Sadly, fossil fuels as limited resources are quickly going the way of the dinosaurs. As such, finding a viable renewable energy source has become increasingly important. So why is this important to investors? Well, the first company to develop a cost effective, renewable energy source is going to offer its investors high growth and even higher stock prices: Something every investor wants. Enter Ormat Technologies (NYSE: ORA ) .
Who needs the sun and the wind?
You've probably heard about wind and solar power as alternatives to fossil fuels. However, the problem with both is that they rely heavily on weather conditions. Unfortunately -- or fortunately for those who want sleep and peaceful weather -- the wind and sun don't blow and shine in each location 24/7, making it impossible to operate these plants 24/7. Additionally, solar power is not exactly cost-effective with the high price of panels, both initial and replacement. So what's the solution?
Well, unlike solar and wind, geothermal power uses the heat from the earth itself to generate electricity. And since the earth is, well, always there, geothermal power plants are able to generate electricity 24/7. As an added bonus, geothermal power is completely sustainable.
As today's only vertically integrated geothermal company (meaning it designs, develops, and manufactures most of the equipment it uses), Ormat Technologies saw the superior benefits of using geothermal, and began working to harness it. Consequently, Ormat now has a number of things working in its favor. Let's take a look at some of its strengths:
- Ormat has been granted 80 U.S. patents with 16 pending that cover the company's products.
- It has lower variable operating costs (principally consisting of maintenance expenditures) than fossil fuel-fired power plants that require ongoing fuel expenses.
- Ormat has a highly experienced management team. Key members have worked in the power industry for most of their careers and average over 25 years of industry experience.
- Ormat has no exposure to fuel price risk.
Who likes old fossils anyway?
In addition to the strengths named above, Ormat has had a number of unique opportunities that have primed it for future growth. For example, in 2010, Ormat received $108 million cash grant from the 2009 stimulus bill, to help with the development of energy. Furthermore, its application for a $350 million loan guarantee with the Department of Energy to finance three projects in Nevada, Hersey Valley, McGinnes Hills, and Tuscarora, is currently in the due diligence stage. So what else does it have going for it?
- As geothermal resources become increasingly cost competitive to fossil fuel-based electricity, consumer interest has increased.
- Legislative and regulatory incentives are becoming more prevalent for renewable energy plants as states pass laws requiring more and more energy to come from renewable energy sources. For example, by Dec. 31, 2040, 40% of energy consumption in Hawaii must be from a renewable energy source.
- Ormat is allowed to claim 30% of certain eligible costs of a new geothermal power plan as a one-time credit against federal income taxes, and it can claim a tax credit based on the power production from a geothermal power plant.
The ability to use geothermal as an alternative energy resource is relatively new. Because of that, there are some things working against Ormat. The biggest hurdle for Ormat is the large start-up costs of building new geothermal power plants. Additionally, Ormat has started exploring the possibility of expanding into Solar Photovoltaic. As with any new venture, this could fail, costing Ormat all of its initial investment.
These fossils are fighting back
As renewable energies becomes more in demand, traditional energy companies like National Grid (NYSE: NGG ) are looking at expanding into these markets, threatening Ormat's profits. Added to that are two additional threats Ormat faces:
- Ormat is competing with alternative renewable energy providers such as A-Power Energy Generation Systems (Nasdaq: APWR ) , CalEnergy, Calpine (NYSE: CPN ) , Siemens AG (NYSE: SI ) , ENEL SpA (OTC BB: ENLAY.PK) and others, for business.
- Ormat relies on transmission facilities that it doesn't own or operate to deliver the power it sells. If this distribution channel is interrupted, it would negatively affect Ormat's ability to deliver power to its customers.
Bring on the GeoT
We all know that alternative energy is the wave of the future when it comes to electricity. Now the question is, which one will dominate? Despite the problems it faces, Ormat is still one of the leaders in geothermal power, which is both cost effective and able to operate 24/7. As such, Ormat may just be one of the next big things in energy.
Want to watch Ormat, or any other alternative energy company in action?