Islandsbanki

With just over 70 operating plants offering capacity of around 3,100 megawatts, the United States is the global leader in generating electrical power from geothermal resources, according to a recent report from Islandsbanki, an Icelandic bank that provides investment and financial services to the sustainable energy sector.

Of course, this represents less than 1 percent of the electricity generation of the United States, and while estimates from the bank’s “United States Geothermal Energy Market Report” suggest the country could greatly expand this capacity, securing financing for geothermal projects remains dicey.

Using current technologies, the report found, the United States could generate another 40,000 megawatts from geothermal resources, while the development of new enhanced geothermal systems could bring an additional 517,800 megawatts online.

Geothermal resources also have the advantage of providing continuous base-load power at a competitive cost compared with alternatives, the study suggested. “Taking into account the long life span of a geothermal plant, its up-time, base-load capacity and predictability, it provides a levelized cost of electricity that is very cost competitive against not only renewable, but also traditional energy sources.”

Still, “financing and the availability of equity will remain the key challenge for the geothermal sector,” as interest in geothermal projects by investors lags behind wind and solar projects.

Large capital costs required for drilling and the risk to this capital until the resource has been proven creates an “investment bottleneck,” said C.J. Arrigo of Glacier Partners, a corporate advisory firm focused on the geothermal-energy sector and authors of “Geothermal Economics 101.”

For a typical project, they assume 50 percent of the cost is spent on drilling four to six production wells that provide heat, water and flow rates required to operate the plant. Exploration technologies do a good job of locating the heat source, but have less success ensuring a good flow of water.

An average 20 percent failure rate during this exploration and drilling phase represents more risk than most investors are willing to bear, said Mr. Arrigo in a telephone interview.

The stimulus package should improve the financing situation. Due to a lack of debt financing caused by the credit crisis, the package provides loan guarantees. And because of the decreased tax appetite for production tax credits, the package offers investment tax credits and cash grants in lieu of credits.

The grant system, administered by the Treasury Department, allows the project developers to receive an upfront payment equivalent to the value of any tax credits, which should prove especially useful for geothermal projects.

“These will all help to get some banks back into the lending business for geothermal,” said Alex Richter, the director of Islandsbanki’s Sustainable Energy group in an e-mail message.

Utilities obligated to comply with state quotas for renewable-energy sourcing will also favor geothermal and “pay a higher price for electricity from geothermal in power-purchase agreements,” Mr. Richter said, because it provides reliable, base-load power compared with wind and solar.

Twenty-nine states have enacted standards that will require utilities to use a specified percentage of renewables in their energy portfolio.

Iceland meets roughly 99 percent of its electrical demand with renewables: 30 percent from geothermal and the rest from hydroelectric.

Also, almost all heating needs in the country are provided by geothermal systems. After its own banking crisis, the country has two major resources to draw on: its fishing industry and renewable-energy expertise. Mr. Richter said he expected that “energy and particularly geothermal will play a major role in rebuilding Iceland’s economy.”