Credit crunch impacts geothermal industry

Executives of companies that generate electricity from earth's hot water resources often say that power in the ground is like money in the bank.

But tapping the credit and equity markets these days is proving just as difficult as drilling into geothermal resources.

Geothermal companies that rely on outside investors to power exploration programs have had to rethink their plans.

"It will take creativity and flexibility for the industry to meet the new economic conditions," said David West, vice-president of marketing at Raser Technologies, during a break at a major geothermal industry

conference in Reno last week.

Utah-based Raser holds three projects in central Nevada's Smokey Valley.

West said strong demand for renewables remains a positive for the industry.

"The fact that we were funded in the midst of this crisis indicates optimism about this industry," he said. Publicly-held Raser struck a deal with Merrill Lynch this year to finance construction of up to 155 megawatts of geothermal generating capacity.

The plummeting stock markets impacted companies such as Sierra Geothermal Power Inc., a Vancouver company whose stock trades on the Toronto Venture Exchange.

"As a public company, SGP was caught up in the whole broad sell-off," says Gary Thompson, president and chief executive officer. "SGP lost 75 percent of our market valuation this year. At depressed prices it's prohibitively expensive to raise money."

And while the company managed to raise $22 million through public markets, the firm is bringing in partners to keep projects in play.

"Essentially that's selling off half of the assets to fund high-risk drilling," Thompson says.

Sierra Geothermal Power is developing five active projects in Nevada: Silver Peak, Reese River, Alum, Barren Hills, and Pumpernickel. Combined, they account for an estimated production capacity of 200 to 400

megawatts.

Alum and Barren Hills are in the initial permitting stage; others are ready for production drilling. And in an industry with a five to 10-year development window, dollars invested during the drilling stage are high-risk but offer promise of greater rewards.

"The value chain on these projects is getting in early," Thompson says. "Later, when the resource is certain, it's like buying a utility stock. There's less risk, but it will take longer to get payback."

Another way to survive the credit crunch is to need less funding up front.

Raser's West says, for instance, that the company plans to build plants quickly.

"On average, it takes five years to get a big plant into operation, but our modular design can be built in six months. So we go to market four times faster," he says. "That's money sooner. We can scale and go larger later."

Another source of capital for the industry may be cities.

"Municipalities are now funding development," West says. Predictably, San Francisco is among the first going proactive to meet its renewable energy targets.

Even though equity and debt financing has dried up across much of the economy, the geothermal industry has been somewhat sheltered, says Mark Albert, a vice president of Vulcan Power Co. of Bend Ore. His company has four geothermal projects in northwest Nevada.

"The 20-year life of a power plant creates a definable market that will grow every year independent of market conditions," he says. "Other sectors have cooled, so a lot of money is sitting in the sidelines. People need to put it somewhere."

Vulcan enjoyed an infusion of capital this year from Denham Capital's $145 million equity investment. Last year Merrill Lynch invested $45 million.

Another boon to the industry is the production tax credit, which were renewed as part of the $700 billion bailout bill approved by Congress about a week ago.

"Investors need to apply production tax credits to shelter income," says Kerry Hawkley, chief financial officer at U.S. Geothermal Inc. of Boise. Earlier this year the company purchased and plans to expand the San Emido geothermal project situated about 100 miles north of Reno. The publicly-traded company partners with a subsidiary of Goldman Sachs, he adds, and will use that equity to drill wells. Then will seek a partner to help fund construction of the plant.

"There's a lot of impetus behind renewables," says Hawkley. "Half your battle's already won before you enter into discussions with people. It holds appeal for their investors."

Still, he adds, in the current climate, "When it comes to investing in geothermal firms, stock market investors in general are sitting it out, just like for all companies. Within the next couple months, it looks like it's going to be a difficult time for everybody."

Adding to funding woes: "The public doesn't understand how to value geothermal companies," says Thompson at SGP. However, he expects that will change as more equities analysts dig into the industry and educate investors.