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GEOTHERMAL ENERGY SERIES Part 1 2022 11 10 CHOA eJournal
GEOTHERMAL ENERGY SERIES
O&G Expertise Unlocking the Earth’s Energy Potential: Part I
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Tim Monachello, CFA, Analyst, Managing Director, ATB Capital Markets
Patrick Tang, CFA, CPA, Associate, ATB Capital Markets
This eJournal article is the first in a series on how Geothermal Energy can impact the energy industry and net-zero transition. The articles have been developed from a thematic report issued by ATB Capital Markets earlier this year.
This first article is an executive summary – the next articles in the series will address Conventional Geothermal, Enhanced Geothermal, Opportunities for the Oil and Gas Service Sector, Economic and Strategic Factors, and the Regional Landscape for Geothermal Development.
O&G Expertise Unlocking the Earth’s Energy Potential
EXECUTIVE SUMMARY
Geothermal Has the Potential to be a Game Changer
The heat generated in the core of the Earth is an enormous source of renewable powerenough to power the globe many times over. While historical geothermal developments have been largely limited to high-temperature hydrothermal resources, typically situated at or near tectonic fault lines where the Earth’s crust is thinnest, new technologies are being developed that could significantly increase the viability of geothermal power generation in lower temperature resource areas and even in areas without natural aquifers. Ultimately, we believe innovations over the coming decades could make geothermal energy production viable in nearly any location on Earth and widely competitive with other forms of renewable and nonrenewable energy while also having the advantages of being zero emission, baseload, and having the optionality of both distributed and centralized energy production.
Ultimately, we believe step-change innovations in geothermal have the potential to make geothermal among the preferred forms of power generation – in this blue-sky scenario, it is conceivable that geothermal could be among the fastest-growing sources of energy globally and could grow to become a significant contributor to the global energy mix.
Geothermal vs. Other Energy Sources
Figure 1 – Geothermal vs. Other Energy Sources
Source: ATB Capital Markets Inc.
Innovation Could Unlock Geothermal Power as a Core Renewable Energy Source Around the Globe
Geothermal energy has been a relatively overlooked source of renewable power over recent decades, as the competitiveness of commercial projects has largely been limited by the scarcity of high-quality hydrothermal resource. These resources have generally been concentrated in areas with strong flow properties and where the Earth’s crust is thinner and therefore hotter - generally along tectonic plate boundaries. That said, new innovations are emerging that have the potential to 1) improve returns from lower-temperature resources, 2) access highertemperature resources that are ubiquitously present at deeper intervals, and 3) reduce the flow requirements of geothermal resources. Overall, these innovations have the potential to make geothermal a competitive and viable renewable energy source around the globe. Within this report, we highlight various innovations being pursued to advance the state of geothermal power generation projects, and we include various case studies highlighting interesting projects and technologies.
Innovation Could Make Geothermal Widely Commercial and Geographically Applicable
Figure 2 – Innovation Could Make Geothermal Widely Commercial and Geographically Applicable
Source: ATB Capital Markets Inc.
Carbon Pricing is Critical to the Growth of the Geothermal Industry
Historically, the growth of geothermal has been limited by the scarcity of high-temperature hydrothermal resources that can generate high enough returns to be economic at a commercial level. Economic returns from lower- temperature resources have generally been too low to incentivize capital. Increasingly, carbon pricing mechanisms (and other grants and subsidies) that meaningfully increase the rate of return for geothermal developments and provide an opportunity to develop lower-temperature, more widely available projects are being introduced. Many new conventional projects (utilizing traditional geothermal technologies) are being proposed in regions where temperatures would have historically been too low to economically develop. Many of these projects are seeing much stronger return potential through the addition of revenue streams from carbon pricing mechanisms and often through one or more additional value enhancements (i.e., direct heat sales, mineral extraction, etc.). For context, we believe high-quality conventional hydrothermal projects often earn returns in the high single digits to mid teens (excluding carbon pricing), while certain lower-temperature projects are targeting returns in the low to mid teens when including carbon-related revenue streams. Specifically, we highlight Terrapin’s No.1 Geothermal project being pursued in Alberta – our scenario analysis suggests its returns could increase from roughly 14%-16% to 20%-25% based on the Canadian federal government’s schedule to increase the price of carbon to $170/tCO2e by 2030.
