A primer on geothermal energy

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In my last blog, I wrote about some of the questions I have about the energy transition, including about underlying infrastructure and systems, costs, capital requirements, and what second and third-order effects of the energy transition might be. This week, I am focusing on one energy source that I think will play an important role in this transition, geothermal energy. At a high-level, geothermal energy is almost a perfect option to replace coal and gas sources that power the electricity grid, as well as replacing the natural gas that helps heat and cool homes and businesses. And the skills and expertise that the oil and gas industry has could be pivoted to accelerate development of geothermal energy in the US. But first, let’s talk about what geothermal energy is.

Geothermal energy is energy derived from the heat of the Earth’s core, located about 1,800 mi below the Earth’s crust. The energy comes from the decay of radioactive isotopes, which can produce temperatures of up to 9,000 degrees F. This heat radiates upward through the layers surrounding the core and heats up water, rock, gas, and other materials as it moves upward towards the crust. If rock beneath the surface reaches a critical temperature (about 1,300 degrees F or more) it turns to magma (the name when it’s beneath the Earth’s crust) and can bubble up as lava on the Earth’s surface. The magma heats up underground water sources, which in turn create surface features like hot springs, geysers, steam vents, or other formations. These are all examples of geothermal energy, and the heat brought to the surface via heated material (water or magma) can be harnessed to produce electricity.

The Advanced Research Projects Agency — Energy (ARPA-E), a part of the Department of Energy, estimates that a mere 0.1% of the Earth’s heat content could supply the total energy needs of humanity for 2 million years. In other words, there’s more than enough geothermal energy to go around for a long time. Depending on what temperatures (i.e. how deep beneath the Earth’s crust you go) energy is extracted at, it can be used for a variety of different applications (left). With an average well depth of 7 km and a minimum rock temperature of 150°C, some estimate that there are over 5,000 GW of electricity capacity coming from US geothermal resources. That means geothermal is a highly feasible baseload energy source that is accessible regardless of whether the sun shines or the wind blows and could reasonably replace coal and petroleum energy sources powering the grid.

So how is this energy actually harnessed? There are a few different ways. The oldest and most straightforward is through conventional hydrothermal technology, sources for which can only be identified through the existence of a geyser, hot spring or the like. Here’s how it works: water or steam gets heated up by energy from the core and as pressure builds, fissures develop in the rock beneath the Earth’s surface and the water or steam seeps upwards and surfaces via fumarole or hot spring. To harvest this energy, wells are drilled below the surface to capture the steam, which is then piped up to the surface to spin a set of electricity-generating turbines. The water byproduct is then piped back beneath the Earth’s surface to maintain underground levels of pressure. Currently, this method is the most common in existing geothermal projects in the US. The main challenge preventing the scale up of this approach is the identification or geothermal resource. Since geothermal energy assets that are suited for this method can only be identified by surface features like a steam vent or geyser, there is a natural cap on the number of locations this technology can be deployed. Moreover, the locations where conventional hydrothermal technology is most applicable are overwhelming in the Western half of the US, meaning geothermal energy produced solely via this method wouldn’t be available to much of the country.

And that’s where Enhanced Geothermal Systems (EGS) come into play. Although there aren’t geysers or other surface-level indicators of geothermal energy everywhere, there is definitely hot rock under the surface everywhere on the planet, which is all EGS needs to produce energy. That means that EGS could theoretically be used anywhere on Earth’s surface and the source of energy would continuously renew itself as the Earth’s core continues to emit heat. A good analogy (though, admittedly, one the geothermal industry would like to distance itself from) for how the EGS process works is hydraulic fracturing (also known as fracking) used to extract oil. Fracking involves the injection of fracking fluid, which contains hazardous chemicals, into geological formations to create fractures that make the rock more permeable and allow oil to flow into oil wells, where it can then be extracted. This paired with horizontal drilling squeezes out greater efficiency from oil wells. EGS mirrors this process by injecting water under the Earth’s surface to break up solid rock and allow heat to be conducted up through the newly formed fissures to the surface, where it generates electricity. Here’s a great step-by-step explainer for those interested in learning more.

