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A few months ago, I committed what I regarded as a cardinal sin. I’ve always been taught never to be a cynic in public – especiallyin front of a bunch of hard-working and well-meaning academics. But, last summer, I was talking to a group of engineers and scientists in Oxford about the financial reality of renewable energy and I said that all the talk about bio-energy solar and wind power as the next great investment category was a load of hot air.
In my view, if you looked at any index that tracks clean power you could see a classic bubble pattern. Most of the shares in the companies involved traded on ridiculous valuations (30 to 100 times earnings) and the share price charts looked scarily like those of dotcom start-ups before 2001. More importantly, although the actual technologies are the key to saving the world, they didn’t seem like viable business propositions without huge subsidies – and a willingness by investors to suspend rational judgment.
Obviously, there are some good, profitable companies out there – such as Vestas, which makes money from wind-turbine manufacture (although it has struggled). But I just didn’t believe their technologies could be as profitable and world-changing as the markets seemed to think. To really change global energy economics, I suggested that we needed oil at $200 or a proper carbon tax regime. The event organiser later told me that the assorted gaggle of scientists were horrified that anyone could be so cynical. “Who’s going to fund all this new technology if private investors don’t?” was one refrain.
In hindsight, I’m not sure I’m right any more. Listed renewable energy companies have continued to shoot up in value and more and more funds (even exchange-traded funds) have been set up to exploit this huge new technology space. I still think most technologies will come crashing back to earth when the hard maths is done. But, for now, I’m willing to admit that there might be a couple of exceptions.
The first is wind-power projects. These can make sense if you know how to play the subsidy game.
The second is geothermal energy, which has the potential to be a huge niche in coming years. If I were a green investor looking for the next big thing (or a venture capitalist looking to develop tomorrow’s carbon-tax-subsidised, green infrastructure play), I’d be looking at the small but growing army of geothermal companies prospecting for heat along the ring of fire that spans the globe.
Geothermal energy is a beautifully simple concept. Water is pumped down an injection well into, for example, heat-producing granites about 3km or more below the surface. Heat, of up to 300ºC, is then extracted as the water flows through the fracture system, and the hot water returns to the surface via a production well. It passes into a heat exchanger, where the heat generates power. So, to get geothermal right, you need three important ingredients:
●A heat source, traditionally found in volcanically active areas (the hot research area is in granites).
●Permeable rock to drill through.
●Water to transport the heat to the surface for power generation.
In theory, this is a great (nearly) carbon-free technology that’s potentially able to supply limitless power. The best bit is that it is already close to being as economic as coal and natural gas.
Research by Australian broker Bell Potter has compared all the energy sources, assuming a standard carbon tax is introduced and used to fund renewables. It shows that, in the potentially lucrative south Australian fracture zone, geothermal energy costs just $45/MW, “which is well below other alternatives such as wind, biomass and solar”, according to the broker’s report. “Conventional coal fired plants are the cheapest at $30-40/MW and combined cycle gas and nuclear plants can also be cheaper than geothermal. However, if a notional $30 penalty per tonne of CO₂ is applied, it would make the geothermal option very attractive indeed”.
Unfortunately, geothermal won’t work in the UK, but in southern Europe, Iceland and the US it’s potentially a very big business. However, it requires a lot of money to drill deep wells to reach the heat. Get it wrong and you could lose more than 60 per cent of the total project cost – $10m or more. That means this is a game for companies with a lot of capital. And if you do strike lucky, you have to spend more building a special power station, requiring regulatory approval which can be slow in coming.
But once you’ve done that, you have a brilliant, cheap, long-lasting source of power, which should also be consistently profitable in a post-carbon tax world.
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