Net Zero by 2050 Will Require Significant Geothermal Capacity Growth
Geothermal energy is a source of renewable, zero Scope 1 and 2 emissions power. The IEA estimates that to achieve net zero by 2050, geothermal energy capacity will need to grow at a CAGR of roughly 13% from 2021 to 2030 (roughly 3.4 GW/year), representing roughly a 250% increase in global geothermal capacity from roughly 15 GW in 2020 to roughly 52 GW by 2030. Longer term, the IEA’s modeling suggests geothermal capacity is required to grow to roughly 126 GW by 2050, representing roughly a 7% CAGR in order to meet its net zero target. Further, the U.S. Department of Energy estimated that US geothermal electricity capacity alone could rise to roughly 60 GW by 2050 based on geothermal innovations, representing roughly a 10% CAGR from 2022 to 2050.
Figure 3 – IEA and US DOE Expect Significant Geothermal Capacity Growth through 2050
Source: International Energy Agency, US Department of Energy, ATB Capital Markets Inc.
Geothermal Likely to be Meaningful Opportunity for Energy Services Companies
Geothermal energy development leverages the billions of dollars invested in upstream energy R&D over recent decades to develop advanced well designs and drilling techniques. In our view, the energy sector’s involvement in geothermal represents 1) a significant catalyst to increase the pace of geothermal innovation, providing both capital and expertise, and 2) offers a sizable opportunity for energy services companies to benefit from the growth in geothermal activity over time. Within this report, we present three scenarios for the pace of geothermal power generation growth through 2050. Scenario 1 is based on the IEA’s prescribed path of geothermal electric generation capacity within its Net Zero by 2050 report (left panel of Figure 4), with geothermal electricity capacity growing from roughly 15GW in 2020 to 126GW by 2050. Scenario 2 is based on a more progressive trajectory to 126GW of global electricity capacity in 2050, which we believe is more realistic given the pace of innovation and our understanding of geothermal activity today (middle panel of Figure 4). Scenario 3 is based on step-change innovations being commercialized and geothermal electricity capacity growing to roughly 1.0% (roughly 334GW) of the IEA’s forecast global electricity capacity by 2050. We believe Scenarios 2 and 3 are the most realistic scenarios. Scenario 2 suggests the upstream market for geothermal well development could grow to roughly $5bn-$10bn per year globally over the 2031-2050 period, representing demand for roughly 70- 75 rigs. Based on the advancement of step-change innovations, such as deep closed-loop geothermal and super-hot rock geothermal, we believe geothermal could reasonably grow to be 1.0% of global electricity capacity; in this scenario, we estimate the global upstream market size could expand to roughly $18bn-$32bn per year globally over the 2031-2050 period, representing demand for roughly 240-250 rigs. For context, we believe there are roughly 150-250 geothermal wells likely to be drilled globally in 2022, representing demand for roughly 10-20 rigs and representing an upstream global market size of roughly $1.0bn-$2.0bn (excluding facilities and related infrastructure).
Scenario Analysis: Global Geothermal Market Size for Upstream Energy Services through 2050
Figure 4 – Scenario Analysis: Estimated Global Geothermal Market Size for Upstream Energy Services through 2050
Source: ATB Capital Markets Inc.
Geothermal Remains a Peripheral Opportunity, but Energy Services Companies are Gaining Exposure
Energy services companies are increasingly announcing strategic investments in geothermal companies, and many energy services companies have direct exposure to geothermal activity through existing business units. While we believe much of the upstream energy services industry would benefit from a build-out of geothermal capacity given inherent increased demand for wells to be drilled, we believe contract drillers and drilling-oriented services lines have the most exposure.
- Drilling Services Company CEO
Part II:
The next articles in this series will address Conventional Geothermal, Enhanced Geothermal, Opportunities for the Oil and Gas Service Sector, Economic and Strategic Factors, and the Regional Landscape for Geothermal Development. Stay tuned for upcoming weekly issues of the CHOA eJournal.
CHOA eJournal – 10 NOVEMBER 2022 | 7
