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Ormat Exploiting The Geothermal Niche

By Gregory S. Davis

Tickers in this Article: ORA, CPN, PGN, AEP

Ormat Technologies (NYSE:ORA) is setting the pace for others to follow when in comes to renewable energy that is not dependent on wind direction, sun availability, or the sway of the ocean. In Greek, geo means "Earth" and therme means "heat". Ormat is one pure geothermal power company that stands to benefit as alternative energy takes center stage. (The average family spends $1,600 a year on utility bills: to find out how to put some of that money back in your wallet, read Ten Ways To Save Energy and Money.)

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Geothermal Primer
California has the "benefit" of being located along the Ring of Fire, an area where most of the geothermal activity in the world takes place. Geothermal heat originates from the earth's core, roughly 4,000 miles below the surface. The heat is captured by molten layers of rock deep inside the earth. When water comes in contact with the molten rock, it is super heated to more than 300 degrees Fahrenheit. Geothermal wells, which are drilled in a similar fashion to oil wells, are used to extract the heated water. The hot water can be turned into steam that can drive turbines to create electricity. (To look at other alternative energy investments, check out Spotlight On The Solar Industry and Clean Or Green Technology Investing.)

How does Ormat Generate Revenue?
Ormat designs, builds and operates geothermal power plants and enters into partnership agreements for other power providers. Long-term power purchase agreements with electric companies are used to sell the electricity Ormat generates. Ormat has existing geothermal projects in the U.S., Guatemala, Kenya and Nicaragua. Ormat's other interesting offering is its recovered energy business. Industrial processes like cement manufacturing use machinery that produce heat. Instead of wasting the heat, Ormat has products that can turn the "waste heat" into electricity.

First Quarter
Ormat’s revenue increased 12% to $69 million during the first quarter of 2008 versus the same period a year ago. The increase in revenue was led by Ormat's increase in geothermal electricity capacity in the US. Other electricity providers like Calpine (NYSE:CPN) also produce geothermal energy. Calpine operates 17 geothermal plants in Northern California while producing the majority of its revenues from natural gas powered generation facilities. Traditional power generation competitors include Progress Energy (NYSE:PGN) and American Electric Power (NYSE:AEP)

Legislation Advantage for Geothermal Energy
According to the Energy Information Administration, the

U.S.

is the largest producer of geothermal electricity, but that output is still less than 1% of electricity produced in the country. The majority of geothermal energy in the U.S. is focused out West, but opportunities to expand are on the horizon as many states including North Carolina, New York and Maine have initiated renewable portfolio standards calling for increased usage of green energy.

Conclusion
Ormat was trading near its all-time high of $57 before the new year and its currently trading just below $50. A dollar cost averaging strategy would be prudent for investors seeking and entry point. Geothermal power is an attractive renewable play that is likely to have an increasing role in energy diversification strategies employed within and outside of the U.S.

For further reading, be sure to check out DCA: It Gets You In At The Bottom.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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