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australian geothermal sector

The promise of large-scale, affordable, emission free baseload power has been an aspirational goal shared by scientists, industry, governments and the broader community for many years. Adoption of renewable technologies such as solar or wind power is slowly gathering momentum, however the relatively expensive cost of these energies combined with intermittent power generation profile has hindered the wider adoption of these technologies.

Recent estimates by Geoscience Australia indicate that approximately 1.9 x 10^25 Joules of energy is contained in the upper 5km of Australia’s crust. By circulating water through strategically located deep production wells, geothermal energy has the potential to transform the Australian economy into a powerhouse, as energy availibility is often a precursor to economic growth.

The presence of massive thermal energy reserves in Australia is undeniable. In recent months numerous companies have made major inroads into demonstrating proof-of-concept for engineered geothermal systems (EGS). A number of major technological challenges confront the industry, specifically the ability to be able to artificially create fractures in buried hot granites at depth.

 

Industry Analysis

The relatively small size of the Australian geothermal industry combined with less than 20% of licence holders being publicly listed companies, is responsible for the limited availability of public domain data for many projects. Most projects are still at the early stages of development, and limited corporate activity in the sector has made determining the economic prospectivity of projects and valuations of these specific projects very difficult.

Traditional valuation methodologies used across a range of industries, including standard valuation metrics based on net present value (NPV) or internal rate of return (IRR) approaches, are not applicable to the geothermal industry at the current stage of development. Initial calculations based on enterprise value to energy reserves ratios (EV/Reserve) have been abandoned due to the uncertainty in the magnitude and the timing of commercialising reserves.

Activated Logic has developed the Australian Geothermal Index™. The Australian Geothermal Index (AGI) is the benchmark composite index of the 10 solely geothermal focused companies listed on the Australian Securities Exchange (ASX). The AGI was based at 100 (as was the XAO) on the 1st of July 2008 to provide an indication of the relative performance of the AGI against the XAO.


Significance of reserves

Geoscience Australia estimates indicate that even if 1% of Australia’s geothermal resources were capable of being exploited, this would represent Australia’s total energy needs for thousands of years.

South Australia hosts the majority of geothermal exploration activity in Australia (~90%), with approximately 30 companies (7 ASX-listed) holding almost 300 geothermal exploration licences across the state. A number of relatively advanced geothermal projects exist in South Australia including Hot Sedimentary Aquifer (HSA) based reservoirs in the south east of the state and recently proven Hot Fractured Rock (HFR/EGS) in the east of the state in the Cooper Basin. The combination of a supportive State & Federal Government, industry critical-mass, significant projected growth in energy demand and some of the hotest granites in the world, combine to make South Australia one of the most attractive destinations for geothermal companies in the world.

 

Australian Electricity Prices

In recent months numerous electricity market participants have released forecasts of what they believe the sale price for electricity is likely to be over the next decade both in regional power networks and across the NEM.

Estimates for prices in 2020 range from $79/MWh to above $200/MWh depending on the outlook for the cost of capital, economic growth and most importantly the implied cost of carbon pollution and how severely the price of carbon (ETS & REC’s) will be factored into production costs.

The electricity price forecasts made in the Garnaut Review (an independent study conducted by economist Professor Ross Garnaut for the Federal government) are widely recognised as being the most reliable data available. Professor Garnaut’s report concluded that wholesale electricity prices in Australia were likely to significantly increase in the near future.

Generally the sale price for electricity is closely linked to the generation costs of electricity; therefore reviewing forecast production costs is a powerful approach to determining the likely wholesale price for electricity across Australia.

A recent study by MMA (MMA, 2009), commisioned by the Australian Geothermal Energy Association found that,
despite the structural reforms in Australian power generation in the next decade, from 2020 to 2030 electricity generation prices:

  • from renewable energy sources such as wind, biomass and geothermal are likely to fall
  • from carbon intensive sources such as coal-fired power stations are likely to increase

This further validates the attractive outlook for renewable electricity generation in Australia.

 

Geothermal drilling costs

One of the biggest challenges faced by Australian geothermal exploration companies (particularly the smaller project operators) is the significant cost of drilling deep geothermal exploration and development wells. In Australia the majority of proposed geothermal projects require extensive drilling at depths of 3,000 to 5,000m depending on the project geology.