The interesting thing about the shift from traditional hydrothermal technology to EGS is that it’s not a binary switch. In the words of Tim Latimer, founder of geothermal company Fervo, “what you really have is a supply curve, where the variables are temperature, depth, well permeability, and reservoir permeability…everything between the two extremes exists.” All Latimer is saying is that given a combination of temperature, depth, etc., energy can be produced at a range of prices and, depending on the demand-side dynamics, energy will be supplied to the grid. This is quite a contrast with wind and solar, the other popular renewable energy sources, which only produce energy when blowing or shining, respectively. Because EGS can supply energy given a range of differing conditions, it would be a much more reliable energy source and could activate during periods of low supply from other sources. One risk posed by EGS is the potential for induced seismicity, which is another way to say causing earthquakes. However, there are a wide range of viewpoints on how great the threat of this risk is, and research to date seems to show that while there are instances of earthquakes occurring near EGS sites, there is no systematic evidence of the risk posed by EGS systems. For example, there was a study that linked an EGS site to a 5.5 magnitude earthquake in South Korea, but also acknowledged the owners of the site failed to take standard steps to manage seismological risk ahead of the project, which may have contributed to the quake.

So to summarize, hydrothermal technology can be used where there are active surface features indicating geothermal energy (geysers, steam vents). Where these features don’t exist, EGS is best-suited to extract energy. The major pros of geothermal energy are that it is a solid baseload energy alternative, it can theoretically be produced anywhere on the Earth’s surface, it emits very little carbon dioxide, and it is a relatively cheap source of electricity. The cons of geothermal are the potential risk of induced seismicity and the large upfront costs of developing geothermal power plants. However, given that the model of high upfront exploration and drilling costs currently accepted by the world of oil and gas producers (as well as the various tax and financial incentives offered to help swallow the bitter pill), similar high upfront costs should not be a reason to hold back on development of geothermal resources. This is especially important once you consider that, when facility is built, it can continuously extract energy into the future and amortize the upfront cost over the facility’s lifetime.

Going forward, I think the cost issue will be the bigger barrier to surmount. Traditionally, the US has allowed the highly capital-intensive oil and gas industry to benefit from specific subsidies targeting the earlier development stages in order to incentivize the domestic supply of fuel to markets. If a similar approach were taken with respect to geothermal energy production, I think development of geothermal energy sources would happen much more rapidly. Another potential barrier is political. As with any transition away from an industry, inevitably there will be job losses and economic consequences for communities who relied heavily on the presence of that industry for their livelihood (e.g. coal workers in the Rust Belt). This could cause political friction among representatives unwilling to push for subsidies that may hamstring home industries and hurt their constituents. Fortunately, many of the core competencies needed for oil and gas production transfer exceptionally well to geothermal energy, which will help limit political inertia and, more importantly, should ease any potential labor market transition from oil and gas to geothermal.

Before wrapping up, here are some companies I follow in the space, divided into legacy and startup buckets.

Legacy geothermal companies:

1. Calpine runs the largest geothermal electricity-generating plant in the world in the Mayacamas Mountains in CA. The company also runs natural gas-burning electricity generators as well as natural gas / steam hybrid electricity generators. The company is owned by investors, including CPPIB and Access Industries.
2. Ormat Technologies is publicly traded on the NYSE under the ticker ORA. It’s a completely vertically integrated energy producer, including design, manufacture, sale, and operation of geothermal power plants that operate at a range of subsurface temperatures. It’s currently worth USD 4.2bn and operates a portfolio of over 900 MW of geothermal energy.
3. Terra-Gen Power operates geothermal, wind and solar energy assets in several US states. The company has 1.3 GW of energy installed across its portfolio and is owned by private equity firm Energy Capital Partners.

Geothermal startup companies:

1. AltaRock Energy is a Seattle-based company founded in 2007, AltaRock focuses on the development of EGS technology at existing geothermal facilities, where it has cost-effectively improved site output. It develops both brand new geothermal energy resources and adapts existing ones to improve efficiency.
2. Dandelion Energy spun out of Google X in 2017. The company offers direct geothermal pumps for home heating / cooling, a very consumerized approach to geothermal energy generation. It works by installing a geothermal pump under your home, pumping energy in during the cold months and allowing energy to flow out during the warm months. According to Dandelion, their pumps save consumers >USD1000s annually on HVAC and use less energy doing it.
3. Fervo Energy was founded in 2017 and was a Cyclotron Road fellow early in its life. The company was founded by a former drilling engineer and a geothermal reservoir engineer and develops EGS technology that incorporate horizontal drilling technology to coax more geothermal energy out of the ground. It also uses extremely sensitive fiber-optics to optimize flow during extraction, which improves a well’s efficiency. This approach could lead to an additional 100GW of energy resource development by 2050.

I’m excited about the potential for geothermal energy, and particularly the fact that oil and gas industry competencies can transfer well to geothermal. Definitely looking forward to watching this industry evolve.