Sleeping giant

Geothermal energies have seethed underground for billions of years. But only since Nevada enacted laws in 2004 requiring that a portion of public utility power come from renewable energy has a market developed.

And executives say the geothermal industry in Nevada is gathering momentum and attracting capital quickly.

Ten years ago, no audience was willing to listen to the word geothermal, says Brian Fairbank, president of Vancouver-based Nevada Geothermal Power Inc.

"Now it's completely different," he says.

"A night and day difference."

State agencies are starting to see the uptick.

"At the start of the decade, fewer than 20 geothermal drilling permits were issued," says Christy Morris, oil, gas and geothermal programs manager at Nevada's Commission on Mineral Resources. "I expect to see 100 permits issued by the end of this year.

Major U.S. investment banks such as Morgan Stanley & Co. Inc., Lehman Brothers Inc. and Merrill Lynch & Co. are funding geothermal development projects. And foreign money is chasing the vast geothermal resources of the American West: Canadian companies RBC Dain Rauscher Inc. and Jacob and Company, Iceland financier Glitnir and Italian-based ENEL are already investing in Nevada projects.

As new geothermal projects come online, finding funding is getting easier for everybody, says Daniel Schochet, vice president of Reno's Ormat Technologies Inc., a major player in the geothermal industry. "You've capitalized expenses up front for a lifetime supply of power." That makes geothermal an attractive choice for investment bankers representing pension and insurance company funds.

"Funding has gotten a lot easier due to two factors," says Mark Albert, vice president of contracts for Vulcan Power Company.

"The industry is now on peoples' radar screen," he says. And, as utilities are required to buy electricity generated from renewable sources, he adds, "If we build it, there's a buyer."

Vulcan, headquartered at Bend, Ore., is developing six projects in Nevada.

Nevada law requires utilities such as Sierra Pacific Resources to purchase 20 percent of their supplies from renewable sources by 2015.

Vulcan Power's founder initiated the concept of energy portfolio requirements and began lobbying for passage of state laws in the 1990s, says Albert.

"We'd been working 10 to 15 years to get the utilities to give us contracts. But natural gas was cheap; there was no interest. Passage of the Nevada law allowed us to take it to California."

Rising prices also spurred the development of the geothermal industry.

"Power prices are well up," Fairbank says. "Power that previously cost $20 per megawatt hour now costs $60 to $100 per megawatt hour."

"Everybody's going green," he adds. "There's a strong political will to develop geothermal power. In politics, a candidate without a green power platform can't get elected. There's a national desire for more security and a diversified energy base. It's a very good time to be in the renewable energy field. Utilities need to continue to add more renewables to their energy portfolios."

However, he adds, "In a new industry that's hot right now, that hit critical mass a mere two years ago, investors have difficulty weeding out those companies that are the real deal from those that lack expertise."

This year, Merrill Lynch invested $35 million in Vulcan.

Morgan Stanley and Glitnir invested in Nevada Geothermal Power Inc., says Shelley Kirk, a company spokeswoman.

Nevada Geothermal is developing the Blue Mountain project near Winnemucca. The company also plans to develop two more projects near Winnemucca and Fernley.

But investors can't expect instant returns. Publicly-traded Nevada Geothermal's March financials clearly caution: "The company does not have operations that generate positive cash flow."

The lack of cash flow means fledgling companies often must give away equity to finance development of projects, says Fairbank.

But Nevada Geothermal is now on the radar screens of investment funds. Half a dozen large investment funds in London, Canada and the U.S. are putting in $15 million to $18 million each.

The payback will come when power produced by the company's first plant, sold to Nevada Power, will generate estimated gross revenues of $380 million over 20 years plus $80 million in tax benefits over the first 10 years.

Companies already experienced in geothermal elsewhere in the world have taken notice.

"Glitnir is very anxious to get into geothermal in the United States," says Max Walenciak, manager of project development at Nevada Geothermal's Reno office. "All of the Icelandic companies are eager to get into this market."

But that takes deep pockets. Blue Mountain, a roughly 30-megawatt power plant, is a $110 million project, says Fairbank.

The hefty price tag hasn't stopped the scramble to secure land leases.

Ormat recently won a Bureau of Land Management auction for 67,000 acres of geothermal leases in Nevada, valued at $8.2 million, and bidding was spirited as geothermal executives crowded into a BLM conference room in Reno.

Ormat has identified affiliates of Morgan Stanley & Co. Inc. and Lehman Brothers Inc. as investors in a newly formed subsidiary that's building geothermal projects in northern Nevada including the southern edge of Reno.

The investors bought limited liability company interests for $71.8 million.

In Churchill County, Italian-headquartered parent company of Enel North America plans to invest $200 million at the Stillwater Salt Wells geothermal projects, says Julie Smith-Galvin, director, corporate affairs.

The company acquired geothermal assets in Nevada, California and Utah from AMP Capital Partners this spring and named that new company Enel Geothermal.

ENEX, an Icelandic engineering construction firm working on that Churchill County project, opened an office in Los Angeles last week. The president of Iceland attended the opening to hobnob with California Gov. Arnold Schwarzenegger.

Glitnir, a financial group that develops Iceland's plentiful geothermal resources, fielded a financial seminar at a recent geothermal conference in Sparks. While big banks will fund a geothermal project once it's a proven resource, Glitnir is looking for early-stage investments.

In a recent analysis of the industry, Glitnir estimates that geothermal energy could provide 20 percent of California's electricity needs and 60 percent of Nevada's needs.

It estimates that more than $26 billion in capital would be needed to develop U.S. geothermal projects during the next eight years, and another $22.5 billion in the decade after that.

Because the geothermal industry is fragmented with many small players, Glitnir analysts expect the industry will see considerable consolidation.