Geothermal energy plant. Photo credit: Flickr user monikomad.

Less than one half of one percent of America's electricity comes from geothermal energy sources. Yet the geothermal energy potential found within just nine Western states could supply 20% of the country's electricity. Further, a new technology inspired by fracking could be a game-changer for America's geothermal energy hopes. So, with so much potential, how do investors make money on any future boom in geothermal energy?

What is geothermal energy?

Before we get to profits we need to first understand geothermal energy. Geothermal is the combination of two words: geo, meaning earth, and thermal, meaning hot. So, geothermal energy uses the heat found within the earth's crust to produce energy. More specifically, geothermal energy harnesses water that is heated within the earth's crust to produce steam. That steam is used to turn a turbine to create electricity. 

Geothermal energy actually uses a process to produce energy that's similar to coal or natural gas. However, it bypasses the need to burn fossil fuels to create steam by using the steam from hot water already found within the Earth's crust. This makes geothermal energy both clean and renewable. Further, unlike other renewables like wind and solar, which are intermittent, geothermal energy is steady, so it's a good base-load power generator.

What's the future of geothermal energy?


Geothermal energy in the U.S. Source: National Renewable Energy Laboratory 

There are currently just over 3,000 megawatts of geothermal energy capacity in the U.S., which accounts for less than one half of one percent of America's electricity generating capacity. One reason why geothermal energy is such a small portion of capacity is because it's expensive to find, and the industry has wasted a lot of money drilling dry holes in the past. Further, it requires extensive reports and environmental permits. On top of that, because the best geothermal energy sources are near fault lines, there has been a link between geothermal energy and increased earthquakes.

That being said America is beginning to see increased investments in geothermal energy. There are currently more than 200 geothermal energy projects in various stages of development representing nearly 8,000 megawatts of capacity. One of the drivers of these new projects is a new technology called an enhanced geothermal system, which uses a technology similar to the hydraulic fracturing used for oil and gas wells. The technology can create a geothermal energy source by simply finding hot rocks instead of needing to find a hot water source as it can inject cold water that then turns to steam when it comes in contact with the rocks.

Geothermal energy investment opportunities

One of the early leaders in using enhanced geothermal systems is privately held AltaRock Energy, which is backed by Google (NASDAQ: GOOG)(NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) co-founder Paul Allen's investment firm. The company recently demonstrated the technology in Oregon where it was able to create a number of geothermal areas from a single well site. It would like to eventually construct a utility-scale power plant at that location so it can commercialize the technology, which it says can produce six to ten times as much power as older geothermal energy techniques. Still, the company is a long way off from being an investment opportunity for the general public. 

Ormat Technologies (NYSE:ORA), however, is a publicly traded geothermal energy company. Like AltaRock, it is testing enhanced geothermal systems and recently completed a project with the help of the U.S. Department of Energy in Nevada. The project boosted the productivity of an existing geothermal energy field by 38%. It also became the first enhanced geothermal system to supply energy to the power grid. Because it's already one step ahead of AltaRock and other smaller geothermal players, it's a company investors will want to watch closely as it does offer a direct investment opportunity in the growth of geothermal energy in the U.S.

Investor takeaway

Thanks to an emerging new technology geothermal energy appears to be heading for strong growth in the years ahead. As it does, it should open up additional opportunities for investors. This growth could boost the earnings of a company like Ormat Technologies while a company like AltaRock could commercialize its technology and then go public. That being said, investors appear to be better served watching these developments from the sidelines before jumping in, as the industry still has a lot of big hurdles to jump before we see geothermal energy start to realize its full potential in America. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), Microsoft, and Ormat Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.