0001296445 ORMAT TECHNOLOGIES, INC. false --12-31 FY 2020 597 0 1,978,220 1,880,547 198,812 149,830 4,721 4,688 7,001 8,479 5,318 6,317 8,557 10,482 2,086 675 1,340 1,519 0.001 0.001 200,000,000 200,000,000 55,983,259 55,983,259 51,031,652 51,031,652 0.53 24 0 18 0.44 0.44 0 1,095 0 0 0 0 1 2 38 0 0 June 30, 2031 September 30, 2022 4.5 6 25 March 31, 2029 March 31, 2029 March 31, 2029 June 30, 2028 June 30, 2028 December 31, 2030 June 30, 2030 December 31, 2030 September 30, 2032 4.35 June 30, 2027 3.5 May 31, 2026 September 30, 2033 December 31, 2032 December 31, 2032 March 31, 2023 February 28, 2035 December 31, 2037 1.93 4.5 1.35 2.0 1.64 5.05 4.5 1.35 2.0 1.64 5.05 5 6 2 25 3 4 1 1 6 10 6 10 6 2 4 6 1 6 6 6 6 2032 2037 2022 2039 2022 2025 2040 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019 2020 2015 2020 2016 2020 2015 2020 2017 2020 10 10 2013 2014 2015 2016 2017 2018 2019 0 0 0 0 March 11, 2021 March 29, 2021 The foregoing forward and put options transactions have not been designated as hedge transactions and are marked to market with the corresponding gains or losses recognized within “Derivatives and foreign currency transaction gains (losses)” in the consolidated statements of operations and comprehensive income. These amounts relate to currency forward contracts valued primarily based on observable inputs, including forward and spot prices for currencies, net of contracted rates and then multiplied by notional amounts, and are included within "Receivables, other" on December 31, 2020 and December 31, 2019, in the consolidated balance sheet with the corresponding gain or loss being recognized within "Derivatives and foreign currency transaction gains (losses)" in the consolidated statement of operations and comprehensive income. payable quarterly in arrears Goodwill is primarily related to certain potential future economic benefits arising from assets acquired. Goodwill is allocated to the Energy Storage segment and is deductible for tax purposes. payable quarterly Upon exercise, SARs entitle the recipient to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date. payable semi-annually, except for Nevada non-recourse which is payable quarterly Intangible assets are primarily related to long-term electricity power purchase agreements and depreciated over an average of 19 years. Goodwill acquired is related to the purchase of the Pomona storage facility as further described in Note 2 to the consolidated financial statements. These amounts relate to CCS contracts valued primarily based on the present value of the CCS future settlement prices for USD and NIS zero yield curves and the applicable exchange rate as of December 31, 2020. These amounts are included within “Deposits and other” and "Accounts payable and accrued expenses" on December 31, 2020 in the consolidated balance sheets. There are no cash collateral deposits on December 31, 2020. The foregoing cross currency swap transactions were designated as a cash flow hedge as further described under note 11 to the consolidated financial statements. The changes in the CCS fair value are initially recorded in "Other comprehensive income (loss)" and a corresponding amount is reclassified out of "Accumulated other comprehensive income (loss)" to "Derivatives and foreign currency transaction gains (losses)" to offset the remeasurement of the underlying hedged transaction which also impacts the same line item in the consolidated statements of operations and comprehensive income. Including unconsolidated investments 98,217 — — 98,217 Electricity segment revenues in the United States are all accounted under lease accounting, except for $68.1 million, $61.3 million and $26.9 million for the years 2020, 2019 and 2018 which are accounted under ASC 606. Product and Energy Storage segment revenues in the United States are accounted under ASC 606, as further described under Note 1 to the consolidated financial statements. The amount of gain or (loss) recognized in Other comprehensive income (loss) is net of tax of $1.1 million. Revenues as reported in the geographic area in which they originate. payable semi-annually in arrears. These amounts relate to contingent receivables and payables and warrants pertaining to the Guadeloupe power plant purchase transaction, valued primarily based on unobservable inputs and are included within "Prepaid expenses and other", "Accounts payable and accrued expenses" and "Other long-term liabilities" on December 31, 2020 and 2019 in the consolidated balance sheets with the corresponding gain or loss being recognized within "Derivatives and foreign currency transaction gains (losses)" in the consolidated statement of operations and comprehensive income. Subsidiaries of NV Energy, Inc. Electricity segment revenues in foreign countries are all accounted under lease accounting. Product and Energy Storage segment revenues in foreign countries are accounted under ASC 606 as further described under Note 1 to the consolidated financial statements. An RSU represents the right to receive one share of common stock once certain vesting conditions are met. The value of an RSU is identical to the value of the underlying stock. Including unconsolidated investments 81,140 — — 81,140 The Performance shares units shall be paid out based on achievement of three-year relative total stockholder return compared to other companies in S&P 500 index. Goodwill is primarily related to the expected synergies in operations as a result of the purchase transaction. The goodwill is allocated to the Electricity segment and not deductible for tax purposes. Electricity segment assets include goodwill in the amount of $20.5 million, $20.1 million and $20.0 million as of December 31, 2020, 2019 and 2018, respectively. Energy Storage segment assets include goodwill in the amount of $4.1 million as of December 31, 2020. No goodwill is included in the Product segment assets as of December 31, 2020, 2019 and 2018. Including unconsolidated investments 71,983 — — 71,983 Revenues reported in Electricity segment. Contract assets and contract liabilities are presented as "Costs and estimated earnings in excess of billings on uncompleted contracts" and "Billings in excess of costs and estimated earnings on uncompleted contracts", respectively, on the consolidated balance sheets. The contract liabilities balance at the beginning of the year was fully recognized as product revenues during the years ended December 31, 2020 and 2019 as a result of performance obligations satisfied. The non-current deferred tax asset has been reduced by the uncertain tax benefit of $0.1 million in accordance with ASU 2013-11, Income Taxes. payable semi-annually Intangible assets of $18.0 million are related to a long-term energy storage resource adequacy agreement with SCE and are depreciated over a period of approximately 6.5 years. 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Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2020

