A Seismic Investment for 2010

A technology that this company is exploring can literally rock the earth, and possibly heat a city.

More on that later. First, consider Iceland — the country, not your backyard during this coldest U.S. winter in decades. Iceland is home to the famous Blue Lagoon outdoor spa, the steamy pools of which are fed by runoff from a nearby geothermal power plant.

The plant uses naturally occurring hot water within the earth to power turbines that generate clean and renewable electricity.

Geothermal energy, located in regions known for volcanic activity, provides most of Iceland’s power. It also generates much of the electricity in Reno, Nevada. The “Biggest Little City in the World” is quite green when it comes to renewable energy.

As leaders in geothermal energy, Iceland and Reno also have in common the equipment engineered by Ormat Technologies Inc. (NYSE: ORA). This $1.7 billion company generates revenue by selling technology and building power plants. Ormat also owns and operates geothermal and recovered-power plants in 71 countries on six continents.

While solar and wind garner most of the headlines, geothermal energy is steaming up revenue for this Nevada-based company. And Wall Street is warming to geothermal’s potential to generate 5% to 20% of the nation’s power by 2050. The U.S. Department of Energy set aside more than $400 million in the Recovery Act to fund Enhanced Geothermal Systems (EGS) and other research.

Ormat’s major competitors include Calpine Corp. (NYSE: CPN), a Houston, Texas power plant operator that shows promise as it re-emerges from bankruptcy. Vancouver, British Columbia-based startup Magma Energy Corp. (TSX: MXY) is gobbling up land rights to build more power plants in the western United States. Ormat remains strong because it owns many of the patents used by competitors.

Ormat’s total revenue of $320 million for the nine months ended Sept. 30 was up +28.3% from $249.3 million in same period in 2008. Net income of $53.9 million increased +42.3% from $37.9 million in the same period in 2008.

Ormat was founded in 1965 by Israeli renewable energy pioneers Lucien and Dita Bronicki. They mastered the engineering of geothermal power plants before acquiring others around the world in the 1990s.

#-ad_banner-#Geothermal still accounts for less than 1% all energy in the United States, in part because of its historical reliance on a limited number of known geothermal hotspots.

Drilling deep into the earth’s surface near fault lines and red-hot magma is complicated, to say the least. The costs are enormous — about $5 million per hole plus millions more for infrastructure. Still, geothermal is considered more stable than wind or solar because it can be harnessed in all weather around the clock.

Enhanced Geothermal Systems have added renewed emphasis, and Ormat is poised to lead the way. Ormat pioneered conventional geothermal prospecting. It’s like drilling for oil, but the commodity is steamy water heated by magma. EGS is an emerging technique of drilling deep into naturally hot underground rock, or permeable strata. Water is pumped into the holes to create steam.

And, oh, yes — word of caution on EGS: It’s known to cause seismic activity. The man-made expansion and contraction of underground rock was linked to a magnitude 3.4 earthquake in Basel City, Switzerland, in 2007. An EGS project by AltaRock near The Geysers in California was placed on hold last fall.

Man-made earthquakes are counterintuitive to an industry that prides itself on being green, so there is uncertainty about EGS at the moment. Whether EGS can be viable, or it becomes a cautionary tale for geology students, Ormat stands a chance of being a leader in the next technological breakthrough. With its expertise, existing resources and use of federal grants, Ormat could be the hot renewable energy stock to add to your portfolio in 2010.

P.S. — Pop quiz: What alternative energy is “hotter” than geothermal, won’t cause earthquakes, and is mandated by U.S. law to watch its production rise +15,900% by 2022? It’s called “cellulosic biofuel” — and according to Government-Driven Investing expert Andy Obermueller, it could be the easiest way to turn a $1,000 investment into $160,000. Click here for Andy’s big idea.