Avoid This Green Sector Until These Changes Happen

I mention alternative energy infrequently. Mostly because I'm not convinced much of the sector is investable.

One possible exception being geothermal.

Speakers at the GeoPower Latin America Conference this week in Santiago, Chile revealed some insights about the sector. Showing that it could be a viable source of baseload power. Almost.

Several industry presenters noted that geothermal plants work well once up and running. Power is available most of the time, at competitive operating costs.

The problem pointed to by all of these experts is development costs.

Drilling exploration test wells for a prospective geothermal project is expensive. These are wide-diameter holes that require an array of specialized completions.

The whole process is somewhat akin to oil-well drilling. But unfortunately the geothermal drilling sector isn't nearly as developed as its sister services industry in the petroleum business.

The reason is scale. Oil and gas is a big enough business that it attracts a lot of services companies. Creating intense competition and driving down costs.

But geothermal drilling is an incredibly small space. Especially today, when geothermal power is a completely new idea in many of the places globally where investors have been trying to establish projects.

This is a chicken-and-egg challenge. Geothermal developers need more services companies in order to make projects profitable. And services firms need enough projects to warrant setting up shop.

That's a tough dilemma to solve. It may mean that geothermal will only take root in places with very high power prices--the type that can lure capital into project developments. Countries like Chile and South Africa might be candidates.

But until there are some definitive answers on this front, the sector will languish. We'll see what the world comes up with.

Here's to recognizing the barriers to entry,

By. Dave Forest