California Rekindles Geothermal Focus Amid Industry Uncertainty

The wind industry isn’t the only one experiencing a development slowdown related to expiring federal tax incentives.

Geothermal developers face a similar challenge, and several Western states including California and Oregon are attempting to rekindle activity. 

In California, industry executives are working with regulators to develop more attractive power purchase agreements and address a lack of power transmission lines. And Oregon is focused on nurturing about 20 projects that are already in the pipeline.

Despite its potential as a reliable clean energy source that doesn’t suffer from the intermittency challenges of solar and wind, geothermal developers are having trouble winning utility contracts as utilities weigh potential impacts of the expiring incentive that ends in 2013. 

That program gives geothermal plant owners the option of taking a 30% investment tax credit against income or opting for a $0.02 per kilowatt-hour production credit over 10 years. Solar plants receive a similar incentive, but it doesn’t expire until the end of 2016. 

In California, developers also face other challenges unique to the state including the amount of water geothermal uses, a shortage of transmission lines and the popularity of solar,  reports Forbes. Only three geothermal proposals were submitted last year in contrast to 235 in solar. One geothermal proposal was approved, compared with 11 in solar.

"There is no question that geothermal is stalled in California," Karl Gawell, executive director of the Geothermal Energy Association. "We need [power purchase agreements] and transmission lines, and this year it is particularly important to see how [Western] states are working together to solve this." 

Some also speculate that California’s utilities are confident they will reach the 33% Renewable Energy Portfolio Standard requirement and are slowing their pace of development for clean energy sources. The slow development cycle of geothermal works against it in this regard, even though the resource provides baseload power.

“There are over-procurements of intermittent resources. The fantastic attributes of geothermal aren’t being recognized today,” Paul Thomsen, director of policy and business development at geothermal developer Ormat Technologies told Forbes.  

Still, geothermal is much bigger in California than solar. Last year, it represented 4.5% of the state’s electricity supply compared with about 0.4% for solar.

So why the slowdown?  Aside from the millions in upfront exploration costs, sizing geothermal projects is tricky. They need to be as big as possible, but small enough (under 50 MW) to avoid being subjected to California Energy Commission licensing, which means more delays. The rapidly declining prices of solar panels are also a factor because it dramatically reduces the price of solar-generated electricity versus geothermal. 

Even more on the side of solar is that state regulation allows utilities to put a premium price for solar when they consider bids because solar performs best during peak hours when electricity is most expensive.

The premium "gives a strong preference to solar, and in a sense it penalizes geothermal," Karl Gawell, executive director of the Geothermal Energy Association told Forbes. "A geothermal bid that is cheaper than solar would lose because of the values assigned to power generated during certain hours of the day."

And when they need to compensate for intermittent solar, agencies tend to use natural gas, which is cheaper, he says.

“I would compare us as the turtles in the race with hares. We are the slow and steady developers of megawatts for the grid,” Paul Thomsen of Ormat told Forbes.

Now that the federal tax incentive is close to expiring, that makes it even harder for geothermal projects to win contracts from utilities given the fairly long development time. 

Geothermal companies want California regulators to assign higher values to the steady supply of power they could generate, speed up the permitting process, and promote more transmission line construction to transport geothermal energy from more remote corners of the state to towns and cities, says Forbes.

Oregon Geothermal Heats Up

Oregon has 16 geothermal projects in progress. Most are in the pre-drilling and analysis phase, reports SustainableBusinessOregon. Three project have permits and wells have been drilled.

Oregon project developers are benefting from a state energy tax credit, says Dan Kunz, CEO of U.S. Geothermal, which is close to completing a 22 MW project at Neal Hot Springs. The thin crust that covers the land between the Rockies and the Coast Range makes it attractive for geothermal development. His company is also looking at other areas served by transmission lines to help keep costs down.

The potential for new geothermal energy in the US is about 38 gigawatts (GW), estimates the National Renewable Energy Lab. While that pales in comparison to wind and solar, it is bigger than the potential for hydro.

Despite this recent sluggish progress, the US added more new geothermal capacity than anywhere else in the world last year, about 91 MW. California leads in capacity, with 2,615 MW online and 2,000 MW under development. The state’s potential is 24,750 MW. 

The Oregon Institute of Technology in Klamath Falls makes heavy use of geothermal sources, and geothermal is also enabling Ball State University in Indiana to eliminate coal. 

Some developers are getting more creative with financing for geothermal, such as PanTerra in Colorado which is experimenting with leasing arranagements.