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The demand for renewable-resource power sheds promising light on U.S. Geothermal.
Daniel Kunz, president and CEO of U.S. Geothermal
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In the U.S., geothermal power production is set to expand rapidly. Some 62 new geothermal energy projects are under development in the U.S. When completed, these projects will provide 2,140 to 2,380 megawatts (MW) of electric power, generating approximately 18 billion kilowatt-hours of electricity annually, according to the Geothermal Energy Association (GEA).
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With sustained support, by 2025 geothermal resources will be a major source for meeting America’s energy needs. Right now, the U.S. leads the world in the generation of electric power from geothermal energy. According to the GEA, in 2005, geothermal energy provided approximately 16 billion kilowatt hours in the U.S.—0.37% of the electricity consumed. As of November 2006, geothermal electric power was generated in Alaska, California, Hawaii, Nevada, and Utah. New power projects are underway in these states, as well as in Arizona, Idaho, New Mexico, Oregon, and Wyoming. By the end of 2008, eight states will likely produce geothermal electric power.
With plant construction proceeding on schedule, U.S. Geothermal (OTC BB: UGTH, TSX: GTH) is expected to throw the switch in the fourth quarter at its geothermal power plant, located at Raft River, Idaho, on the site of a former geothermal installation belonging to the U.S. Department of Energy. The DOE spent over $40 million from 1974 to 1982 developing the 7 MW geothermal plant, but with the cost of energy significantly lower at that time (oil prices were below $30 a barrel, and cheap hydroelectric power was plentiful) the Raft River project fizzled out.
The Idaho-based company resurrected the project by drilling a mile below the surface of the earth to extract 300-degree water, convert it into energy, and pump it back into the same layer of the earth’s crust. The geothermal fluid transfers a portion of its heat to a secondary fluid, which in turn expands into vapor, and it is this energy that turns the turbines that power the generators. The site has a 50% probability of power-production capacity of 15.6 MW per square mile, which may translate to 100 MW or more, says a report by GeothermEx, the company’s independent consultant.
With the first phase of its operation fully funded, U.S. Geothermal raised $20 million in a private placement in June, which is earmarked for its next growth phase. “We partnered with Goldman Sachs, who invested capital up front for the construction of our plant, and then we traded off the earnings stream that they will get from saving taxes,” says Daniel Kunz, president and CEO. “We get tax credits from our power plant for the first 10 years of its generating life. In fact, we get about $20 an hour for every megawatt generated. That’s about $2.2 million worth of tax credits each year for the first ten years.” Other shareholders in the company include SPCP Group, Wexford Capital, and the Winslow Green Growth Fund.
To strengthen its position, U.S. Geothermal recently acquired additional geothermal energy rights near the Raft River project. “This parcel adds 1,685 acres (2.6 square miles) of energy rights in an area that hosts good exploration potential and fills in a core area of our current holdings,” he says. With this lease, the company has increased the total Raft River project holdings by 31.7% to 6,933 acres (10.8 square miles).
In addition, the company has signed a new, 13-megawatt power purchase agreement with Idaho Power. The new contract, which replaces an existing 10-megawatt, 20-year contract, has a 25-year term. It is the first contract signed as part of ongoing negotiations with Idaho Power for a total of 45.5 megawatts.
U.S. Geothermal is also developing a second geothermal project at Neal Hot Springs in eastern Oregon, near the Idaho border. Chevron Minerals discovered the geothermal resource while drilling for gold in the late 1970s. The steam was found at a depth of 2,820 feet. A Chevron drill hole encountered high temperature and massive lost circulation of drill fluids within the geothermal production zone, indicating the potential for abundant resources.
A geophysical program using gravity and magnetic surveys was completed in February 2007 and will be used to develop a production well drilling program to determine the commercial viability of the geothermal resource. Based on initial data, the company anticipates 26 MW of power production at Neal Hot Springs.
One of the major advantages of utilizing geothermal power is that it can be generated on a long-term basis without having to pay for annual fuel supply. Capital costs include the cost of land, drilling of exploratory and steam field wells, and physical plant, including buildings and power-generating turbines. The plants have little ongoing fuel costs. “We’ve got some ongoing maintenance costs, but we use binary technology and have turbines and a generator that should last up to 50 years,” says Kunz.
Unlike wind or solar energy, geothermal power is much more reliable. “The entire geothermal industry provides about 95% to 97% online availability,” he says.
Due to the adoption of renewable portfolio standards (RPSs) in 23 states, politicians on both sides of the aisle are starting to focus more on the challenge of future carbon constraints and are speeding up the process to combat global warming and reduce dependence on foreign oil. “We’ve come a long way in cleaning up sulphur and nitrogen, but we have not yet mastered how to address carbon emissions, which go into the atmosphere,” says Kunz.
RPSs have done much to provide incentives for the development of renewable energy sources such as wind, solar, biomass, and geothermal energies. As a result of these legislative measures, the following states have set targets requiring electric utilities to generate a percentage of their energy from renewable sources by 2020: California 33%, Colorado 10%, Connecticut 27%, and Hawaii 20%. By 2025, Arizona’s RPSs require regulated electric utilities to generate 15% of their energy from renewable sources.
“There’s no question that the renewable industry has a little more wind at our back,” says Kunz.
COMPANY
U.S. Geothermal Inc.
1509 Tyrell Lane, Suite B
Boise, ID 83706
Phone: (208) 424-1027
Toll Free: (866) 687-7059
info@usgeothermal.com
www.usgeothermal.com
CONTACT
U.S. Geothermal Inc.
Investor Relations
Saf Dhillon
Phone: (604) 484-3031
Toll Free: (866) 687-7059
saf@usgeothermal.com
SHARE DATA
Recent Price: $4.21
52-Week Price Range: $0.80-$4.58
Shares Outstanding: 53.3 million
Market Cap: $224 million
BALANCE SHEET DATA
(as of June 30, 2007)
Total Assets: $40 million
Liabilities: $3.6 million
Shareholders’ Equity: $36 million
Book Value Per Share: $0.67
RISKS:
Although it claims to have proven reserves and the capability of producing sustainable power, U.S. Geothermal’s true potential will be realized when its plant comes online and sustainable profits start rolling in.
— By Arnaldo Arroyo
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