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Dec 12, 2009Geothermal Industry Seeing New Investments
In October of 2008, Alexander Richter wasn’t sure he would have a job when he returned home to Iceland from a geothermal conference in Nevada. As director of global geothermal development at Glitnir Bank—one of Iceland’s three main banks that was nationalized that month—he was staring into a bleak and uncertain future. And so was the rest of the geothermal industry.
Just one year before, Glitnir announced plans to invest over a billion dollars in the U.S. Geothermal market through 2012. That would would have represented roughly 10 percent of all investment in the country. Richter and his colleagues were excited by the new growth that was occurring in the U.S., a market that had been dormant for more than a decade.
By the following fall, however, Glitnir was swept up in a perfect storm of financial troubles, resulting in a government take-over and forcing the bank to scale back investment plans in the U.S. It was a big blow to the industry, but it was just the beginning. Around the same time, many other financial institutions pulled out of the debt and equity markets, leaving the hot geothermal industry in the cold.
“It was a surreal experience, to say the least,” says Richter. “No one knew what would happen.”
A year later, in 2009, Richter wanders the aisles of the same conference in Reno, smiling warmly at passersby and stopping occasionally to greet people in their booths. He seems remarkably happy for a person who’s been stuck in the middle of the worst financial crisis in 80 years.
It turns out that Richter didn’t lose his job. Over the last 12 months, as many of his friends and colleagues were tossed out of the banking world, he and a few other members of the former geothermal team were kept together to manage sustainable energy investments for the bank, now called Islandsbanki. Although the team has substantially scaled back operations, they are still very focused on the U.S. geothermal market.
“Naturally there are limitations to what we can do, but there’s an interest by the [Icelandic] government and our creditors to continue our work,” says Richter. “We’ve always believed strongly in the geothermal sector, and we have continued to stay in the industry in various ways.”
For the Islandsbanki team, that has meant focusing more on advisory-related services rather than directly investing in companies and financing projects. Richter says that the bank plans to announce more debt-finance activity in the coming months. In the meantime, the sustainable energy team at Islandsbanki watches the U.S. geothermal market — the world’s largest — eagerly awaiting the day when it can play a more active role.
“Very clearly we are looking to the U.S. This is a very mature market…you have a pipeline of projects that is impressive,” says Richter.
According to figures from the Geothermal Energy Association and Islandsbanki, the number of projects in development throughout the U.S. increased by 60 percent in 2009, to 144. If those projects go forward, the U.S. could add another 6,400 MW of capacity in the next five years, resulting in almost 10 GW of total capacity. That’s equal to today’s global installed capacity.
If history is any guide, there is a good chance that up to a quarter of those projects will not get completed. Factor in the tight debt and equity markets and that number could fall further still. Islandsbanki projects that more than $25 billion will be needed by 2014 in order to see those projects through.
In order to ensure that the industry stays strong through the ongoing economic downturn, the U.S. government has begun throwing hundreds of millions of dollars into the geothermal space in recent months. The impact of the stimulus funds are still unknown: Many companies may not qualify for certain pieces of the program because of how long it takes to build out projects. But recently announced funds are signaling investors like Islandsbanki that the U.S. is intent on continuing to build the geothermal industry.
“There are some uncertainties about if companies will be able to access some funds. But the stimulus shows us that the government is serious about geothermal. That can only be a good thing for attracting investors,” says Richter.
Geothermal can be a risky space to be in. It takes many years and many millions of dollars — sometimes three fifths of a project’s cost — just to explore a resource and drill a test well. That makes the industry particularly vulnerable to the conservative mindset in the financial markets.
Given that many of the projects underway in the U.S. and around the rest of the world today are relatively new, financing needs for the exploration and project feasibility stages are high. Therefore, many developers are in the tough position of asking venture capital and private equity firms for millions of dollars to determine the viability of a project.
“That’s where the risk is in this business, on the front end. You need investors who understand that risk and are willing to take it — and right now, not many are,” says Frank Monastero, President of Magma Energy, a rapidly-growing Canada-based geothermal developer. Once a resource is established, geothermal is a remarkably safe business to be in, says Monastero, who is also president of the Geothermal Resources Council. On average, geothermal power plants are online 95% of the time, creating a stable, predictable revenue stream for project owners. That is especially true in the U.S. where state renewable portfolio standards, federal tax credits, loan guarantees and cost-shared drilling programs are making geothermal an attractive investment for those willing to accept the risks in exploration. For those reasons, Magma Energy is focusing a lot of attention on the North American market, which is still seeing healthy growth despite many of the financial problems that companies are facing.
“Of course, the financial crisis has been difficult for everybody. But that doesn’t mean that growth has stopped. In fact, we’re seeing unprecedented demand for the power,” says Monastero. “Because of that we still see new entrants coming into the market and new partnerships to help finance projects.”
In the last six months, the industry has seen some consolidation as cash-hungry developers in the early development phases look for help. In August, Western GeoPower and Polaris Geothermal — two companies listed on the Toronto Stock Exchange — merged with Ram Power, another developer formed in 2008. Ram Power subsequently raised $165 million to finance projects in the U.S. and South America.
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