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-32347

 

ORMAT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

88-0326081

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

6140 Plumas Street, Reno, Nevada

89519-6075

(Address of principal executive offices)

(Zip Code)

 

(775356-9029

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock $0.001 Par Value

ORA

New York Stock Exchange

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑   No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐     No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large  accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller  reporting company 

Emerging growth  company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No ☑

 

As of June 30, 2020 the aggregate market value of the registrant’s common stock held by non-affiliates was $2,544,589,505.  As of February 24, 2021, the number of outstanding shares of common stock, par value $0.001 per share was 55,983,259.

 

Portions of the registrant's definitive proxy statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K..

 



 

 

 

 

ORMAT TECHNOLOGIES, INC.

 

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2020

 

TABLE OF CONTENTS

 

   

Page
No

PART I

ITEM 1.

BUSINESS

9

ITEM 1A.

RISK FACTORS

54

ITEM 1B.

UNRESOLVED STAFF COMMENTS

76

ITEM 2.

PROPERTIES

76

ITEM 3.

LEGAL.PROCEEDINGS

76

ITEM 4.

MINE SAFETY DISCLOSURES

76

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

77

ITEM 6.

SELECTED FINANCIAL DATA

78

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

78

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

105

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

106

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

177

ITEM 9A.

CONTROLS AND PROCEDURES

177

ITEM 9B.

OTHER INFORMATION

179

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

179

ITEM 11.

EXECUTIVE COMPENSATION

180

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

180

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

180

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

180

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

181

SIGNATURES

188

ITEM 16.

FORM 10-K SUMMARY

187

 

i

 

 

Glossary of Terms

 

Unless the context otherwise requires, all references in this annual report to “Ormat”, “the Company”, “we”, “us”, “our company”, “Ormat Technologies”, or “our” refer to Ormat Technologies, Inc. and its consolidated subsidiaries. A glossary of certain terms and abbreviations used in this annual report appears at the beginning of this report. When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:

 

Term

Definition

ACUA

Atlantic County Utilities Authority

Amatitlan Loan

$42,000,000 in initial aggregate principal amount borrowed by our subsidiary Ortitlan Limitada from Banco Industrial S.A. and Westrust Bank (International) Limited.

AMM

Administrador del Mercado Mayorista (administrator of the wholesale market — Guatemala)

ARRA

American Recovery and Reinvestment Act of 2009

Auxiliary Power

The power needed to operate a geothermal power plant’s auxiliary equipment such as pumps and cooling towers

Availability

The ratio of the time a power plant is ready to be in service, or is in service, to the total time interval under consideration, expressed as a percentage, independent of fuel supply (heat or geothermal) or transmission accessibility

BESS

Battery Energy Storage Systems

BLM

Bureau of Land Management of the U.S. Department of the Interior

BOT

Build, operate and transfer

BPP

PLN's existing average cost of generation

CAISO California Independent System Operator

Capacity

The maximum load that a power plant can carry under existing conditions, less auxiliary power

Capacity Factor

The ratio of the actual MWh generated and the generating capacity times 8760 hours expressed in percentage

CARES Coronavirus Aid, Relief, and Economic Security Act

CCA

Community Choice Aggregator

CDC

Caisse des Dépôts et Consignations, a French state-owned financial organization

CEO

Chief Executive Officer

CFO

Chief Financial Officer

C&I

Refers to the Commercial and Industrial sectors, excluding residential

CNEE

National Electric Energy Commission of Guatemala

COD

Commercial Operation Date

Company

Ormat Technologies, Inc., a Delaware corporation, and its consolidated subsidiaries

CPI

Consumer Price Index

CPUC

California Public Utilities Commission

DEG

Deutsche Investitions-und Entwicklungsgesellschaft mbH

CREE The Regulatory Commission of Electric Power in Honduras
DFC U.S. International Development Finance Corporation (formerly OPIC)

DOE

U.S. Department of Energy

DOGGR

California Division of Oil, Gas, and Geothermal Resources

DSCR

Debt Service Coverage Ratio

EBITDA

Earnings before interest, taxes, depreciation and amortization

EDF

Electricite de France S.A.

EGS

Enhanced Geothermal Systems

EIB

European Investment Bank

EMRA

Energy Market Regulatory Authority in Turkey

 

 

2

 

ENEE

Empresa Nacional de Energía Eléctrica

Enthalpy

The total energy content of a fluid; the heat plus the mechanical energy content of a fluid (such as a geothermal brine), which, for example, can be partially converted to mechanical energy in an Organic Rankine Cycle.

EPA

U.S. Environmental Protection Agency

EPC

Engineering, procurement and construction

ERCOT

Electric Reliability Council of Texas, Inc.

