The sun beneath our feet: the growing case for geothermal

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: Geothermal’s time has come. The heat from the earth may be the world’s most overlooked energy source – but not for much longer. A compelling combination of growing demand and improving supply means that there could be a 20x jump in geothermal energy production over the next 25 years. By 2050, geothermal may be generating 10% of our electricity needs. Advancements in drilling technologies mean that geothermal is becoming increasingly available. Given that the energy source is virtually unlimited, releases few emissions and occupies just a fraction of the space required by other sources, geothermal represents a perfect source for baseload energy. It can help fulfil AI-driven data demand and pave the way for countries to increase their energy independence. If growth projections are correct, then the industry could see $1tr of cumulative investments in the next decade. There are few listed pure-play businesses currently, but VC interest in the space is significant, while existing oil and gas businesses (and their supply chains) are also getting actively involved.  

We need more energy. This fact is indisputable. Before even considering the impact of AI and data centres, population and income growth are driving demand only one way. If history is any gauge, energy demand will typically run at double the rate of global GDP. Then add in the impact of new technologies. A simple ChatGPT request consumes nearly 10x the power of a traditional Google search. Given the pace at which AI is currently developing, the computational power required to meet new data demands is doubling roughly every 100 days.

Now add into the mix geopolitics. Combine the acceleration in reshoring with the growing importance of energy independence. What should become abundantly clear is that the world cannot rely on conventional energy sources to fulfil all its needs. Irrespective of net zero-commitments, wind and solar alone cannot sustain domestic demands. It is against this background that geothermal can fulfil a critical role.

Geothermal is far from a novel idea. Indeed, ancient civilisations used geothermal energy to preserve food and bathe before the resource was later harnessed and leveraged to heat buildings and generate electricity. Geothermal heating, using water from hot springs, has been purposed for bathing since Palaeolithic times; and for space heating since Roman times. The Aquae Sulis in Bath (which it is still possible to visit today) exploited the hot springs beneath the city to supply public baths and underfloor heating. The admission fees for these baths probably represent the first commercial use of geothermal energy.

Think of geothermal as a renewable energy heat source that is found under the surface of the earth. The clue is in its name: geo meaning ‘earth’ and thermal meaning ‘heat.’ The literal heat from the earth is an essentially inexhaustible supply of energy. This heat is continually replenished by the decay of naturally occurring radioactive elements such as uranium, thorium and potassium beneath the subsurface. None is in short supply.

Fast-forward from the Roman era. Modern-day geothermal power plants operate by drawing fluid or steam from underground reservoirs. Geothermal stations pump cold water underground where it is heated up by the Earth’s temperature. The resulting steam turns turbines and produces electricity. Geothermal energy can be extracted at various depths, temperatures, and energy types. It has multiple applications, including home and industrial heating and electricity generation.

Although geothermal forms part of the energy mix in around 30 countries currently, it accounts for just 0.8% of total energy supply. Among clean energy sources, modern bioenergy makes up almost 7% of global energy supply, while the shares of others such as hydropower, nuclear, wind and solar range from 1% to 3% each (all data per the International Energy Agency, or IEA). Today, geothermal is the second least-used clean energy source after ocean energy.

However, there are multiple reasons why geothermal’s share of the energy mix will grow considerably from current levels. Geothermal has faced historic issues relating to high upfront costs, notable well failure rates and challenges attached to scaling. To drill one 4 kilometre well costs about $5m; at 10 kilometres, the drilling cost quadruples to $20m per well. The high upfront cost and associated exploration risks have deterred development capital and limited the geographic reach of geothermal.

Today the geothermal industry stands at a critical juncture: drilling technologies and the power of AI are revolutionising its potential. Conventional geothermal technologies operated by exploiting high-temperature resources where the permeability of the subsurface allowed for high water flow rates. This meant traditional drilling could only occur in sites that were both hot and permeable – attributes that are usually considered mutually exclusive in the world of geothermal. In contrast, the latest enhanced geothermal systems (EGS) and advanced geothermal systems (AGS) can be used far more widely. In EGS, hot, dry rock is fractured to create permeability. AGS uses a closed-loop system drilled into the rock and is ideal to repurpose end-of-life oil and gas wells for heat and power production.

