Master Thesis
International MBA program 2004/2005 Course MIP1 EADA Business School/ Spain

GEOTHERMAL MARKET: A RENEWABLE ENERGY FOR THE FUTURE

by Phillip Sack
2005

CONTENTS

1 Executive Summary ... 4

2 ENEL S.p.A. ... 6
2.1 Company Background ... 6
2.2 Company Chart ... 8
2.3 Services and Other Activities ... 9
2.4 Geothermal Activities ... 9
2.5 Outlook ... 10

3 Definition of Geothermal Energy ... 12

4 Geothermal Industry ... 15
4.1 Geothermal Development ... 15
4.2 Current Situation ... 15
4.3 Growing Demand ... 17

5 Technology ... 19
5.1 Technology and resource type ... 20
5.2 Technology overview – Electric power generation ... 21

6 Economics ... 38
6.1 Production and Operating & Maintenance Costs ... 38
6.2 Pricing ... 38

7 Substitutes / Renewable Energy ... 43
7.1 Introduction ... 43
7.2 Biomass ... 44
7.3 Hydro ... 45
7.4 Solar ... 47
7.5 Wind ... 48

8 Real Option Risk Analysis ... 50
8.1 Definition of Real Option ... 50
8.2 Real Option and Investment in Geothermal Energy ... 51
8.3 Country Analysis ... 52
8.4 Competitors Analysis ... 66
8.5 Geothermal Exploration ... 70
8.6 Distribution ... 72

9 Recommendation ... 73

Figures

Figure 1 – Geothermal Energy
Figure 2 - World Geothermal Power Installed, Industrial and Developing Countries, 1950-97
Figure 3 – Installed & Potential Capacity
Figure 4 – Earth Dynamics
Figure 5 – Dry Steam Power Plant
Figure 6 – Flash Steam Power Plant
Figure 7 – Binary Cycle Power Plant
Figure 8 – Power From Moderate – Low Temperature Fluids
Figure 9 - Projected Capital Costs for Hot Dry Rock
Figure 10 - Development Process
Figure 11 – Real Option Tree
Figure 12 – Installed Capacity versus Open Potential Capacity
Figure 13 – Average Risk versus Open Potential
Figure 14 – GDP Growth Rate % versus Open Potential
Figure 15 – Electricity Development Central America
Figure 16 – Exploration Phases
Figure 17 – Thermal Efficiency HOKKAIDO ELECTRIC POWER

Tables

Table 1 – Key Financial Data
Table 2 – Installed and Potential Capacity
Table 3 - Cost and Technical evolution data for Geothermal Electricity
Table 4 - Production and OM Costs
Table 5 - Levelized cost comparison of based power by sources
Table 6 - Geothermal operating and maintenance costs by plant sizes (U.S. cents/KWh)
Table 7 – Action Plan

Appendix

Appendix 1 – Financial Data Enel
Appendix 2 – Installed & Potential Capacity
Appendix 3 – Country Risk Analysis
Appendix 4 – Competitor Analysis
Appendix 5 – Regulatory Framework

