Season 6, Post 41: Watt about the hot rocks?
The International Energy Agency’s recently published annual report on renewable energy is a must-read for anyone interested in the state of the industry. Your author would be lying if he claimed to have read the 177-page document from cover to cover, but two notable things stood out. The direction of travel for renewables is only headed one way. Solar and wind are forecast to account for most of the growth. However, geothermal energy received surprisingly little coverage.
Begin with the positive. According to the IEA (as the Agency is commonly known), the world is set to add more than 5,500 gigawatts of new renewable energy capacity between 2024 and 2030. This figure is almost three times the increase seen between 2017 and 2023 – an impressive statistic. Against this background, renewables are on course to generate close to half of global electricity by 2030. Solar looks clearly to be in the vanguard, accounting for 80% of the growth in global renewable capacity between now and the decade’s end, driven by a combination of large-scale plant build and growing installations by both companies and households.
Geothermal energy is referenced only 35 times in the IEA’s report and is classified as part of “other renewables.” The category, which includes bioenergy, is forecast to account for no more than a 3% share of the energy market by 2030. This may be an error, in our view. Historically, the industry has admittedly struggled with issues such as high upfront costs, notable well failure rates and the challenges of scaling. Much of what we have read recently would suggest that change is afoot. Next-generation drilling technologies, novel well designs, and modular geothermal plant configurations are driving investment into the space.
Recent results from privately-owned Fervo Energy constitute a potential game-changer for the geothermal industry. Last month (and presumably after the IEA had finished writing its report), Fervo announced that it had achieved record-breaking commercial flow rates at its first test well site. Electricity production is almost three times ahead of the output at its prior pilot. At the same time, drilling costs had been reduced by around 50%. Fervo has already partnered with Google. The energy from Fervo’s wells will help power the tech company’s data centres. This makes sense since geothermal energy is both cheap and reliable, creating baseload renewable power with minimal land use. At the same time, Google has committed to running its data centres on carbon-free energy 24/7 by 2030. Geothermal will naturally play a role. As the industry scale, its levelized (or like-for-like) cost should fall, making it comparable with other competing sources.
Other businesses will logically now seek to replicate the Fervo playbook. Expertise gained in the oil and gas sector is potentially easily transferable to the geothermal space. In any geography where there is an abundance of dry, hot granite rock, geothermal could be possible. Add in an absence of nuclear power (as a competing baseload fuel) and high existing wholesale electricity prices and the case for geothermal becomes even more compelling. The final piece of the jigsaw: look where the data centres are being built, for these will fuel – no pun intended – energy demand.
23 October 2024
The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
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Alex Gunz, Fund Manager
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