EPRA

Energy and Petroleum Regulatory Authority

EWG Exempt Wholesale Generators

Exchange Act

U.S. Securities Exchange Act of 1934, as amended

FASB

Financial Accounting Standards Board

FERC

U.S. Federal Energy Regulatory Commission

FIT

Feed-in Tariff

FPA

U.S. Federal Power Act, as amended

GAAP

Generally accepted accounting principles

GCCU

Geothermal Combined Cycle Unit

GDC

Geothermal Development Company

Geothermal Power Plant

The power generation facility and the geothermal field

Geothermal Steam Act

U.S. Geothermal Steam Act of 1970, as amended

GERD Grand Ethiopian Renaissance Dam

GHG

Greenhouse gas

GIS Geographic Information Systems

GW

Giga watt

GWh

Giga watt hour

HELCO

Hawaii Electric Light Company

IDWR

Idaho Department of Water

IGA

International Geothermal Association

IID

Imperial Irrigation District

INDE

Instituto Nacional de Electrification

IOUs

Investor-Owned Utilities

IPPs

Independent Power Producers

IESO

The Independent Electricity System Operator (IESO) works at the heart of Ontario's power system.

ISO

International Organization for Standardization

ISONE ISO New England

ITC

Investment Tax Credit

JBIC

Japan Bank for International Cooperation

JOGMEC Japan state-owned resources agency

John Hancock

John Hancock Life Insurance Company (U.S.A.)

JPM

J.P. Morgan Capital Corporation

KenGen

Kenya Electricity Generating Company Ltd.

Kenyan Energy Act

Kenyan Energy Act, 2006

KETRACO

Kenya Electricity Transmission Company Limited

KGRA

Known Geothermal Resource Area

KLP

Kapoho Land Partnership

KPLC

Kenya Power and Lighting Co. Ltd.

KRA

Kenya Revenue Authority

 

3

 

kW

Kilowatt - A unit of electrical power that is equal to 1,000 watts

kWh

Kilowatt hour(s), a measure of power produced

LCOE

Levelized Costs of Energy

Mammoth Pacific

Mammoth-Pacific, L.P.

MEMR

The Indonesian Minister of Energy and Mineral Resources

MW

Megawatt - One MW is equal to 1,000 kW or one million watts

MWh

Megawatt hour(s), a measure of energy produced

NIS

New Israeli Shekel

NOA

Notice of Assessments

NV Energy

NV Energy, Inc.

NYSE

New York Stock Exchange

NYISO

New York Independent System Operator, Inc.

OEC

Ormat Energy Converter

OFC

Ormat Funding Corp., a wholly owned subsidiary of the Company

OFC 2

OFC 2 LLC, a wholly owned subsidiary of the Company

OFC 2 Senior Secured Notes

Up to $350,000,000 Senior Secured Notes, due 2034 issued by OFC 2

Opal Geo

Opal Geo LLC

OPC

OPC LLC, a consolidated subsidiary of the Company

OrCal

OrCal Geothermal Inc., a wholly owned subsidiary of the Company

ORC

Organic Rankine Cycle - A process in which an organic fluid such as a hydrocarbon or fluorocarbon (but not water) is boiled in an evaporator to generate high pressure vapor. The vapor powers a turbine to generate mechanical power. After the expansion in the turbine, the low-pressure vapor is cooled and condensed back to liquid in a condenser. A cycle pump is then used to pump the liquid back to the vaporizer to complete the cycle. The cycle is illustrated in the figure below:

 

ora20201231_10kimg001.jpg

 

Ormat International

Ormat International Inc., a wholly owned subsidiary of the Company

 

4

 

Ormat Nevada

Ormat Nevada Inc., a wholly owned subsidiary of the Company

Ormat Systems

Ormat Systems Ltd., a wholly owned subsidiary of the Company

ORIX

ORIX Corporation

ORPD

ORPD LLC, a holding company subsidiary of the Company in which Northleaf Geothermal Holdings, LLC holds a 36.75% equity interest

OrPower 4

OrPower 4 Inc., a wholly owned subsidiary of the Company

Ortitlan

Ortitlan Limitada, a wholly owned subsidiary of the Company

ORTP

ORTP, LLC, a consolidated subsidiary of the Company

Orzunil

Orzunil I de Electricidad, Limitada, a wholly owned subsidiary of the Company

PEC

Portfolio Energy Credits

PG&E

Pacific Gas and Electric Company

PGV

Puna Geothermal Venture, a wholly owned subsidiary of the Company

PJM

PJM Interconnection, LLC

PLN

PT Perusahaan Listrik Negara

Power plant equipment

Interconnection equipment, cooling towers for water cooled power plant, etc., including the generating units

PPA

Power purchase agreement

PTC

Production Tax Credit

PUC Public Utilities Commission

PUCH

Public Utilities Commission of Hawaii

PUCN

Public Utilities Commission of Nevada

PUHCA

U.S. Public Utility Holding Company Act of 1935

PUHCA 2005

U.S. Public Utility Holding Company Act of 2005

PURPA

U.S. Public Utility Regulatory Policies Act of 1978

Qualifying Facility(ies)

Certain small power production facilities are eligible to be “Qualifying Facilities” under PURPA, provided that they meet certain power and thermal energy production requirements and efficiency standards. Qualifying Facility status provides an exemption from PUHCA 2005 and grants certain other benefits to the Qualifying Facility

RCEA Redwood Coast Energy Authority

REC

Renewable Energy Credit

REG

Recovered Energy Generation

RER

Renewable Energy Resource certificate

RPS

Renewable Portfolio Standards

RTO

Regional Transmission Organization

SCE

Southern California Edison

SCPPA

Southern California Public Power Authority

SDG&E San Diego Gas and Electric

SEC

U.S. Securities and Exchange Commission

Securities Act

U.S. Securities Act of 1933, as amended

SOL

Sarulla Operations Ltd.

solar PV

solar photovoltaic

SOX Act

Sarbanes-Oxley Act of 2002

 

5

 

SRAC

Short Run Avoided Costs

TASE

Tel Aviv Stock Exchange

Tax Act

Tax Cuts and Jobs Act

UIC

Underground Injection Control

Union Bank

Union Bank, N.A.

