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Right now alternative fuels and sources of energy are gaining a lot of traction. If conventional fuel prices spike again (which I expect to happen), we’re going to see even more demand for alternative sources of energy. One type of energy you don’t read a lot about is geothermal energy. But I think you’re going to be hearing more about it soon. For those who don’t know, geothermal is energy from heat inside the earth’s core. It is typically extracted by drilling wells at various depths to harness the earth’s energy. It is done through various means.

The advantages of geothermal energy are:

1) Its better for the environment than fossil fuels. A lot better. With new environmental legislation coming soon restricting emissions, companies are going to start looking harder at this type of energy.

2) Its cheaper than other alternative energies. The big cost for geothermal is upfront. This is why private capital is necessary. The recession has hindered the amount of private capital looking for these types of projects, but that will likely come back. This quote summarizes the differences in price:

Geothermal energy is expected to cost about 7.3 cents per kilowatt hour by 2030 compared to 8.1 cents per kilowatt for wind, 12.5 cents per kilowatt hour for concentrating solar thermal and about 22.9 cents per kilowatt hour for solar photovoltaic, according to the Energy Department.

3) Geothermal energy provides base-load power. Utility companies need a continuous source of energy to meet minimum energy demands, or basically a 24/7 source. Geothermal provides that. This is a big advantage over sources like solar and wind, which can be intermittent.

Like any alternative energy, there are barriers to entry. To me, the most important factors that limit geothermal energy are A) Political Will, and B) Private Capital.

Political Will behind Geothermal Energy

As far as politics goes, the right group of politicians are in Washington if you’re looking for a change in our energy plan. Some of this is already happening. You also have what are called “renewable portfolio standards”, which are being enacted all across the country. They require states to generate a certain percentage of their electricity through renewable sources. California is one of the first to go into effect with 20% required by 2010. This is good news for geothermal, as much of its potential is in the Western U.S., as evidenced by the included geothermal energy map. We’re also seeing plenty of tax credits and incentives through the federal government. The economic stimulus plan added some money for renewables, and I expect those type of measures to continue.

Private Capital to Support Geothermal Energy Projects

Private capital funds and individual consumer money is flowing into geothermal as well. Google’s philanthropic arm Google.org is also granting money to geothermal research and projects. This technology is definitely starting to gain some awareness, and Google is taking a big role in it.

How can you we invest in geothermal? The largest players are diversified energy companies like Calpine and Chevron. For me, that is too indirect. I like Ormat Technologies (symbol ORA). I think they are the best pure play on geothermal. They sell electricity through their own plants, but also sell products and help set up geothermal projects for companies all over the world. They just reported a great quarter with a strong outlook ahead. The stock is expensive, at 22x forward earnings, but the shares would look attractive if we see any pullback.

So what’s the bottom line here? Geothermal isn’t developed enough to be a stand-along solution to our energy problems, but it can be a major player in our revamped energy plan. It will just take more time, awareness, and willingness of political leaders. Overall, I think geothermal has a bright future.

Disclosure: Author does not own shares in companies mentioned.

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