As the depth of geothermal drilling increases, the actual cost of drilling increases exponentially (refer to illustration) as a more powerful drilling rig is required, the well will take longer to drill, a bigger drilling pad is needed and an increasing number of casing strings are required.

In addition to the significant drilling costs, the mobilisation of these large rigs to a project site can exceed $500,000 in the case of remotely located geothermal projects.  In many instances in Australia and also around the world, significant costs associated with drilling such deep wells, is comparable to the enterprise value of company operating the projects.

Activated Logic can assist geothermal companies reduce early-stage exploration risks by assisting with the introduction of technically capable project partners and investors with strong balance sheets to advance the development of geothermal projects at all stages of development. 

Speak to Activated Logic to explore additional strategies to reduce project risk and accelerate the development of your project through innovative financing strategies including RECPA’s that have been used extensively in Europe and North America, but have only been introduced to Australia by Activated Logic.

 

Cost of Geothermal Electricity Generation

Investment in alternative energies will remain attractive over the medium to long term, however careful consideration should be taken when comparing different sources of alternative energy.

Market commentators and even complacent industry representatives often make the comparison that other sources of alternative energy such as wind energy is cheaper to install per megawatt of capacity than geothermal.

Although this is generally the case, it should be noted that wind farms only operate at nameplate capacity about a third of the time, hence the capacity factor for wind powered electricity generation is much less than that of geothermal energy. Although solar or wind power remain important sources of alternative energy, the relatively poor capacity factors of these technologies remains a major limitation, as they do not have the ability to provide baseload power.

The very high capacity factor of geothermal energy, combined with middle of the road installation costs (depending on quality of resource) and long plant life, combine to make the levelised cost of electricity generation through geothermal energy cheaper than many conventional sources of energy.

The key expense categories relevant to the financial modelling of the potential of a geothermal project can be categorised into two broad categories.

  • Capital Expenditure (CAPEX) costs which include resource definition, power plant construction and connection of transmission lines as these are sunk costs.
  • Operating Expenditure (OPEX) costs that comprise of all ongoing power generation costs which are often referred to as Operating and Maintenance (O&M) costs.

Additional assumptions include the cost and availability of finance, government grants and the value of Renewable Energy Certificates (REC’s). Contact Activated Logic for more information regarding REC's.

The 2006 Australian Electricity Supply Industry Planning Council Annual Planning Report provided an indicative comparison for the levelised cost of electricity from alternative sources (ESIPC, 2006).

Consideration needs to be given to the average price of electricity generation over the entire life of a project, not just the marginal cost of production at the time a power generation plant is installed. Although geothermal plants are generally capital intensive and require substantial exploratory work before a project can be considered for a commercial development, the free cost of fuel (sub-surface heat) and low operating and maintenance costs make geothermal energy a potentially attractive candidate for renewable electricity generation.

In addition to the attractive levelised cost of electricity generation, renewable sources of electricity generation in Australia are eligible for one tradeable renewable energy certificate (REC) for every megawatt-hour (MWh) of net
electricity generation.


Renewable Energy Certificates

Renewable Energy Certificates (RECs):

  • are an electronic form of currency initiated by the Renewable Energy (Electricity) Act 2000;
  • may be created, on the internet based registry system (known as the REC Registry), by eligible parties for each megawatt-hour of eligible renewable electricity generated or deemed to have generated;
  • are created by registered persons;
  • are validated by the Office of the Renewable Energy Regulator;
  • are registered;
  • are traded between registered persons;
  • are eventually surrendered to demonstrate liability compliance against the requirements of the Australian Government’s mandatory renewable energy target or voluntary surrender; and
  • may be traded separately from the physical electricity in a REC market.

The current REC spot price is approximately A$50 per MWh with the price dependent on international developments at present, namely an international agreement on cuts to emissions in a UN-sanctioned agreement in Copenhagen in November 2009. The Coalition of Australian Governments (COAG) recently increased REC penalties from A$40 per MWh to A$65 per MWh.

For additional information on the current market price of REC’s or technical supply and demand based REC price forecasts out to 2030, including major price catalysts - please contact Activated Logic.