U.S.

United States of America

U.S. Treasury

U.S. Department of the Treasury

USG

U.S. Geothermal Inc.

VAT

Value Added Tax

VCE

Valley Clean Energy

Viridity

Viridity Energy Solutions Inc., a wholly owned subsidiary of the Company

YTL

Turkish Lira

 

Cautionary Note Regarding Forward-Looking Statements 

 

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections of annual revenues, expenses and debt service coverage with respect to our debt securities, future capital expenditures, business strategy, competitive strengths, goals, development or operation of generation assets, market and industry developments and the growth of our business and operations, are forward-looking statements. When used in this annual report, the words “may”, “will”, “could”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “projects”, “potential”, or “contemplate” or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this annual report are primarily located in the material set forth under the headings Item 1 — “Business” contained in Part I of this annual report, Item 1A — “Risk Factors” contained in Part I of this annual report, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this annual report, and “Notes to Financial Statements” contained in Item 8 — “Financial Statements and Supplementary Data” contained in Part II of this annual report, but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this annual report completely and with the understanding that actual future results and developments may be materially different from what we expect attributable to a number of risks and uncertainties, many of which are beyond our control.

 

Summary of the risks that might cause actual results to differ from our expectations include, but are not limited to the following:

 

Risks Related to the Company’s Business and Operation

 

 

Our financial performance depends on the successful operation of our geothermal and REG power plants, which are subject to various operational risks.

 

 

Our exploration, development, and operation of geothermal energy resources are subject to geological risks and uncertainties, which may result in decreased performance or increased costs for our power plants.

 

 

We may experience a  cyber incident, cyber security breach, severe natural event or physical attack on our operational networks and information technology systems.

 

 

We may decide not to implement, or may not be successful in implementing, one or more elements of our multi-year strategic plan, and the plan may not achieve its goal of enhancing shareholder value.

 

 

Concentration of customers, specific projects and regions may expose us to heightened financial exposure.

 

 

Our international operations expose us to risks related to the application of foreign laws and regulations, political or economic instability and major hostilities or acts of terrorism.

 

 

Political, economic and other conditions in the emerging economies where we operate may subject us to greater risk than in the developed U.S. economy.

 

 

Conditions in and around Israel, where the majority of our senior management and our main production and manufacturing facilities are located, may adversely affect our operations and may limit our ability to produce and sell our products or manage our power plants.

 

 

Continued  reduction in our Products backlog may affect our ability to fully utilize our main production and manufacturing facilities.

 

 

Some of our leases will terminate if we do not extract geothermal resources in “commercial quantities”, thus requiring us to enter into new leases or secure rights to alternate geothermal resources, none of which may be available on terms as favorable to us as any such terminated lease, if at all.

 

6

 

 

Our BLM leases may be terminated if we fail to comply with any of the provisions of the Geothermal Steam Act or if we fail to comply with the terms or stipulations of such leases.

 

 

Some of our leases (or subleases) could terminate if the lessor (or sublessor) under any such lease (or sublease) defaults on any debt secured by the relevant property, thus terminating our rights to access the underlying geothermal resources at that location.

 

 

Reduced levels of recovered energy required for the operation of our REG power plants may result in decreased performance of such power plants.

 

 

Our business development activities may not be successful and our projects under construction may not commence operation as scheduled.

 

 

Our future growth depends, in part, on the successful enhancement of a number of our existing facilities.

 

 

We rely on power transmission facilities that we do not own or control.

 

 

Our use of joint ventures may limit our flexibility with jointly owned investments.

 

 

Our operations could be adversely impacted by climate change.

 

 

Geothermal projects that we plan to develop in the future, may operate as "merchant" facilities without long-term PPAs and therefore such projects will be exposed to market fluctuations.

 

 

Storage projects that we are operating, currently developing or plan to develop in the future, may operate as "merchant" facilities without long-term power services agreements for some or all of their generating capacity and output and therefore such projects will be exposed to market fluctuations.

 

 

We may not be able to successfully conclude the transactions, integrate companies, which we acquired and may acquire in the future.

 

 

The power generation industry is characterized by intense competition.

 

 

We face increasing competition from other companies engaged in energy storage and the combination of solar and energy storage.

 

 

Changes in costs and technology may significantly impact our business by making our power plants and products less competitive, resulting in our inability to sign new PPAs for our Electricity segment and new supply and EPC contracts for our Products segment.

 

 

Our intellectual property rights may not be adequate to protect our business.

 

 

We may experience difficulties implementing and maintaining our new enterprise resource planning system.

 

Risks Related to Governmental Regulations, Laws and Taxation

 

 

Our financial performance could be adversely affected by changes in the legal and regulatory environment affecting our operations.

 

 

Pursuant to the terms of some of our PPAs with investor-owned electric utilities and publicly-owned electric utilities in states that have renewable portfolio standards, the failure to supply the contracted capacity and energy thereunder may result in the imposition of penalties.

 

 

If any of our domestic power plants loses its current Qualifying Facility status under PURPA, or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded to Qualifying Facilities, our domestic operations could be adversely affected.

