Long term future good for geothermal - Part one

By Paula Wallace

Walter Gerardi of McLennan Magasanik Associates, provided a comprehensive market overview and insight into opportunities for geothermal producers as Australia embraces more renewable energy and heads towards introduction of emissions trading.
Discussing financing issues for geothermal projects, Simon Schwarz, director at Investec Bank (Australia), used a depth of knowledge about other alternative energy sources, particularly wind, to make some astute observations.

Market overview and opportunities
Looking at Australia’s long-term emissions reduction target in regard to electricity generation, Walter Gerardi noted that roughly 300,000 gigawatt hours (GWh) or 300 terawatt hours (TWh) of low emission generation would be required in order to meet the target assuming demand stays the same.
“Given that we are generating at the moment roughly 250-270 TWh it means we need one and a half times more than the current capacity in low emission generation options by 2050.
“Now it’s that need that creates the opportunity. The problem of course is the relative cost of all the generation options.”
Renewable energy sources at this stage are still more expensive than other conventional technologies.
“We’re estimating geothermal at around $80 to $100 per megawatt hour (MWh) in costs. Of the renewables geothermal appears to be the best option,” he said.
Gas prices are rising and most projections have them rising substantially, nearly a doubling of gas prices over the next ten to fifteen years, and coal is also following this trend.
Worldwide there has been a significant uptake of renewable energy, something like 20-30 per cent growth across the technologies worldwide. That growth is leading to a stage where “we’re starting to see scales of production for renewable equipment and there’s a lot of economies of scale starting to show up,” said Gerardi.
“And also a lot of ‘learning by doing’ which is tending to reduce the capital costs of renewable options.”
Despite all these developments it’s still likely that renewable energy will be relatively less competitive than fossil fuel alternatives over the next decade according to Gerardi’s modelling.
“Something else has to happen in order for us to realise that opportunity and in Australia there’s been a number of policies announced and the major one…is the Carbon Pollution Reduction Scheme (CPRS).”
The Emissions Trading Scheme or CPRS will cover not just electricity generation but a whole lot of other sectors. One of the other sectors covered is fugitive emissions, which means that for gas and coal fired generation there is an additional impost in having to cover those emissions.
In addition Australia has an expanded Renewable Energy Target Scheme (RETS) which will ultimately encourage 45,000 GWh of renewable generation by 2020.
“…essentially they’re allowing existing generators to remain eligible under that Scheme right up to the end of it up to 2030…eventhough it targets 45,000 the amount for new projects is really about 35,000 GWh,” said Gerardi.
In regard to what will happen to permit prices under the CPRS, Gerardi said that Commonwealth Treasury modelling indicates, “it starts anywhere from low 20’s to the low 30’s, by 2020 it reaches around the mid-thirties to around $50 a mark and by 2050 it goes from $116 to $160 a tonne mark.”
“That will be one of many factors that feed into electricity prices which is the ultimate thing that will determine the viability of your projects,” Gerardi told delegates at the 4th Hot Rock Energy conference.
Again, based on the Treasury modeling work, in a ‘Business as Usual’ case wholesale electricity prices stay flat around $40, but once you start to introduce permit prices (which increases the cost of high emitting generation) the prices start to increase quite sharply – around $80 by 2020 and then $100-120 by 2050.
“…if wholesale prices eventuate like this it basically means that by 2020…you should be able to survive in a market framework with these emissions trading schemes without any further assistance,” said Gerardi.
“So the long-term outlook based on these prices is pretty good.”
The second part of that story is what’s going to happen to the technology mix under a CPRS. That will depend on a whole range of factors including what happens to fuel costs, what happens to capital costs, and the actual resource availability of the various low emissions options.
What comes out the Treasury modeling are some fairly clear trends.
“Coal fired generation stays flat in a CPRS world, hardly any growth at all and then towards the back end it even starts to shrink as the emissions targets get tougher,” said Gerardi.
“The story could be a lot worse for black coal because a lot of this is underpinned on the development, or assumed development of carbon capture and storage technologies.”
It’s a similar story for brown coal. Natural gas grows under all scenarios mainly because there are some existing policy measures which help support it.
“The clear winner is renewables…in a CPRS world up to 2030 you’re getting a doubling if not trebling, we had to start limiting it because we were getting to the outer bounds of what was seen as possibly not conservative in terms of the total resource base so the potential’s possibly even greater,” said Gerardi.
“In terms of the 2040-50 picture that’s nearly equal to the existing level of total generation it’s almost two-thirds or three-quarters of it, so that’s quite a large potential in the long-term driven again by those high electricity prices.”
While the long-term picture for renewables including geothermal is strong, there’s still the next ten years to consider. Gerardi believes this is where the expanded RETS comes in.
Gerardi’s database has something like 505 renewables projects that are either existing, committed or announced but more importantly the total amount of energy generation for projects that are already in play is 23,000 GWh – of which roughly 7,500 is eligible under the expanded RETS.
“We’ve got close enough to 3,000 GWh hours under construction at the moment mostly in the form of wind farms, we have something like 40,000 GWh of proposed projects that people have announced including about 3,000 GWh of geothermal type projects,” said Gerardi.
“So already with known projects we have more than enough to meet the 45,000 GWh RETS target.”
He noted that the ability of the electricity grid to accommodate additional generation will be one of the determinants over the next ten years of the types of renewable generation that will come into the market.
“Wind takes up a lot of what is required to meet the target by 2020…geothermal’s contribution is about 20-30 per cent by 2020,” said Gerardi, also suggesting that there are technical and network issues that need to be addressed.
“What the outlook shows is that in the long-term the outlook for renewables and particularly renewables like geothermal is fairly good.
“In the next ten years the outlook is reasonably good as long as you can get that technology developed and as long as you can remain competitive with wind generation in that time frame,” he said.
 

To read the final part of this report click here.