Are there obstacles to scaling up geothermal to serve a larger national or global customer base?
From this point of view geothermal is base load: 24 hours a day, seven days a week.
Therefore, the utilities like it very much. There is a small difference between winter and summer, as with any thermal power plant, nuclear power plants in particular, but it is base load. So when the utilities buy geothermal, they don't have to have standby power in the form of gas turbines as they do with windmills. So this is not an obstacle. The other obstacle that we don't have is that even if you have to build a power line, this power line is a dedicated power line. This power line is used 24 hours a day. If you build a power line for a wind or a solar plant, the capacity of this power line is only used during a certain number of hours. Which means that your return on investment is smaller for this power line.
Can the existing energy infrastructure handle growth in geothermal energy? Or does that, too, need further modification?
I will give you two examples where power lines were built in the U.S. for geothermal. One is in the Imperial Valley, where we and other developers participated in building a dedicated line from the valley to the network of Southern California Edison. And there is one dedicated line in Nevada which goes from one specific power plant to the network of California. So there are at least two cases that it was done.
But many geothermal resources are really close, and this is how we look for new prospects—we look at where the power line is. If the power line is too far and this means permitting and so on, for all practical purposes, we keep it for the future and we don't develop it because the permitting is a very, very important element, at least in the U.S. Just to offer an example which was given by the governor of Nevada at one of the events the geothermal industry had: to get the permits for exploratory drilling for oil takes three weeks. For geothermal, it's six months.
Why? Because people know exactly what to do and what to ask for.
Given the current economic crisis, can your industry get the necessary capital (from public or private sources) to adequately finance its growth?
Of course it does have an impact, but from the point of view of, say, the projects Ormat has on the way, we are not yet impacted. This is because of the way we have been building in the last few years: We use our own funds that we are able to raise for a construction loan. The construction loan is the loan that you need when the risk is the largest, which is building, drilling, and so on. And therefore if you want to close financing, it's very complicated. It takes a very long time. We did it in the beginning, but when we got more at ease with capital we decided as a policy to do projects where we can spend our own funds during this period and then go for financing when the plant is operating.
But this is a big problem. No question. I assure you if this situation is not going to change, it will impact not only the newcomers but established companies like ours also.
One word about Ormat because we are a special animal—we are vertically integrated. We actually started from solar energy. And we went into geothermal because solar was too expensive; we went into geothermal trying to sell equipment, but this was too small for the utilities. So we became a developer.
First we were just a niche contractor for supplying our equipment but were also installing it. And then slowly when we got richer we started to keep equity in what we built, and this enabled two things. One is that we don't have margin upon margin upon margin. We are able to compete because if you have to subcontract, everybody has to get a margin on it. Of course we do subcontract a lot, but most of the time we don't have a prime contractor. We are the prime contractor. We don't have an engineering firm. And this enabled going on much smaller projects than the 1,000-megawatt coal-fired plant to keep the margins low.
From a strategic standpoint, which is the bigger competitor for geothermal: incumbent coal, oil and gas technologies or other alternative energy technologies?
In the U.S. the main competitor is coal, which has the lowest price; you still have areas where the cost of producing electricity from coal is three cents or less [per kilowatt-hour]. But this is not for the long term—if the EPA rules limiting the emission of mercury pass, the additional scrubbers will double the price of the electricity produced. I am not even speaking, of course, about carbon sequestration—nobody knows how much that will cost. So everybody is guessing.
Longer-term the main competitor is gas, because gas is much more environmentally friendly. A combined-cycle plant is the most efficient way of using hydrocarbons. A gas-fired combined cycle plant is cheaper than a coal-fired plant. So this is a very tough competitor. But the gas prices today are of course are much lower than they were a year ago, when they were high enough in Nevada, for instance, that we were the cheapest source of electricity.
Is there a cost target that you and others in your industry are aiming to achieve in, say, five years?
I think that if we are successful in getting less than 30 percent or 35 percent dry wells and accelerating different elements, we probably will be below 10 cents, something around eight cents, for [a kilowatt-hour of] base-load electricity.