 

 

We may experience a reduction or elimination of government incentives.

 

 

We are a holding company and our cash depends substantially on the performance of our subsidiaries and the power plants they operate, most of which are subject to restrictions and taxation on dividends and distributions.

 

 

The costs of compliance with federal, state, local and foreign environmental laws and our ability in  obtaining and maintaining environmental permits and governmental approvals required for development, construction and/or operation may result in liabilities, costs and delays in construction (as well as any fines or penalties that may be imposed upon us in the event of any non-compliance or delays with such laws or regulations).

 

 

We could be exposed to significant liability for violations of hazardous substances laws because of the use or presence of such substances at our power plants.

 

7

 

 

Current and future urbanizing activities and related residential, commercial, and industrial developments may encroach on or limit geothermal or solar PV activities in the areas of our power plants, thereby affecting our ability to utilize access, inject and/or transport geothermal resources on or underneath the affected surface areas.

 

 

U.S. federal income tax reform could adversely affect us.

 

Risks Related to Economic and Financial Conditions

 

 

We may be unable to obtain the financing we need on favorable terms  to pursue our growth strategy.

 

 

Our foreign power plants and foreign manufacturing operations expose us to risks related to fluctuations in currency rates, which may reduce our profits from such power plants and operations.

 

 

Our power plants have generally been financed through a combination of our corporate funds and limited or non-recourse project finance debt and lease financing. If our project subsidiaries default on their obligations under such limited or non-recourse debt or lease financing, we may be required to make certain payments to the relevant debt holders, and if the collateral supporting such leveraged financing structures is foreclosed upon, we may lose certain of our power plants.

 

 

We may experience  fluctuations in the cost of construction, raw materials, commodities and drilling.

 

 

We are exposed to swap counterparty credit risk.

 

 

We may not be able to obtain sufficient insurance coverage to cover damages resulting from any damages to our assets and profitability including, but not limited to, natural disasters such as volcanic eruptions, lava flows, wind and earthquakes.

 

Risks Related to Force Majeure

 

 

The global spread of a public health crisis, including the COVID-19 pandemic may have an adverse impact on our business.

 

 

The existence of a prolonged force majeure event or a forced outage affecting a power plant, or the transmission systems could reduce our net income.

 

Risks Related to Our Stock

 

 

A substantial percentage of our common stock is held by stockholders whose interests may conflict with the interests of our other stockholders.

 

 

The price of our common stock may fluctuate substantially, and your investment may decline in value.

 

Company Contact and Sources of Information

 

Our website is www.ormat.com. Information contained on our website is not part of this Report. Information that we furnish or file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to, or exhibits included in, these reports are available for download, free of charge, through our website. Our SEC filings, including exhibits filed therewith, are also available directly on the SEC’s website at www.sec.gov.

 

You may request a copy of our SEC filings at no cost to you, by writing to the Company address appearing on the cover page of this annual report or by calling us at (775) 356-9029.

 

8

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a leading vertically integrated company that is primarily engaged in the geothermal and recovered energy power businesses. We leveraged our core capabilities and global presence to expand our activity into different energy storage services and solar photovoltaic (PV) (including hybrid geothermal and solar PV as well as energy storage plus Solar PV). Our objective is to become a leading global provider of renewable energy and we have adopted a strategic plan to focus on several key initiatives to expand our business.

 

We currently conduct our business activities in three business segments:

 

 

Electricity Segment. In the Electricity segment, which contributed 76.8% of our total revenues in 2020, we develop, build, own and operate geothermal, solar PV and recovered energy-based power plants in the United States and geothermal power plants in other countries around the world and sell the electricity they generate. In 2020, we derived 63.1% of our Electricity segment revenues from our operations in the U.S. and 36.9% from the rest of the world.

 

 

Product Segment. In the Product segment, which contributed 21.0% of our total revenues in 2020, we design, manufacture and sell equipment for geothermal and recovered energy-based electricity generation and remote power units and provide services relating to the engineering, procurement and construction of geothermal and recovered energy-based power plants. In 2020, we derived 3.9% of our Product segment revenues from our operations in the United States and 96.1% from the rest of the world.

 

 

Energy Storage Segment. In the Energy Storage segment, which contributed 2.2% of our total revenues in 2020, we mainly provide energy storage, related services as well as services relating to the engineering, procurement, construction, operation and maintenance of energy storage units. In 2020, we derived all of our Energy Storage segment revenues from our operations in the United States.

 

The charts below show the relative contributions of each of our segments to our consolidated revenues and the geographical breakdown of our segment revenues for the fiscal year ended December 31, 2020.

 

The following chart sets forth a breakdown of our revenues for each of the years ended December 31, 2019 and 2020:

 

 

 

updatedgraph.jpg

 

9

 

The following chart sets forth the geographical breakdown of revenues attributable to our Electricity, Product and Energy Storage segments for each of the years ended December 31, 2019 and 2020:

 

ora20201231_10kimg003.gif

 

 

 

updgraph2.jpg

 

10

 

 

Technology and products we use in our operations include geothermal, recovered energy, solar PV and energy storage.