1 Executive Summary

The purpose of this project is to provide Enel with an outlook and a possible development of the geothermal sector worldwide.
We analyzed the current geothermal market, its main players, the countries in which they operate as well as the most promising areas with respect to availability and accessibility.
Further, we analyzed technological trends and pursued a risk assessment of the factors that mostly affect the exploration and development of any geothermal field. Based on the above analysis, we propose our recommendation to Enel to further strengthen its geothermal activities and global positioning.
After getting a broad overview from the main geothermal organizations, we interviewed experts with technical and business background as well as geothermal operators, and visited production power plants in order to deepen our knowledge. The analysis of the information we gathered enabled us to develop the following conclusion.
Geothermal is a clean, reliable and sustainable renewable energy, which has proved to be a viable alternative to oil, coal and gas. Its capacity has grown consistently over the last 20 years due to the rising attractiveness to energy companies. Among the reasons for this growth are the reduced exploration and drilling costs, the incentives that some governments offer and the increased corporate awareness of environmental problems (i.e., the Kyoto Protocol restrictions and the Clean Development Mechanism). A good example is Iceland, where 90% of the households already profit from energy offered at a competitive price and generated by geothermal resources.
Nevertheless, geothermal is still an underestimated energy, which is reflected by the fact that only 5.8% of the potential capacity is currently exploited. Indonesia and Mexico as well as many other countries have an open potential which in some cases is ten times higher than the capacity they are actually using. Furthermore, among those are countries which could be 100% powered by geothermal energy (e.g. Costa Rica, El Salvador, Kenya)¹ .
These unexplored resources are increasingly attracting international corporations that operate in all segments of the value chain and compete for the most profitable fields. Many companies supply the steam and sell the electricity generated likewise (e.g. Pertamina, Unocal, Calpine), whereas others (such as Ormat) initially focused on technology excellence and later recognized profitable business opportunities also on the supplier side.
Based on the above observations and conclusions, we suggest the following recommendations.
Considering the prosperous geothermal resources and the current market situation, we are convinced that promising opportunities exist in the USA and Indonesia, where regulations encourage development, political and economical conditions are favorable and the chance to partner with suitable local players is possible. Additionally, for future opportunities, special attention should be paid to countries like Mexico, where privatization is in process, Guatemala and Nicaragua, where political and economical conditions are not yet stable but the open geothermal potential is very high. Finally, Kenya and Ethiopia, which are located along the African Rift, represent a long term perspective since the geothermal resources are mostly unexplored but the political and economical framework hinder current market penetration.
Further details will be outlined in the presentation and in the final report.

2 ENEL S.p.A.

2.1 Company Background

Enel S.p.A (“the Company”) was founded December 6, 1962, as Ente Nazionale per l’Energia Elettrica (National Board for the electric energy), to which the Italian Government gave the role to produce, import, export, transport, transform, distribute and sell electricity.
The company today is engaged in the generation, distribution, sale, and transmission of electricity in Italy. It also sells and transmits electricity primarily in Spain, and North and Central America. As of December 31, 2003, the company had 593 generating plants, consisting of thermal, hydroelectric, geothermal, and other renewable resources facilities. Its distribution network consisted of 1,082,369 km of lines, as of the above date. As of 31.12 2004 the company had 61,896 employees.
The Company has completed a refocusing strategy and is now entirely focused on the electricity and gas business. During 2004 they refocusing strategy was completed with the sale of real estate activities and waste treatment business, and the agreement reached for the disposal of our water activities.
Their mission is “to be the most efficient, market driven, quality focused provider of power and gas creating value for its customers, shareholders and people”.²
The key financial data of the Company can be seen in Table 1.
During 2004 the revenues grew by 16.5% from previous year. The gross operating margin grew by 11.9% in 2004. Main increases were registered in Telecommunications (up euro 544 million) and the Parent Company (up euro 473 million). Gross operating margin of the Networks, Infrastructure and Sales Division grew by euro 151 million (up 4.1%), the Generation and Energy Management Division registered an increase of euro 136 million (up 3.5%), Transmission Networks an increase of euro 62 million (up 10%), while the Services and Other activities area registered a euro 183 million decline due to the reduction in the operating perimeter. The EBITDA rose by 11,9% and the net profit excluding extraordinary and non-recurring items grew by 68%. The Company is now a highly cash generative business and this enables us to sustain a high dividend flow. During 2004 the value of their shares rose about 38.8%, reaching a maximum of euro 7.25.

you can find Table 1 in the Downloadfile

Table 1 – Key Financial Data

For the future the company predicts that growth will come in a number of areas – in renewables, where they have strong positions both in Italy and abroad; in gas, where they will acquire businesses and develop organically their customer base through their attractive dual fuel offer and their trusted brand.
As of 31.12.2004 the shareholding structure was the following:

• 31.45% owned by the Ministry of Economics and Finance ³
• 10.28% by its subsidiary Cassa Depositi e Prestiti, and
• the residual 58.27% is floated on the market (mostly owned by institutional owner, the biggest being Lazard Asset Management LLC)

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1 http://www.geo-energy.org/PotentialReport.htm
2 Enel S.p.A., “Annual Report 2004”, p.2
3 The Ministry of Economics and Finance reduced its ownership in the company through a stock market placement (at December 31), reducing its ownership to 31,45 %.