Progress at field demonstrations in the last two years have reduced estimated project development costs for enhanced and advanced geothermal systems by almost 50% according to the US Department of Energy (DOE). At the same time, AI-powered models can now accurately simulate the earth’s subsurface at a specific geographic location. This inherently reduces the risk of drilling a well that fails to reach adequate geothermal heat. Risk of failure has historically accounted for between 20-30% of the cost of capital in early-stage geothermal projects. In addition, minimising exploration risk shortens project development timelines from a typical 7-year time horizon to around 2 years.

These developments serve only to enhance the investment case for geothermal. As an energy source, it is commercially feasible and ready for expansion today, unlike technologies not commercially viable at scale, such as long-term battery-based energy storage, hydrogen, and carbon capture. Geothermal overcomes the limitations of other renewable energy sources. It does not suffer from intermittence, as do solar and wind, nor does it rely on the supply of water, required for hydropower. Consider that geothermal plants can run at 90% availability or higher (i.e. power is produced 90% of the time or more), compared to less than 30% for wind or below 15% for solar, per the DOE. Even coal plants typically achieve only a 75% availability rate.

Geothermal installations are characterised by low operational costs. This is because unlike fossil fuels and nuclear, plants do not depend on the supply or price of a commoditised fuel. Therefore, the cost is largely concentrated on the technology and power plant. On a levelised cost of energy (i.e. like-for-like) basis, geothermal’s cost per unit range of $64-106 puts it in-line with solar and wind depending on exact category and compares favourably with $68-166 for coal or $115-221 for natural gas, per June 2024 analysis from Lazard. In contrast to many other energy sources, geothermal power plants tend to have a lower profile and smaller land footprint, and they do not require fuel storage, transportation, or combustion. Work from the US Global Change Research Programme show that number of square kilometres required for a geothermal plant is equivalent to 10% of the land of a wind farm and 20% of a solar farm. Further, unlike nuclear, geothermal energy creates minimal issues at the point of decommissioning.

An additional positive when making the case for geothermal istransferability.Many industry sources suggest that up to 80% of the investment required in a geothermal project involves capacity and skills that are common to the oil and gas industry. Skills and drilling technologies developed in the areas of fracking and liquefied natural gas have considerable transferability to and commonality with geothermal.

Today, around 140,000 jobs are associated with geothermal power development and operations worldwide, with the industry worth $64bn in 2023 (data from the International Energy Agency and Global Market Insights respectively). Project ahead and most consultants expect the geothermal industry to grow at least at an 8% CAGR over the next decade. In the US – the world’s largest market – the Department of Energy forecasts a 20x increase in geothermal energy production by 2050, generating 10% of the country’s electricity, and creating an industry worth $250bn.

The IEA is even more optimistic and believes that with continued technology improvements and reductions in project costs, geothermal could meet up to 15% of global electricity demand growth to 2050. To reach this objective, the Agency predicts that, globally, total investments in geothermal could reach $1tr cumulatively by 2035 and $2.5tr by 2050. At its peak, geothermal investment could reach $140bn per year, which is higher than current investment in onshore wind power globally.

Recent case studies point to the potential of geothermal. Major pilot projects include Fervo Energy’s Project Red in Nevada and Eavor’s AGS project in Geretsried, Germany. Project Red has a capacity of 3.5MW and is already operational. Eavor’s facility has a capacity of 8.2MW and is due to go into operation in 2026. Both will involve a total investment of over $200m. Fervo announced in October 2024 that it had achieved record-breaking commercial flow rates at its first test well site, with electricity production almost three times ahead of output at its prior pilot.

Even the UK has ventured into geothermal generation. Located near Redruth in Cornwall and funded through a joint state-backed and private venture, the United Downs Deep Geothermal Power Project marks the country’s first initiative. The project features two wells. The first reaches to 5.3km, making it the deepest in the UK. It is set to begin operations during 2025, with the venture  currently forecast to deliver 2MW of electricity.