 

Our owned geothermal power plants include both power plants that we have built and power plants that we have acquired. The substantial majority of the power plants that we currently own or operate produce electricity from geothermal energy sources. Geothermal energy is a clean, renewable and generally sustainable form of energy derived from the natural heat of the earth. Unlike electricity produced by burning fossil fuels, electricity produced from geothermal energy sources is produced without emissions of certain pollutants such as nitrogen oxide, and with far lower emissions of other pollutants such as carbon dioxide. As a result, electricity produced from geothermal energy sources contributes significantly less to global warming and local and regional incidences of acid rain than energy produced by burning fossil fuels. In addition, compared to power plants that utilize other renewable energy sources, such as wind or solar, geothermal power plants are generally available all year-long and all day-long and can therefore provide base-load electricity services. Geothermal power plants can also be custom built to provide a range of electricity services such as baseload, voltage regulation, reserve and flexible capacity. Geothermal energy is also an attractive alternative to other sources of energy and can support  a diversification strategy to avoid dependence on any one energy source or politically sensitive supply sources. We own and operate a geothermal and solar PV hybrid project and have similar projects currently  under construction, in which the electricity generated from a solar PV power plant is used to offset the equipment’s energy use at the geothermal facility, thus increasing the renewable energy delivered by the project to the grid.

 

In addition to our geothermal energy business, we manufacture and sell products that produce electricity from recovered energy or so-called “waste heat”. We also construct, own, and operate recovered energy-based power plants. We have built all of the recovered energy-based plants that we operate. Recovered energy comes from residual heat that is generated as a by-product of gas turbine-driven compressor stations, solar thermal units and a variety of industrial processes, such as cement manufacturing. Such residual heat, which would otherwise be wasted, may be captured in the recovery process and used by recovered energy power plants to generate electricity without burning additional fuel and without additional emissions.

 

In our Energy Storage segment, we commissioned three energy storage facilities with a total of 42 MW in New Jersey and Vermont, a 10 MW facility in Texas and acquired a 20 MW facility in California. We plan to accelerate long-term growth in the Energy Storage segment market to  establish a leading position in the U.S..

 

Our Power Generation Business (Electricity Segment)

 

Each of our current geothermal power plants sells substantially all of its output pursuant to long-term, fixed price PPAs to various counterparties denominated in or linked to the US dollar or Euro. These contracts had a total weighted average remaining term, based on contributions to segment revenue, of approximately 16 years at December 31, 2020. In addition, the counterparties to our PPAs in the United States had a credit rating of between Aa3 to Baa2 by Moody's and  BB- to A by S&P. The purchasers of electricity from our foreign power plants are mainly state-owned entities in countries with below investment grade rating.

 

Power Plants in Operation

 

We own and operate 25 geothermal, REG and solar sites globally with an aggregate generating capacity of 932 MW. Geothermal comprises 94% of our generating capacity. In 2020, our geothermal and REG power plants generated at a capacity factor of 87% and 59%, respectively, which is much higher than typical capacity factors for wind and solar producers that are usually at 20% to 30%.

 

11

 

The table below summarizes certain key non-financial information relating to our power plants and complexes as of February 24, 2021. The generating capacity of certain of our power plants and complexes listed below has been updated from our 2019 disclosure to reflect changes in the resource temperature and other factors that impact resource capabilities:

 

Type

Region

Plant

Ownership(1)

Generating

capacity

(MW) (2)

PPA Tenor

Capacity Factor

Geothermal

California

Ormesa Complex

100%

36

23

 

   

Heber Complex

100%

81

14

 
   

Mammoth Complex

100%

30

13

80%
   

Brawley

100%

13

12

 
 

West Nevada

Steamboat Complex

100%

84(3)

18

82%

   

Brady Complex

100%

26

16

 
 

East Nevada

Tuscarora

100%

18

13

 

   

Jersey Valley

100%

8

13

 
   

McGinness Hills

100%

145

19

93%
   

Don A. Campbell

63.3%

32

16

 
   

Tungsten Mountain(4)

100%

29

24

 
 

North West Region

Neal Hot Springs

60%

24(5)

19

 

   

Raft River

100%

12

13

90%
   

San Emidio

100%

11

19

 
 

Hawaii

Puna

63.3%

38

33

NA%(6)

 

International

Amatitlan (Guatemala)

100%

20

9

88%(8)

   

Zunil (Guatemala)

97%

20(7)

15

 
   

Olkaria III Complex (Kenya)

100%

150

15

 
   

Bouillante (Guadeloupe Island, France)

63.75%(9)

15

11

 
   

Platanares (Honduras)

100%

38

13

 
             

Total Consolidated Geothermal

     

831

 

87%(8,10)

             

REG

 

OREG 1

63.3%

22

12

 
   

OREG 2

63.3%

22

15

 
   

OREG 3

63.3%

5.5

10

 
   

OREG 4

100%

3.5(11)

10

 

Total REG

     

53

 

59%

             

solar

 

Tungsten Mountain

100%

7

24

 
             

Total solar

     

7

   
             

Unconsolidated Geothermal

Indonesia

Sarulla Complex

12.75%

42

28

 
             

Total Unconsolidated Geothermal

     

42

   
             

Total

     

932

   

 

12

 

 

1.

We indirectly own and operate all of our power plants, although financial institutions hold equity interests in three of our subsidiaries: (i) Opal Geo subsidiaries, which own the McGinness Hills Phases 1 and 2 geothermal power plants, the Tuscarora and Jersey Valley power plants and the second phase of the Don A. Campbell power plant, all located in Nevada; (ii) ORNI 41, which owns the McGinness Hills Phase 3 located in Nevada; and (iii) ORNI 43, which owns the Tungsten Mountain geothermal power plant located in Nevada. In the table above, we list these power plants as being 100% owned because all of the generating capacity is owned by these subsidiaries and we control the operation of the power plants. The nature of the equity interests held by the financial institution is described below in Item 8 — “Financial Statements and Supplementary Data” under Note 13.

