Geothermal power has trailed behind solar and wind in the race to find an alternative to dirty fuels like coal and crude oil. But unlike solar and wind power, geothermal energy resources are enormous and readily available 24/7. So, why have companies like Nevada Geothermal Power Inc. (OTCBB: NGLPF, TSX.V: NGP) failed to attract as much attention as firms like First Solar Inc. (NASDAQ: FSLR) and Argan Inc. (NYSE: AGX).
High Costs Generate Long-term Returns
One of the reasons that geothermal has trailed wind and solar is its relatively high upfront costs that have kept many smaller players out of the market. For instance, exploring a potential geothermal site can cost upwards of $50 million to drill a hole 4-5 kilometers deep. Meanwhile, the energy sources also take longer to develop than solar or wind power plants.
Public companies like Nevada Geothermal Power, Inc. are perfectly positioned to capitalize on these developments. Since they can raise money in public markets, the upfront costs are covered by shareholders that are willing to wait for long-term gains. And once these wells are developed, they do generate above-average returns on investment over the long haul in many cases.
For instance, the typical breakeven point for a geothermal power plant in 2007 was approximately $0.054 per kWh, while the average cost of residential electricity in the U.S. was about $0.12 per kWh in 2009. And yet, geothermal companies trade at just a fraction of the valuation seen in many solar and wind companies.
New Technologies are Helping Overcome Costs
Trends in the geothermal industry are also moving in the right direction. While solar and wind companies are relying on government subsidies, geothermal energy extraction techniques are constantly improving to become more efficient by the year. So-called Enhanced Geothermal Systems (EGS) use fractured hot rocks to create more cost-effective solutions.
According to an article in the Renewable Energy Journal, geothermal companies are also looking to old oil and gas wells for potential power. Some 2.5 million abandoned wells are already drilled, which dramatically reduces the upfront costs, while a typical well could produce as much as 54 kilowatts of energy, leaving enormous untapped energy potential.
Over the long term, these trends suggest that the economics behind geothermal power will only get better and help the sector. But even now, many companies are making strong progress in geothermal projects. For instance, Salt River Project recently signed its second geothermal power agreement covering 49 megawatts, while new projects are being built in New Mexico as well.
A Great Investment Opportunity
The geothermal energy industry offers a unique opportunity to investors. As one of the largest and cleanest sources of energy on the planet, geothermal is here to stay, and new technologies are only making exploration and development more efficient. As a result, many solar and wind investors may want to consider diversifying into companies like Nevada Geothermal Power, Inc.
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