. The handful of publicly traded geothermal companies left after Raser's Chapter 11 filing, including firms such as Ormat Technologies and Magma Energy Corp., are doing yeoman work. However, it's hard to envision geothermal energy achieving its full potential without much greater participation from much larger, better-capitalized firms that could pursue such opportunities on a completely different scale.

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