 

Notwithstanding our 63.75% equity interest in the Bouillante power plant, 60% equity interest in the Neal Hot Spring power plant and 63.25% direct equity interest in the Puna plant, the first phase of Don A. Campbell, OREG 1, OREG 2 and OREG 3 power plants as well as the indirect interest in the second phase of the Don A. Campbell complex owned by our subsidiary, ORPD, we list 100% of the generating capacity of the Bouillante power plant, the Neal Hot Springs power plant and the power plants in the ORPD portfolio in the table above because we control their operations. We list our 12.75% share of the generating capacity of the Sarulla complex as we own a 12.75% minority interest. Revenues from the Sarulla complex are not consolidated and are presented under “Equity in earnings (losses) of investees, net” in our financial statements.

 

 

2.

References to generating capacity generally refer to gross generating capacity less auxiliary power. We determine the generating capacity of these power plants by taking into account resource and power plant capabilities. In any given year, the actual power generation of a particular power plant may differ from that power plant’s generating capacity due to variations in ambient temperature, the availability of the geothermal resource, and operational issues affecting performance during that year.

 

 

3.

The Steamboat complex includes the Steamboat Hills enhancement that commenced commercial operation in  June, 2020. 

 

 

4.

Tungsten Mountain is a hybrid geothermal and solar power plant that uses the solar energy for geothermal power plant auxiliary power. The solar power plant generates 7 MW and is presented separately in the table above.

 

 

5.

We own 60% and Enbridge owns 40% of the Neal Hot Springs power plant.

 

 

6.

The Puna geothermal power plant has been shut down since May 3, 2018 when the Kilauea volcano located in close proximity to it erupted following a significant increase in seismic activity in the area. In November 2020, Puna resumed operations and currently it is operating at a generating capacity of approximately 13MW . In addition, we signed an amended PPA to extend its duration and expand its contract capacity as described below in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings "Recent Development".

 

 

7.

In Zunil, power plant revenues used to be calculated based on 24 MW of generating capacity and was unrelated to the performance of the reservoir. In 2019 and onward, revenues are calculated based on the actual generation of the power plant, therefore the generating capacity was updated to reflect the current generating capacity.

 

 

8.

Capacity factor for Olkaria adds back the curtailed MWh. 

 

 

9.

We own 63.75%, CDC owns 21.25% and Sageos owns 15.0% of the Bouillante power plant. 

 

  10. The total availability of the geothermal power plants excludes the Puna power plant that is not in operation, as discussed above. 

 

  11. The OREG 4 power plant is not operating at full capacity due to low run time of the compressor station that serves as the power plant’s heat source. This has resulted in lower power generation.

 

New Power Plants

 

We are currently in various stages of construction of new power plants and expansion of existing power plants. Our construction and expansion plans include 92 MW in generating capacity from geothermal and solar PV power plants in the United States. In addition, we have several geothermal and solar PV projects in the United States, Indonesia, Guatemala and Guadeloupe that are either under initial stages of construction or under different stages of development with an aggregate capacity of between 98 MW and 108 MW.

 

13

 

We have substantial land positions across 31 prospects in the United States and 10 prospects in Ethiopia, Guatemala, Honduras, Indonesia and New Zealand that we expect will support future geothermal development and on which we have started or plan to start exploration activity. These land positions are comprised of various leases, exploration concessions for geothermal resources and an option to enter into leases.

 

We expect adding between 250 MW to 270 MW of Geothermal and Solar PV by the end of 2023.

 

Our Product Business (Product Segment)

 

We design, manufacture and sell products for electricity generation and provide the related services described below. In addition, we recently started to provide cementing services for well drilling to third parties. We primarily manufacture products to fill customer orders, but in some situations, we manufacture products as inventory for future projects that we will own and for future third party projects.

 

Power Units for Geothermal Power Plants 

 

We design, manufacture and sell power units for geothermal electricity generation, which we refer to as OECs. In geothermal power plants using OECs, geothermal fluid (either hot water, also called brine, or steam or both) is extracted from the underground reservoir and flows from the wellhead to a vaporizer that heats a secondary working fluid, which is vaporized and used to drive the turbine. The secondary fluid is then condensed in a condenser, which may be cooled directly by air through an air cooling system or by water from a cooling tower and sent back to the vaporizer. The cooled geothermal fluid is then reinjected back into the reservoir. Our customers include contractors, geothermal power plant developers, owners and operators.

 

Power Units for Recovered Energy-Based Power Generation 

 

We design, manufacture and sell power units used to generate electricity from recovered energy, or so-called “waste heat”. This heat is generated as a residual by-product of gas turbine-driven compressor stations, solar thermal units and a variety of industrial processes, such as cement manufacturing, and is not otherwise used for any purpose. Our existing and target customers include interstate natural gas pipeline owners and operators, gas processing plant owners and operators, cement plant owners and operators, and other companies engaged in other energy-intensive industrial processes.

 

EPC of Power Plants

 

We serve as an EPC contractor for geothermal and recovered energy power plants on a turnkey basis, using power units we design and manufacture. Our customers are geothermal power plant owners as well as our target customers for the sale of our recovered energy-based power units as described above. Unlike many other companies that provide EPC services, we believe that our competitive advantage is in using equipment that we manufacture allowing us better quality and control over the timing and delivery of required equipment and its related costs.

