The investment future is bright for the US biofuels sector, but the geothermal industry will continue to struggle, according to financiers.
Geothermal projects are hampered by drilling costs and the distance between project sites and demand centres, which makes the projects uncompetitive with other energy sources, said Michael Carter, the Denver, Colorado-based director of the energy group for analysis firm SNL Energy.
US Renewables Group has a large exposure to geothermal companies such as Bend, Oregon-based exploration and development company Newberry Geothermal "for better or worse, which today I will tell you is worse because it's a tough market", Jonathan Koch, co-founder of the investment firm, told attendees of the Wall Street Green Summit on Monday.
“On geothermal, the drilling risk is overwhelming on a lot of the markets,” he said.
The future for renewable energy development in the US will be generally challenging for a number of reasons, including the fact that a lot of utilities have already met their targets under renewable portfolio standards and there is no federal clean energy mandate, which makes it very difficult to secure the power purchase agreements needed to finance projects, experts said.
It also appears unlikely that the production tax credit (PTC), the key federal support mechanism for renewables, will be extended, as seen by last week's failed amendment to the transportation bill. Meanwhile, natural gas prices remain low.
“[The utilities] don't have any incentive to buy the power,” Koch said. “They don't have to build the renewable. They're only going to do it if it competes with fossil.”
Ideally, the US would have a renewable energy feed-in tariff and a national renewable electricity standard with “really high targets” so that the renewable energy sector can stop depending on “crazy” financing structures, he said.
However, both outcomes are “politically, ridiculously, impossible,” Koch said.
Bullish on biofuels
But he added said he is “much more bullish” on the biofuels sector because of the need to reach the US Renewable Fuels Standard (RFS2) targets by 2022.
“If you’re building advanced and cellulosic projects, I think you’re building into a market that’s fundamentally short,” he said.
“The good news is I don’t think we're going to repeal RFS2,” Koch added. “It’s the law of the land unless Congress all goes Republican and actually strips the entire programme.”
He added that “feedstock agreements and off-take agreements are critical to financing.”
The ethanol sector is expected to remain healthy despite the expiration of an ethanol blending credit and taxes on ethanol imports at the end of 2011, financing experts said.
“When you stop hearing complaints in a sector, that generally means they’re making money and that’s what’s happening in the ethanol business,” said Thomas Blum, a partner with New York-based investment firm GC Andersen Partners. “There’s a balance in demand and supply for corn-based ethanol.”