More information available from the Office of the Renewable Energy Regulator

Source: ORER, 2009


The Australian Geothermal Reporting Code

The Australian Code for Reporting of Exploration Results, Geothermal Resources and Geothermal Reserves has been developed as a joint initiative between The Australian Geothermal Energy Group (AGEG) and the Australian Geothermal Energy Association (AGEA). This is the world’s first uniform code to guide the reporting of geothermal data to the market and is designed to underpin the quality of the Industry’s relationship with the market.

The development of a Geothermal Reporting Code, and its adoption by operating companies to shape the way they report their geothermal exploration results, resources and reserves, is an important step in the development of Australia’s geothermal energy industry. Activated Logic understands that a second edition of the Geothermal Reporting Code is expected to be released at the 2009 Australian Geothermal Energy Conference.

The Framework
The Code uses a classification taking into account levels of geological knowledge and confidence and Modifying Factors which directly affect the likelihood of commercial delivery. It makes the key distinction that 'Geothermal Reserves' are deemed energy that is commercially recoverable now, while  'Geothermal Resources' require further work to be classified as 'Geothermal Reserves'.

Geothermal Lexicon
The Lexicon for Geothermal Exploration, Resources and Reserves has been prepared to facilitate understanding of geothermal energy concepts and the methods used to determine geothermal resources and reserves. However, it does not form part of the Geothermal Code.

Download the first edition of the Geothermal Lexicon document from AGEG by using this link.

Updates
The Geothermal Code and Lexicon will be maintained on the websites of AGEG and AGEA.
www.agea.org.au
www.pir.sa.gov.au/geothermal/ageg

Australian Geothermal Code Committee
The Geothermal Code has been prepared by the Australian Geothermal Code Committee. This Committee was initiated by the Australian Geothermal Energy Group and has advanced to be a committee of both the Australian Geothermal Energy Group and the Australian Geothermal Energy Association.

Correspondence with the Committee should be through a Secretariat supported by PIRSA:
      The Secretary, Australian Geothermal Code Committee
      Mr Tony Hill
      Principal Geologist, Petroleum and Geothermal Group
      Primary Industry and Resources SA
      GPO Box 1671
      Adelaide SA 5001
      Email: Hill.Tony2@sa.gov.au


How can Activated Logic Help?

  • Assistance with geothermal project investment through a network of experienced strategic partners, attendance at geothermal and renewable energy events, and the coordination of priority investor briefings including the preparation of company roadshow style events.

  • Geothermal project evaluation through comprehensive due-diligence, in-depth feasibility analysis including use of Activated Logic’s Sequential Investments Assessment Matrix (al-SIAM) to determine the attractiveness of geothermal project investment or  other forms of corporate transactions including M&A.

  • Manage geothermal grant applications under the Australian Geothermal Drilling Program (GDP) and the Renewable Energy Demonstration Program (REDP). Activated Logic also can provide assistance with international grant schemes including those available through the International Finance Corporation (IFC) division of the World Bank Group.

  • Preparation and presentation of technical communications including investment proposals and information memorandums with the objective of raising capital or forming alliances with industry participants to develop geothermal projects.

  • Geothermal project development & management - from early stage project initiation through to pre-feasibility, resource definition, FEED, project sanction and all commercial development stages.

  • Develop integrated and effective strategies (including geothermal  power plant technology selection) to accelerate the commercialisation of attractive geothermal projects and maximise likelihood of sustained success of geothermal projects.

  • Government policy – Activated Logic provides research, interpretation and advisory services in relation to the actual and expected implications of current and future government policies in relation to geothermal exploration and development.

  • Effective project and company communications for internal and external stakeholders demonstrating key-benefits. Full suite of graphic services provided to ensure technical communications including seismic-sections, gravity surveys and other geological data is presented professionally.

For more information on how Activated Logic can assist your organisation create and extract value from your geothermal portfolio, please contact us.


Other geothermal Sectors:

 

Industry Membership

Activated Logic Pty Limited is a Member of the Australian Geothermal Energy Group. As a member of the AGEG, Activated Logic has a common interest in sharing information to commercialise Australia’s geothermal resources at maximum pace and minimum cost in Australia’s competitive energy markets.

 

 

 

 



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