Drilling down to the reasons behind geothermal's failure

A billion dollars is a lot of money, especially when it delivers the dimming of a green dream and a lot of frustration for investors.

This is today’s story for enhanced geothermal energy, or ‘hot rock mining’, as some in the media will have it.

The technology’s travails have been revealed in a report commissioned by the Australian Renewable Energy Agency and it does not make especially happy reading.

ARENA asked an international expert panel chaired by economist Quentin Grafton of the Australian National University to canvass the local opportunities for geothermal. The shorthand response was “not good”.

This is of more than esoteric interest. Bear in mind that geothermal was a technology touted by the Gillard government as one of the big green hopes for the ‘clean energy future’ just three years ago.

In the Treasury paper ‘Strong growth, low pollution’ published by Wayne Swan and Greg Combet to support the carbon tax argument, the government endorsed the view of consultants that geothermal power generation could fuel up to 23 per cent of mid-century electricity production, helping to shove coal to the sidelines of baseload supply.

This was one of the cornerstones of the government’s assertion that its policies could deliver renewables as the largest electricity contributor (with a 40 per cent market share).

What happened?

Grafton and his panel say the pursuit of geothermal development has stalled and the sector is facing a funding crisis as many private sector investors exit the field after spending $828 million (or $1 billion if you translate the sum in to today’s dollar values), about 13 per cent of which was obtained from taxpayers as subsidies.

‘Unrewarding’ is the word for geothermal in the minds of investors, the panel observes.

“Utility-scale power generation from geothermal is not cost-competitive in 2014 and is not expected to be so in 2020,” they reported. They added that the technology might become competitive with fossil fuel generation in 2030 “but only with a high carbon price” and if it can sort out a few other hassles.

They estimate that the levelised cost of geothermal energy will sit in the range of $170 to $300 per megawatt hour in an east coast market where the wholesale price of power is likely to be between $50 and $100.

As Grafton and the panel see it, the future for geothermal is remote -- literally not figuratively -- and ironically is tied up with green radicals’ bete noir, shale gas production.

They suggest that the most prospective market for the technology out to 2030 is in locations off the power grid where there are commercial scale applications for electricity or direct heat.

In the case of shale gas, the Cooper Basin, where it is most likely Australia’s first commercial shale operations will occur, also has some of the best ‘hot rock’ resources.

As Grafton & co point out, the gas needs to be processed in situ to remove impurities before being sent on its way to the next stages of production for the market. At present, this is done using the gas as feedstock. Geothermal energy could be an alternative.

Even here, the geothermal people have some barriers to climb to make their product cost-competitive.

One of the bugbears is drilling charges, which make up a big part of geothermal upfront costs as the rigs have to bore up to five kilometres in to the ground and this is no task for just any old kit.

This situation isn’t helped by the fact that drilling costs onshore in Australia have shot up in recent years as the result of upstream petroleum industry demands.

Another irony, given the carrying-on by the Greens, some Labor types and ‘Lock the Gate’ etcetera, is that geothermal development requires hydraulic fracturing (the much demonised ‘fracking’.)

A social licence to operate could be an issue, the panel notes.

Grafton and his colleagues have produced a 128-page report that canvasses not only what has been going on here but also the experience around the world.

A condensed version of their careful analysis is “much still needs to be known and risks remain”.

Ultimately, they say, Australian development will require gaining access to resources that can be cost-effectively drilled and can produce heat at levels that make the expense worthwhile.

And by the way, they add, it helps if the resources are placed where the electricity they produce doesn’t require mighty expensive delivery bills.

One of the problems with Cooper Basin ‘hot rock mining’ is that production and consumers are separated by about a billion bucks worth of (to be built) transmission line.

The bottom line, however, as the panel says, is that everything in the energy market depends on access to capital, either through investors or taxpayer handouts. The Australian geothermal business, at least for the time being, has apparently exhausted the patience of the investment community.

This leaves us with handouts.  Which is where ARENA comes in -- the Abbott government is hell-bent on giving it the chop.

All of this has the nuclear lobby raising its hand to ask: doesn’t it make more sense as a zero emissions baseload option?

Keith Orchison, director of consultancy Coolibah Pty Ltd, publisher of the This is Power blog and editor of OnPower newsletter, was chief executive of two national energy associations from 1980 to 2003. He was made a member of the Order of Australia in 2004 for services to the energy industry.