Renewable Energy Is Gaining Steam in My Portfolio

It is no secret that oil and natural gas are finite resources on which the whole world is becoming increasingly more dependent. As more and more uses are developed for natural gas, it is inevitable that production will increase in order to meet expanding demand. While I may never live to see the day when either resource runs completely dry, I do believe that I will still be a going concern when their extraction reaches the point of diminishing returns.

Because of this obvious dilemma, renewable resources are continually gaining traction both in labs and within investors' portfolios. Which renewable source emerges the victor has yet to be seen. In my case, I have chosen to place my first bet on the effect that geothermal energy could have on the world. Here is an energy bestowed upon us from the belly of Mother Earth that can be harnessed in the form of steam after drilling several miles below the surface.

What makes this more unique than solar or wind? Well for one, the consistency in which power can be generated from a geothermal plant ranks leaps and bounds ahead of the other two which are largely dependent on the time of day, weather, etc. Therefore, geothermal power can be relied upon as a base-load source much like nuclear and coal plants are now. Add in the fact that it has a comparable levelized cost to that of natural gas facilities while beating out all other renewable sources other than wind, and geothermal appears to be an ideal choice to build the energy infrastructure of the future around.

Based on this favorable outlook, I will be adding Ormat Technologies (NYSE: ORA  ) to my real-money portfolio in order to gain exposure to the geothermal industry. Ormat Technologies specializes in binary cycle plants which have the ability to operate in areas where temperatures don't quite reach those necessary to generate power from traditional dry steam or flash steam plants.

Because binary cycle plants "simply" cycle the geothermal fluid through a heat exchanger -- where its heat is transferred to the low-boiling-point fluid which powers the turbine -- and then returns the cooled geothermal fluid to the reservoir, it protects the sustainability of the reservoir. Environmentalists can also rest at ease because the only emission that typically escapes from these plants is water vapor.

On top of returning the fluid to the reservoir and keeping our air breathable, binary cycle plants can be placed in areas of geothermal activity where temperatures don't reach those necessary to operate dry or flash steam plants. This increases the marketplace for Ormat's equipment and services well beyond what was traditionally thought of prior to their design.

While the cost of bringing a binary cycle plant on line might be a bet burdensome, I forecast that costs will fall as geothermal becomes more en vogue. With companies such as Halliburton (NYSE: HAL  ) and Schlumberger (NYSE: SLB  ) handling the bulk of drilling activity, technological advances can't be too far off.

From a financial standpoint, Ormat has been able to deliver cash flow from operations on a consistent basis for at least the past 10 years, where it has grown at a compound annual growth rate of 22.7% since 2003. I do have some reservations regarding its debt level, but if it continues generating cash like it has been, then I don't foresee any problems meeting its current obligations.

As my portfolio expands, this early base of new school versus old school energy is a nice near- to mid-term hedge after which I believe the new school regime will officially take over. I look forward to watching this technology leader grow along with its promising industry in the coming years.

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