As countries seek low- and zero-carbon alternatives to fossil fuels to meet their energy demands, the geothermal sector continues to struggle to gain traction against cheap renewables except in a select few regions. According to Lazard's latest Levelized Cost of Energy Analysis, the levelized cost of electricity (LCOE) for geothermal is estimated at between $69/MWh and $122/MWh, while the LCOE for utility-scale solar and wind has dropped to below $40/MWh. Despite having higher costs, geothermal can provide baseload power, unlike intermittent renewables. As renewable power generation continues its trajectory toward a tipping point for the power grid, geothermal presents a complementary technology rather than a competitive one on the roadmap toward decarbonization. In line with decarbonization pushes, in 2019, countries around the globe installed 759 MW of geothermal power, topping 2014's total of 750 MW. This made 2019's total the largest capacity increase in the past two decades. Yet installed capacity does not always equate to innovation.
While high upfront costs around drilling and site exploration currently constrain conventional geothermal, emerging technologies promise to lower the barrier to deployment. Innovation activity has steadily increased over the past two decades, and in our analysis, we selected the technologies that are most primed to move the needle for geothermal – geothermal drilling, oil and gas wells, binary geothermal systems, and enhanced geothermal systems. The delineations between technologies are not meant to be mutually exclusive, as geothermal systems consist of many individual technologies and subsystems. Rather, the following focuses on broader technology areas that indicate promising paths forward for the geothermal sector.
- Geothermal drilling: While there is a clear connection between the oil and gas and geothermal sectors, drilling innovation is not plug-and-play from one to the other. This lack of interoperability arises from the need to drill into hard, impermeable rock formations for many geothermal projects. Using conventional oil and gas drilling tools for geothermal applications leads to slower drilling rates and causes excessive wear on drill bits. In general, drilling solutions leverage a combination of laser, plasma, chemical, and/or electric arc to replace or enhance conventional mechanical drill bits and increase the life of drilling tools, reduce energy requirements, and decrease material consumption. In addition to nonmechanical drilling, innovation activity ranges from drilling fluids, to well casing, to downbore sensors. Patent activity in this space has been very robust, especially between 2014 and 2017, and continues to make up the majority of activity in geothermal innovation.
- Oil and gas wells: Another emerging development trend involves retrofitting existing oil and gas wells into geothermal systems. The basic concept uses warm water co-produced during oil and gas production to generate heat or power. Patent activity has been relatively robust, increasing steadily over the past two decades.
- Binary geothermal systems: Binary geothermal plants operate by heating a secondary working fluid with a lower boiling point using geothermal fluid in a heat exchanger. This secondary fluid then drives a power generation cycle, often based on the organic Rankine cycle (ORC). Binary cycle power plants are often closed-loop systems, with the geothermal fluid reinjected – thus lowering overall emissions. Binary plants are well-suited for low-to-moderate-heat geothermal resources (below 200 °C), which is important considering that many geothermal resources are below 100 °C. Binary system development is an exercise in system integration, combining existing geothermal plant technology and, most often, ORC generation units. While patent activity in the binary geothermal space is relatively minor compared to drilling, it has remained constant for more than a decade.
- Enhanced geothermal systems: Conventional geothermal power production is limited by geological formations, hence the overall lack of traction outside of specific geographic regions. As a result, the industry is seeking potential applications in reservoirs that have sufficient heat but may lack naturally occurring water or steam and/or exhibit low fluid permeability (called hot-rock or hot but dry resources). Enhanced geothermal systems (EGS) are a main approach to accessing these resources by enhancing permeability via similar processes to those used in the fracking industry. Innovation activity encompasses a range of technologies, including horizontal drilling, zonal isolation, and, as most EGS systems are closed-loop, heat exchange systems. Similar to binary geothermal systems, EGS patent activity emerged a decade ago and has remained consistent since.
- Advanced closed-loop systems: While most binary and EGS systems are closed-loop, a small subset of EGS developers are targeting advanced closed-loop systems that do not require inducing fractures to improve fluid permeability. These systems either use horizontal drilling to connect an injection and production well or use pipe-in-pipe designs. Developers claim this reduces both drilling costs and potential increases in seismic activity while a providing better control over flow rate and power production. These developers also often utilize the thermosiphon effect, in which convection drives the working fluid – thereby reducing the pumping requirements during operation. Innovation activity generally focuses on well designs and working fluids to increase heat capture and integrate into geothermal power plants. As a result, patent activity broadly falls under all of the above technology areas, with most considered EGS.
With an overall uptick in patent activity in the geothermal space over the past two decades along with newer technologies emerging in the previous decade, the different technologies present varying levels of potential in advancing the geothermal industry. Companies are advised to monitor the following trends and activities in the coming years for potential opportunities.
- Drilling remains the dominant area of innovation activity. While fracking capabilities are not a drop-in replacement for geothermal wells, developers Lux Research has spoken with highlight that drilling costs and timelines have decreased significantly over the past decade, mirroring those of fracking. With oil and gas wells as the second-highest area of innovation activity, we expect a renewed interest in geothermal from the oil and gas industry as it couples its efforts to decarbonize its operations with its drilling know-how to overcome the drilling and site exploration cost barriers that currently hold back geothermal energy's potential.
- Binary geothermal systems are unlikely to change the geothermal landscape, likely only seeing incremental improvements over the upcoming years. While binary systems have potential in specific regions like Turkey due to their medium-to-low-temperature geothermal resources, we expect binary designs to play a role as a component of more innovative approaches like EGS. However, despite having vast potential, EGS innovation activity remains limited after seeing an initial surge in interest following a seminal 2006 study by MIT that found EGS could potentially provide 100 GW of electrical power by 2050 in the U.S. While the industry is not on track to reach such capacity, strong government support – especially in the U.S. – will continue to propel the technology along its development timeline.
- Looking ahead, advanced closed-loop systems offer compelling upside as a promising route to expand geothermal energy's potential, which has largely been limited by geography. In addition, the pairing of geothermal systems with thermal energy storage (TES) systems that enable the capability to control power output would provider greater flexibility for geothermal installations, leading to improved project economics and making geothermal more attractive to utilities and large energy users.
At the macroeconomic level, the analysis of advanced geothermal patent activity closely follows the fortunes of the oil and gas industry. Surging activity between 2014 and 2016 coincided with a drop in oil prices; as oil prices began to rebound, activity decreased. With the oil and gas industry suffering a historic drop in oil prices in early 2020 due to the global COVID-19 pandemic, the industry is likely to experience a renewed interest in geothermal energy as companies look for new business opportunities to mitigate exposure to a decreased future oil demand. There is a clear opportunity for existing know-how in exploration, drilling, supply chain, and logistics, as well as capital capable of geothermal project development, and we expect to see momentum as the industry recovers in the post-COVID-19 world.
This blog is part of a series of research on the Decarbonization of Industry storyline, focusing on low- and zero-carbon power for industrial energy demand. A second blog will explore the geothermal innovation landscape and the developers driving key geothermal technologies. Sign up for our newsletter to stay up to date on this research and the rest of the energy transition narrative.
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