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September 14, 2014

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Geothermal energy loses a bit of its steam

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Geothermal energy development is a growth industry for Nevada, even though it doesn’t look as hot as it did a couple of years ago.

In the latest leasing of Bureau of Land Management parcels, geothermal energy developers picked up more than 284,000 acres. The state will get about $1.4 million in lease revenue. Another $722,000 will be split among the counties where the land is located.

None of the land for which leases were allocated May 11 is in Clark County, so it won’t get any direct income. But geothermal growth could take some burden off the state’s economic workhorse as rural counties begin to collect money from leases and royalties.

Energy experts say this year’s results reflect a trend of stabilization for geothermal.

The leasing brought in about $2.9 million this year. That’s down from 2009’s $8.9 million, and 2008’s record $28 million.

In 2008, a backlog of leases pushed the average sale price to $85 an acre.

The average winning bid this year was $21 an acre. That average is a little misleading, however, because Magma Energy paid $1,000 an acre for a 640-acre parcel. The vast majority — 63 of 75 parcels, or 84 percent — sold for $5 an acre or less. Twenty-three parcels, which had failed to sell on Day One, were sold the next day at a flat rate of $2 an acre.

The downward price trend indicates a healthier market, American Geothermal Energy Association Executive Director Karl Gawell says. Energy companies, especially smaller and local geothermal developers, were holding back a bit in previous years because of concern about the high per-acre bids.

“What this says is the market is coming into balance. You’re seeing the backlog in demand for new leases abating. There’s still interest in new development because all the tracts were sold, but there’s no longer that pent-up demand,” Gawell says.

This is typical in the industry. The higher priced leases are generally on land where the potential has been confirmed. The parcels receiving lower bids are those where the geothermal resource is untested, making investment riskier. The most expensive and financially risky part of developing geothermal energy plants is the exploratory stage.

The industry gets some help from UNR’s Great Basin Center for Geothermal Energy, which has a team that helps evaluate potential high-resource areas. But the team is small, and the land is far-flung.

Geothermal energy companies often spend millions of dollars on exploratory drilling operations.

That’s one reason other utilities, such as NV Energy, have avoided building geothermal power plants. The utility has power purchase agreements with about two dozen geothermal energy companies and has signed an investment deal with another, but isn’t building any geothermal energy plants on its own, company spokesman Mark Severts says.

“It can be very difficult to find a proven resource, and expensive,” he says. “It’s not unlike drilling for oil. Even when you find a geothermal opportunity, you never really know how well it will produce until you’ve done the exploratory drilling.”

But as the price of leases decreases and geothermal energy rises in popularity, the types of companies becoming power plant owners is changing.

For decades the geothermal energy plants in Nevada and California were owned by a few midsized international corporations. But as the White House and Congress push for a renewable energy revolution and the technology becomes more familiar, smaller startups are popping up and utilities are jumping on the bandwagon.

Click to enlarge photo

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

NV Energy has penned an investment deal with an Ormat-planned geothermal plant in Northern Nevada. If the deal is finalized after resource tests are complete, it will be the first time the utility will have a direct ownership stake in a geothermal energy plant.

The Southern Nevada Water Authority purchased a lease for about 4,500 acres near Ely in the most recent BLM auction.

Although lower land prices are a boon for geothermal developers, states and counties prefer the price stay as high as possible. That’s because the leases have become an important source of revenue for state and local governments, which get a cut of the income.

The 2005 Energy Policy Act allocated half of lease and royalty revenue from geothermal development on public land to states in which the land is located and a quarter of the revenue to the counties.

Since the law went into effect in 2007, Nevada counties have taken in nearly $17.8 million and the state has received $35.6 million.

Clark County has had no geothermal development, so it doesn’t get any money directly, but geothermal development could bring enough income to the state to help alleviate its economic woes and potentially reduce the amount of money the state grabs from county coffers every year.

Congress briefly revoked that provision late last year, sending the money to federal coffers, before congressional delegations from geothermal states discovered the money grab and passed legislation giving the money back and protecting the states’ right to the money in the future.

It was a major win for rural Nevada counties, which are expecting an economic boom from geothermal development in coming years.

Although lower lease prices bring less in upfront income to the state and counties, they speak of economic benefits to come.

In addition to the lease income, the state will receive a portion of royalties on geothermal power plants. The current royalty rates, set by the federal government, are 1.75 percent of the gross income for the first 10 years of a project and 3.5 percent after that.

The state also stands to see hundreds of new jobs for those working on test drill rigs, and building and operating the plants.

Much of Northern and Western Nevada is dotted with geothermal energy hot spots. And although California has far more geothermal energy plants operating, generating 2,566 megawatts compared with Nevada’s 427 megawatts, Nevada could add more than 3,600 megawatts in the next decade, according to Geothermal Energy Association estimates.

Nevada is the leader in geothermal exploration, with far more projects in the early stages than any other state. It is also getting more federal funding for new and experimental projects than any other state — $26.7 million compared with runner-up California’s $15 million.

The trend now is early-stage projects moving toward development, Geothermal Energy Association researcher Daniel Jennejohn says. Five hundred to 885 megawatts of geothermal energy are in the final stages of development in Nevada, according to the group’s latest report.

Many geothermal projects stalled in Nevada in 2008 and 2009 because of the recession, Gawell says. Many of those projects are finally headed into the final stages of exploration and permitting, and Jennejohn and Gawell expect to see a building boom this summer.

Nevada is also a proving ground for many industry developments. Most of the experimental projects the Energy Department is helping fund are in Nevada.

It is one of the first states to see the ownership of geothermal energy diversify. As the technology becomes familiar and the land lease prices drop, utilities and tribes are beginning to invest in geothermal energy plants.

“I think we’ll see a different market in the future with a wider range of companies,” Gawell says. “One of the issues with geothermal companies is that they need additional financial resources to get their projects built and these utilities have those financial resources. So we could see more teaming up.”

The state is also at the forefront of geothermal development at oil, gas and mining operations. The process, which the federal government calls “innovative drilling,” consists of taking the hot water or other hot fluids associated with drilling or mining and using them to run a geothermal power plant.

Because drilling and resource discovery are the most expensive and risky parts of geothermal development, the prospect of tapping into an essentially free resource thrills some developers.

“That’s really interesting because it’s one of the really new trends we’re seeing and there’s great power potential there,” Gawell says. “They’ve already drilled the well and the wells are bringing up hot water and we’re just learning how to use that to produce electricity. That’s another area we’re seeing pop up across the country.”

There are four such projects under development in Nevada.

Nevada is also host to one of the first federally funded geothermal energy experiments on tribal land. The Pyramid Lake Paiute tribe of Northern Nevada was awarded $4.85 million to build a geothermal energy plant on its land. The project is in the second phase, with drilling permits approved and exploratory drilling under way.

“The office of Indian Affairs made a series of awards to promote renewable projects on tribal lands and geothermal projects were the largest winners,” Gawell says. “The Pyramid Lake project is one of the most significant in the program. That is an exciting new area for the industry and for economic development on these tribal lands.”

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