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October 25, 2014

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DAILY MEMO: ENERGY:

Financing lag holds up geothermal

Expert says sharp drop in ’09 land lease sales a ‘leveling out’ of market

Click to enlarge photo

A view of Ormat Technologies' 100 megawatt geothermal complex in Steamboat, which supplies power to Reno.

When the Bureau of Land Management released results of the 2009 Nevada geothermal energy land lease auction in mid-August, it looked like the industry’s balloon had burst.

A year ago Nevada was hailed as the geothermal energy production heir apparent to its champion neighbor, California. The prediction was that Nevada’s geothermal industry would outpace California’s in five to seven years.

New exploratory techniques introduced in Nevada in recent years had revealed vast wells of geothermal potential at hundreds of hot spots covering much of the Silver State. Geothermal exploration, drilling and testing was under way across Nevada.

That’s why the results of the BLM’s July auction of hundreds of acres of prime geothermal Nevada land were so shocking. The number of acres offered almost doubled this year, but the income generated by the auction was less than one-third what it was in 2008.

Nevada gets half of the lease income, and in 2007, the first year the BLM offered lots under an auction system, the state got a check for about $6 million. The state’s take shot up to $14 million last year.

But this year, when Nevada could have most used the extra revenue, the state reaped only $4.5 million from the auction.

The average lease price plummeted from $85 per acre last year to $35 an acre this year. About 57 percent of lots went for less than $5 an acre this year. Last year only 6 percent of the lots went for that lowest price.

But industry experts say those dollar amounts don’t tell the full story.

Sure, bid amounts this year are down, but the lending industry is in the toilet, and the past two years of leases in Nevada represented an industry anomaly, said Geothermal Energy Association Executive Director Karl Gawell.

For years, BLM issued leases to geothermal developers on a first-come first-served basis, as is currently done with wind and solar projects. The agency was underfunded and understaffed, and applications for leases backed up for years. When the agency opened up dozens of lots for lease in its first auction in 2007, developers rushed in and bought up nearly everything offered. The bidding was even more frenzied last year. But by this year, the backlog was significantly reduced.

That can be seen in the number of lots that only one company wanted and were simply leased without any competitive auction. The BLM leased 39,000 acres in Nevada in noncompetitive lease sales that brought in nearly $50,000.

Gawell said it’s a trend he has seen across the country and was not unexpected.

“I’ve been waiting for lease prices to catch up with the market,” he said. “The number of noncompetitive leases is an indicator the market is leveling out. We’ve seen an increase in noncompetitive leases compared with six months ago all over the country and certainly in Nevada.”

But the real issue isn’t the market for land. It’s the market for loans.

Since the crash of the financial industry, geothermal developers have struggled to get financing for their billion-dollar power plants. Yes, geothermal energy is significantly cheaper to develop and easier to sell to utilities than wind and solar energy, but that didn’t help developers get loans. Three projects in the U.S. were canceled in the past year because of the financial crisis, Gawell reported at an industry event in spring.

Government help with financing, provided through stimulus funding, was supposed to alleviate the problem. But the Energy Department, which oversees the program, hasn’t yet launched the government-backed loan program. That program would give renewable energy developers a better shot at getting financing and lower interest rates on those loans.

On a multibillion-dollar geothermal plant, jumping the gun on a higher-interest-rate loan could mean a loss of tens of millions of dollars. That’s forced most developers to sit on their hands — and their pocket books.

“What we’re seeing is the market is stalling,” Gawell said. “Some projects are still working forward if they’ve got deadlines to meet, but if a company is still at the project finance stage, they’re waiting.”

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