Is the World Warming to Geothermal Energy?

Owing its very existence to volcanic activity, it is perhaps no surprise that the island nation of Iceland has figured out how to tap into geothermal energy, which now powers more than 90% its homes. What is surprising, though, is that Iceland seems to have warmed up to an even bigger geothermal opportunity: North America.

Two recent developments highlight this growing interest, and investors interested in clean energy and geothermal energy in particular are encouraged to take note. The first newsworthy announcement occurred when Iceland's Geysir Green Energy revealed it was investing $6.3 million in Western GeoPower, a Canadian-based geothermal company, which earlier this spring entered into a deal with Pacific Gas & Electric (NYSE: PCG  ) to supply it with 25.5 megawatts of geothermal energy.

The second and more noteworthy event occurred when Iceland's Glitnir Bank released a 67-page report on the geothermal market in the United States. In addition to indicating that it intends to invest $1 billion in U.S. geothermal projects over the next five years, the report estimated that a total of $9.5 billion in new investments will be required to service existing geothermal projects.

Longer term, the report suggested that almost $40 billion will be required to develop various geothermal opportunities in the United States through 2025. When one considers that geothermal energy is more environmentally friendly than coal; more reliable than wind power; and, according to the report, has the potential to supply California with 20% of its energy needs, Nevada with 60%, and Hawaii with 30%; the scope of the geothermal opportunity in the western United States begins to take shape. The bank estimates up to a sixfold increase in the annual sales revenue of electricity from geothermal sources in the United States in the next 15-20 years.

But be forewarned. The report also suggests that the geothermal industry in the United States will likely undergo consolidation in the years ahead, so investing in the field is not without risks. Further, growth in the space is already widely anticipated by the market. For example, Ormat Technologies (NYSE: ORA  ) , a promising geothermal company that has a number of projects currently under development, now trades at around 78 times trailing-12-month earnings.

So I encourage investors who are already high on the energy sector and looking for a safe way to play the emerging opportunity in geothermal energy to consider Chevron (NYSE: CVX  ) . That's right, Chevron. Although overwhelmingly an oil and gas play, it is also the largest geothermal producer in the world, with geothermal facilities in Indonesia and the Philippines. My guess is that if Iceland is eyeing the geothermal opportunity in the United States, Chevron is also looking at similar opportunities in its own backyard.

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