Geothermal Is Heating Up

by Jon Markman | April 3, 2012 11:26 am

Ormat Technologies (NYSE:ORA[1]), a subsidiary of Ormat Industries, produces electricity and a variety of related products for geothermal and recovered-energy businesses. The company has two divisions: The first develops and operates multiple geothermal and recovered-energy plants, then sells the electricity to local utilities; the second designs and manufactures equipment for geothermal and recovered-energy plants and various power-generating utilities.

Geothermal plants uses underground heat sources to heat water. The resulting steam is then collected and directed to turn turbines that generate electricity. Geothermal is highly prized because it produces almost none of the harmful emissions of fossil fuels, locations are plentiful, and unlike solar and wind power, it can operate 24 hours a day in any weather conditions.

Ormat developed a proprietary technology that allows its turbines to collect electricity at lower pressure than rivals’ devices. This allows Ormat’s geothermal source to last longer and create more energy overall. The company’s research is partly funded by the U.S. Department of Energy.

Ormat operates 14 geothermal power plants and is constructing six more. Two-thirds of its electrical capacity is based in the U.S.; the rest is in the Philippines, Kenya, and Central America. This division produced 74% of Ormat’s revenues in 2011.

The other 26% of revenues (up from 22% the previous year) was generated by Ormat’s machinery division. It supplies contractors, owners, and operators of geothermal plants as well as owners and operators of interstate natural-gas pipelines, gas-processing plants, cement plants, and other companies in other energy-intensive industrial processes.

In 2011, Ormat’s total revenues were $437 million, vastly exceeding analysts’ estimates.

While energy production generates consistent revenues, geothermal is plagued by exploration costs and high capital requirements for construction projects. However, around the world, geothermal and recovered energy is becoming more popular, and Ormat is taking advantage.

Geothermal construction has risen dramatically worldwide over the past few years. While contracts were down in 2010, U.S. government efforts to ramp up the industry increased business in 2011 and this year. The Fukushima nuclear power plant disaster also raised the desirability of geothermal. Japan has now set a goal of 670 megawatts of geothermal energy by 2020.

Ormat has two joint ventures contracted with Sunday Energy Ltd. to build six solar-photovoltaic energy systems with a capacity of 38 megawatts and eight projects in Israel with a total capacity of 18 megawatts.

In 2011, Ormat acquired leases in California, Hawaii, Nevada, Chile, Guatemala and New Zealand to build geothermal plants and sell the electricity to local utility companies. Morningstar analysts believe that Asia may be a more profitable region, but growing within the U.S. is safer and ultimately better for the company.

Through January 2012, Ormat has commitments of $500 million for future development projects, and current revenue predictions are set as $465 million to $495 million for 2012.

Ormat shares are up 3.2% this month, which is in line with the market. If you’re looking for an alternative way to spread your bets on energy, you’re getting warm with this one.

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