One clean energy stock to buy now

Technological improvements and government stimulus money have given geothermal energy a boost in the US. Here, David Fessler picks one stock that stands out from the rest of the sector.

Geothermal energy isn't a new concept in the United States.

It's actually been around for some time, with numerous geothermal power plants in California, Nevada and a few other western states. There are new plants on the drawing board, too. But unfortunately, the recession has stifled the construction progress on many of them.

But all that's about to change. Thanks to a few key technological developments and a big cash infusion from the government, the stars are aligning to produce the perfect storm for this super-green energy source...

The benefits of underground energy

If you're unfamiliar with how geothermal energy is produced, here's a quick-fire (and simple) look at how the process works.

A well is drilled over an underground hydrothermal (hot water or steam) heat source (in the United States, most are located in a few western states). The hot steam or water is piped up from below, which is used to spin a turbine connected to an electrical generator. Viola... you have geothermal power.

Naturally, the benefits are obvious...

Environmentally friendly: You can't get much greener than geothermal. There's no pollution, no greenhouse emissions and the cooled water is re-injected back to where it came from via a second well.

Cheap: Geothermal power plants are cheap, unassuming and relatively simple to maintain. In industry-speak, they're 'baseload' sources - in other words, they operate 24 hours a day, 365 days a year.

But there's a key requirement - and it's a big one...

Getting steamy isn't easy

The problem with geothermal power in many cases is that conventional plants have to be constructed over known hydrothermal sources. And those only exist in a few concentrated areas.

However, as with many things these days, new technology is making it possible to overcome problems. In this case, even when there isn't any hot water or steam readily available, you can still get some.

Nearly two decades ago, scientists at the Los Alamos National Laboratory in New Mexico determined that the rise in temperature as you descend into the Earth is roughly 125F per mile. Drill down two miles or so and you'd have rocks hot enough to produce steam. This is the result of heat from the Earth's molten core radiating up towards the surface.

It's not that easy, though. Once you inject water into the well, the rock next to the borehole cools. When it cools enough, you don't get any more steam. This seemed like an insurmountable problem... at least until recently...

Ripping a page from the natural gas playbook

Ten years ago, Marcellus, Barnett and Haynesville were merely considered to be interesting rock formations that contained natural gas in very small pockets.

But that changed when the natural gas industry successfully commercialised the technique of horizontal drilling and hydraulic fracturing.

I won't bore you with too many technical details, but the simple process involves drilling a hole down to the shale rock, which contains the natural gas. The drill bit then continues through the rock for as long as several miles. The bit is then withdrawn when the hole is pressurised enough, and the rock is hydraulically fractured. This process releases the gas, which then flows to the surface.

This is what has created boom times for the natural gas industry.

Today, geothermal scientists are experimenting with a modified version of the natural gas technique for geothermal energy - known as an Enhanced Geothermal System (EGS).

Simply put, it involves pumping cold water down one well, which the underground rock then heats as the water flows through. The water then returns to the surface through a second well. The rest of the process is the same as conventional geothermal.

So how much power could be generated using this technique?

America's energy usage... multiplied by 140,000

According to a 2006 report from the Massachusetts Institute of Technology (MIT) and funded by the Department of Energy, the amount of EGS resources in the United States could provide 140,000 times the total annual energy use in the country.

Using technology available today, the MIT scientists further estimated total recoverable power from EGS resources to be as much as 12,200 Gigawatts. That's 15 times higher than the largest peak summertime electrical load in the United States.

We're not close to that yet. But the report further estimated that with an investment of $1 billion over 15 years towards research and development (roughly cost of one coal-fired power plant), 100 Gigawatts of capacity could be in place in the United States by 2050.

So what's the federal government waiting for? This would appear to be a no-brainer in terms of boosting America's natural energy resources and relieving some of our dependence on foreign sources...

The Feds are hot on geothermal energy

The geothermal message seems to be getting through to the purse-string pullers. On February 1, the Department of Energy unveiled a $28.4bn budget request for the 2011 fiscal year (which starts in October this year).

Part of the package includes $2.36bn for the Office of Energy Efficiency and Renewable Energy - a 5% increase over last year. Even better... its geothermal program will get a 25% increase. There's also money set aside to support an estimated $3-5 billion in loan guarantees for projects like EGS.

So where's the profit opportunity?

The goliath of geothermal

There are plenty of companies in the geothermal space, but one stands out among the others - Ormat Technologies, Inc. (NYSE: ORA). With 45 years of experience, it's the leader in the geothermal and recovered energy power sector.

The company designs and builds geothermal power projects in the United States and around the world. And you can bet that as EGS advances from the R&D phase into widespread commercialisation, Ormat will be in the driver's seat.

If you want to get in ahead of the crowd on this burgeoning area, consider adding a few Ormat shares to your energy portfolio.

This article was written by David Fessler and was first published in the daily investment newsletter Investment U


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