Australian Geothermal Plays
A surprising number of Geothermal Renewable Energy companies (17) have emerged just in the last few years. They are active both in Australia as well as overseas markets, and as a group have caught the attention of major utilities and investment analysts. Morgan Stanley recent labelled them in an investment research note an ‘Evolving Sector with Investment Appeal’ . We have been tracking many of the major players closely for a number of years.
However, none of the companies, so far as I am aware of, have yet to produce one MWh, or a single dollar. So what’s the scoop?
The projects are all at an early stage. No-one really expects that the Renewable Energy Target (RET) will be instrumental in driving the development of Geothermal plays, not even the Australian Geothermal Energy Association. The estimate by MMA in government-commissioned modelling that geothermal might meet 1-2 GW, or 40% of the RET target capacity, by 2020, would not have taken into account the market dynamics which have since become evident: the preponderance of low-cost Renewable Energy Certificate (REC) supply by domestic solar hot water systems.
The geothermal component of the Australian Government’s Renewable Energy Development Programme (REDP) will soon issue further substantial capital grants to certain companies, however.
They are not the lowest-cost short-term renewable energy generation options, and have some way to go in terms of up-front capital investment and development before any one of them will reach scale.
Typical projects involve drilling 2-5km bores, each of which will enable approximately 5MW installed capacity. Each well might cost $15 million. A number of such wells will need to be drilled and developed in order to produce sizeable power generation assets. While the generation assets can be developed incrementally on a modular basis, high up-front capital costs are implied.
Other technical and financial difficulties include unproven or problematic technical characteristics associated with Engineered Geothermal Systems (EGS) – the focus of some of the Australian companies including the largest, Geodynamics – and the high cost of building electricity transmission capacity to some of the more promising tenements.
Morgan Stanley label geothermal plays as competitive at an AUD$ carbon price of $35/tCO2e. As we know from watching the shenanigans surrounding the Carbon Pollution Reduction Scheme (CPRS) – the Australian Emissions Trading Scheme – there is likely to be price caps at $10 and then $40 per t/CO2e in the near-term. The dialogue on the U.S. bills on pricing carbon doesn’t envisage prices up to $35 any time soon – and Australia will be a global price-taker in that market.
However, on the flip-side geothermal is a long-term infrastructure asset play, and is helpfully baseload generation, so there is appeal for strategic long-term investors in the sector.
The Australian companies work across the spread of the three geothermal resource types: Volcanic systems (not in Australia), EGS, and Sedimentary (sandstone/limestone with existing water reservoirs, typically low-heat).
While the latter hydrothermal approach represents lower technical risk in that no artificial reservoir and fracturing needs to be established and conventional proven turbines can be used, the main characteristics to establish are the likely heat temperature and gradient, and the availability and likely flow characteristics of the water.
How much appetite, and how many investors are there, for such capital-intensive infrastructure development projects, given that for most in the Australian market the project types and market security are somewhat unknown?
In my mind, the geothermal groups that can rapidly establish partnerships with large strategic investors – the major electricity utilities – will succeed, but others may thereafter find it hard to find necessary partners.
Alternatively, the other obvious theme is the effort by some of the companies to rapidly bring to market conventional geothermal plays off-shore to generate more immediate cash-flow.
I think it is true that there will be substantial winners from this sub-sector, but detailed knowledge of the strategy and rapid developments being pursued by these companies is critical in understanding who will be on the podium once the dust settles.