In theory, all you need is dry, hot rocks for geothermal to be a success. Practically, geothermal makes most sense in geographies where four factors are present: no nuclear (for this energy source constitutes the only other sustainable and effective source for baseload energy), high wholesale electricity prices, high data centre demand and supportive regulation. Against this background, the logic for further geothermal project developments in countries such as the US, the UK, Australia and Ireland looks high. The recent appointment of Christopher Wright to run the US Department of Energy is encouraging, given his background in fracking and board membership at Fervo.

Arguably, the main barrier to growth for geothermal is cost. Novel technologies do appear compelling, but there remains a burden of proof in terms of how they are scaled. Wood Mackenzie, a consultant, estimates that to compete with other flexible low-carbon power generation technologies, geothermal capex costs would need to fall by 30-60%.

Given the relative nascence of the industry, exploring, discovering, developing, and managing geothermal resources can have greater risks and upfront costs than other renewable energy technologies. The geological uniqueness of each development may make it more difficult to transfer learnings from one site to another. At the same time, internationally recognised technical standards have not been established for geothermal technologies. Geothermal may face barriers in respect of land access, permitting, and project financing. There is also the practical consideration of matching energy demands (particularly in terms of where the hyperscalers’ data centres are located) to where geothermal resources lie (or governments offer access to licences).

Put another way, geothermal projects may be subject to long timelines driven by complex permitting processes and multiple points of contact with permitting and licensing agencies. Logically, then, if geothermal is to realise its potential, then governments need to move it up the national energy policy agenda. While more than 100 countries have policies in place for solar and/or onshore wind, fewer than 30 have implemented policies for geothermal, per the IEA.

For investors, geothermal’s potential should be clear. Scaled geothermal energy projects have the potential to offer stable and predictable income flows, with power plant lifetimes spanning 80 years or more. Oil and gas companies have long recognised the potential of geothermal energy, but today pure-player geothermal developers and utilities own most installations.

Capitalised at over $4bn and listed in the US, Ormat Technologies is the largest geothermal owner and operator globally, based on installed gross capacity, per data from the consultancy ThinkGeoEnergy. It has over built over 200 geothermal wells in the US, Italy and Chile and has other projects underway in geographies as diverse as Turkey and Indonesia. Ormat says that it makes a 13-15% post-tax IRR on a typical project. Also listed, albeit in the Philippines, is Energy Development Corporation (EDC), which ranks number two globally in terms of installed capacity. EDC is followed in capacity terms by CFE, a state-owned entity in Mexico, and then Star Energy, an Indonesian business.

Many oil and gas companies are already making efforts to harness geothermal energy. Using its experience with traditional geothermal electricity in Indonesia and the Philippines, Chevron is leading next-generation projects. Equinor and Shell have worked together on conventional geothermal projects like Lithium de France. While new to geothermal energy, BP is a partner in Eavor’s AGS project and the Texas Geothermal Alliance, assessing EGS potential in the state.

Geothermal energy start-ups attracted over $650m in venture capital funding in 2024, the largest value ever recorded, according to Dealroom. Highest profile among these is Fervo (referenced earlier), which raised $250m of new funding last year and is currently considering a potential initial public offering, per Bloomberg. Founded in 2017, the business counts Google, Devon Energy and Mitsubishi as partners. Sage Geosystems is another significant private US player, which claims to have developed a proprietary geothermal system and has filed over 200 patents. Meta has partnered with Sage, which will provide power for its data centres. Elsewhere, Eavor Technologies in Canada, Quaise Energy (an MIT spin-out), Bedrock Energy, Geothermal Anywhere and Solution Energy include other start-ups to watch.

Don’t forget the metaphorical shovel makers. Fuji Electric is one of the world’s largest equipment suppliers and engineering-services providers for geothermal-energy plants. It has delivered roughly 60 geothermal turbines. Other players active in the geothermal space include Toshiba, Mitsubishi, Sumitomo, Schlumberger and GE. If the geothermal industry does develop in a fashion similar to fracking or liquefied natural gas, then the spoils for the leading industry participants will certainly be significant.

08 April 2025

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.

Alex Gunz, Fund Manager, Heptagon Capital