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Vol. 16, No. 6 Week of February 06, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Ormat confirms Spurr geothermal; needs utilities to purchase power

Ormat Technologies’ summer 2010 small-bore drilling program on the southern flanks of Mount Spurr volcano, on the west side of Alaska’s Cook Inlet, has confirmed the likely existence of a geothermal source that would enable power generation for the Alaska Railbelt, Paul Thomsen, Ormat’s director of policy and business development, told the Alaska House Resources Committee Jan. 24.

Thomsen said that the purpose of the company’s drilling program is to determine whether there is an appropriate combination of underground heat, underground water and permeable rocks to enable the construction of a viable geothermal power plant.

And so far things look good.

Encouraging

“Results to date have been very encouraging,” Thomsen said. “The shallow water shows the mixing of geothermal fluids. The geochemistry indicates that there is a very high temperature resource — we can look at water molecules and see how hot they’ve ever been. All of this is indicating, as we thought, that this is a very hot, very good potential geothermal resource.”

Ormat picked up 15 leases on the southern flanks of Mount Spurr in the State of Alaska’s September 2008 geothermal lease sale and since then has moved ahead with a geothermal exploration program involving aerial surveys, ground surveying, surface sampling and the small-bore drilling.

To date the company has invested about $5 million in its Mount Spurr project, Thomsen said. The company has drilled two slim holes to depths of about 1,000 feet — the plan is to continue with the slim-hole drilling, with core holes to depths of up to 4,000 feet in 2011, and with the possibility of drilling a full-size production well in 2012, to determine whether there is a commercially viable geothermal reservoir, he said.

Customer needed

However, the project has reached a point where Ormat needs to find a potential customer, willing to sign up to a power purchase agreement that can underpin the risk of funding the Mount Spurr work.

“As a company, we’re reaching the very tough decision of how much capital can we outlay without having a guaranteed contract to take that power, and at what price is that contract going to be at,” Thomsen said.

The project should produce 50 to 100 megawatts of power, Thomsen said. And with an expected year-round reliability of 95 percent or better, and with a constant, self-refreshing underground heat source, a geothermal power plant could contribute to meeting the Railbelt’s base-load power needs, he said.

Ormat typically self finances a geothermal project until the geothermal power plant goes into operation, at which point the company refinances the project using long term debt — the relatively low project risk at that stage leads to attractive interest rates on the debt.

In the case of Mount Spurr project, the company has been using a $2 million grant from the Alaska Energy Authority, with the company matching that grant with $2.1 million of its own money. The company has been recommended for a further $2 million AEA grant, subject to further company expenditure in excess of $3 million, Thomsen said.

Infrastructure cost

However, coupled into the financing issues for the project is the question of the likely $70 million to $80 million cost of the necessary power plant support infrastructure: a 40-mile power transmission line from Mount Spurr to the nearest point on the Railbelt power grid and about 25 miles of permanent access road. Ormat anticipates holding discussions with the state and with Chugach Electric Association, the operator of the Beluga power plant where a transmission line from Mount Spurr would connect with the grid, about the appropriate mechanism for infrastructure funding, whether by private industry or by the state.

With an estimated construction cost per kilowatt hour capacity of $5,000 to $6,000, the cost of a Mount Spurr power plant would be somewhat higher than the typical $3,000 to $5,000 per kilowatt hour of a comparable plant in the Lower 48. And the costs and possible performance of the plant lead to a likely electricity cost of around 12 cents to 13 cents per kilowatt hour, a figure that is a few cents higher than the avoided cost of using current sources of Railbelt power, Thomsen said.

A reduction in geothermal royalties enacted by the state legislature in 2010 has shaved about one cent off the projected power rate, but some additional incentive, perhaps a refundable tax credit, would be needed to allow geothermal to compete on a straight cost basis, he said.

Fixed cost

But although currently more expensive to produce than, say, power a from a natural gas-fueled plant, much of the cost of geothermal energy involves the amortization of the initial cost of the plant, thus offering the enticing prospect of locking in a fixed power price over a 20-year period, while also enabling the generation of base-load power with virtually no environmental impact. And a typical geothermal power purchase agreement conveys to the power utility all of the green attributes of the power source, such as the elimination of sulfur dioxide, carbon dioxide and nitrogen oxides emissions, Thomsen said.

The proposed design for a Mount Spurr power plant involves bring hot geothermal water to the surface through a well, using that water to heat a secondary, low-boiling point fluid and then using the boiling of that secondary fluid to drive a turbine. The used water would be re-injected underground into the geothermal reservoir, where geothermal energy would reheat the water for re-use. And the secondary fluid would also be continuously recycled.

Air cooling

Taking advantage of the low prevailing air temperatures on the flanks of Mount Spurr, the facility could be air cooled to prevent water evaporation, thus eliminating water depletion and thereby extending the life expectancy of the geothermal reservoir almost indefinitely into the future.

“Once we develop this project we have a lifetime supply of free fuel,” Thomsen said.

And, so, the thorny question is whether the utilities, and hence the electricity ratepayers, are willing to pay a bit more now than the going electricity rate, to gain the geothermal benefits of locking in fixed future pricing and gaining the use an environmentally friendly power source.

Some states have renewable energy portfolio standards that drive energy economics in a direction that tends to make geothermal energy viable, Thomsen said. But Alaska, despite a state policy to increase renewable energy use, does not have a mandated standard to move the economic playing field. And so Ormat is facing this financial gap between current power prices and the potential cost of geothermal power.

“If the state wants to help us with that gap, we can offer the ratepayers a much lower price,” Thomsen said. “If the state can’t help us with that, we need to offer the ratepayers a higher price, and that could or could not make the project viable.”

Multiple utilities

Thomsen also commented that having to deal with several interrelated Railbelt power utilities complicates power purchase agreement negotiations. In the Lower 48, there are typically one, or at most two, utilities involved, he said.

On the other hand, the Railbelt utilities and the local communities all endorse the Mount Spurr project, viewing Mount Spurr geothermal energy as a near-term means of addressing concerns over tightening natural gas supplies, he said.

With the use of proven geothermal technology, the Mount Spurr project presents little technical risk; the geology looks very encouraging; and the project permitting has progressed smoothly. The immediate project challenge is to secure a market for the geothermal power, Thomsen said.

—Alan Bailey



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