 

Remote Power Units and Other Generators 

 

We design, manufacture and sell fossil fuel powered turbo-generators with capacities ranging from 200 watts to 5,000 watts, which operate unattended in extreme hot or cold climate conditions. Our customers include contractors who install gas pipelines in remote areas and offshore platform operators and contractors. In addition, we design, manufacture, and sell generators, including heavy duty direct-current generators, for various other uses.

 

Our Energy Storage Segment

 

Our energy storage segment has grown consistently in 2019 and 2020 and we expect continuous and even stronger growth over the coming years, while we target the sector as one of our major segments for further investment and growth.

 

14

 

In 2020, we successfully brought on line one new Ormat-owned BESS project, the 10 MW/10 MWh Rabbit Hill project in Georgetown, Texas.  We also acquired the operating 20 MW / 80 MWh Pomona BESS project in southern California, that has been in commercial operation since December 2016 under a 10-year resource adequacy agreement with Southern California Edison. These activities brought our total operating portfolio at the end of 2020 to approximately 73 MW / 136 MWh within the footprint of 4 RTOs or ISOs: CAISO, PJM Interconnect, ERCOT and ISONE.

 

We are currently in the final commissioning stage of our 10 MW / 40 MWh Vallecito project in southern California, for which we secured a 20-year resource adequacy agreement with Southern California Edison. We are also in the process of constructing a 5 MW / 20 MWh Tierra Buena project in northern California, which we expect to reach commercial operation by the end of 2021 and our Andover 20 MW project in NJ, which we expect to reach commercial operation in the first quarter of 2022 and Howel 7 MW project in NJ, which we expect to reach commercial operation in the second quarter of 2022. We acquired rights in a project under development, in Upton County, Texas, and plan to start the construction of a 25 MW / 25 MWh BESS project there before the end of 2021. 

 

We have a approximately 1.2 GW pipeline of additional potential projects, in different stages of development across the United States that we believe we will be able to commission between 200 MW and 300 MW by 2023. The development of such projects is dependent, inter alia, on site permitting, interconnection agreement and economic viability, which are not certain. We plan to continue leveraging our experience in project development and finance, as well as our engineering, procurement and construction know-how and our relationships with utilities and other market participants, to develop additional BESS projects.

 

Business Strategy

 

Our strategy is focused on further developing a geographically balanced portfolio of geothermal, energy storage, solar (PV) and recovered energy assets and continuing our leading position in the geothermal energy market with the objective of becoming a leading global provider of renewable energy. Our strategy focuses on three main elements:

 

 

our core geothermal business in the United States as well as globally;

 

 

establishing a strong market position in the energy storage market; and

 

 

exploring opportunities in new areas by looking for synergistic growth opportunities utilizing our core competence, market reputation as a successful company and new market opportunities focused upon environmental solutions.

 

We intend to implement this strategy through:  

 

 

 Development and Construction of New Geothermal Power Plants — continuously seeking out commercially exploitable geothermal resources, to accelerate the development  and construction of new geothermal power plants by either entering into long-term PPAs providing stable cash flows or selling in the "merchant" market in jurisdictions where the regulatory, tax and business environments encourage or provide incentives for such development; 

 

 

Expanding our Geographical Reach increasing our business development activities in an effort to grow our business in the global markets in all business segments. While we continue to evaluate global opportunities, we currently see the U.S., Indonesia, Central America and Ethiopia as attractive markets for our Electricity segment and New Zealand, Philippines, Turkey, Chile, Indonesia and China as attractive markets for our Product segment.  We are actively looking at ways to expand our presence in those countries;

 

 

Accelerating the Development and Construction of New Energy Storage Assets - increasing our business development activities seeking potential sites for development and construction of energy storage facilities (including hybrid storage and solar PV facilities) in an effort to significantly grow our energy storage market; 

 

 

Acquisition of New Geothermal Assets — expanding and accelerating growth through acquisition activities globally, aiming to acquire additional geothermal assets with long term PPAs or without a PPA as well as operating and development assets that can support our geothermal business;

 

15

 

 

Acquisition of Energy Storage Projects and Assets – expanding and accelerating growth through acquisition activities of operating assets, shovel ready projects and projects in various stages of development ;

 

 

Using Our Operational Capabilities to Increase Output from our Existing Geothermal Power Plants increasing output from our existing geothermal power plants by adding additional generating capacity, upgrading plant technology, and improving geothermal reservoir operations, including improving methods of heat source supply and delivery;

 

 

Creating Cost Savings through Increased Operating Efficiency — increasing efficiencies in our operating power plants and manufacturing facility including procurement by adding new technologies, restructuring of management control, automating part of our manufacturing work and centralizing our operating power plants;

 

 

Diversifying our Customer Base evaluating a number of strategies for expanding our customer base to the CCA and C&I markets.  In the near term, however, we expect that the substantial majority of our revenues will continue to be generated from our traditional electrical utility customer base for the Electricity segment;

 

 

Maintaining a Prudent and Flexible Capital Structure — we have various financing structures in place, including non-recourse project financings, the sale of differential membership interests and equity interests in certain subsidiaries, as well as revolving credit facilities and term loans. We believe our cash flow profile, the long-term nature of our contracts, and our ability to raise capital provide greater flexibility for optimizing our capital structure;

 

 

Improving our Technological Capabilities  investing in research and development of renewable energy technologies and leveraging our technological expertise to continuously improve power plant components, reduce operations and maintenance costs, develop competitive and environmentally friendly products for electricity generation and target new service opportunities. In addition, we are expanding our core geothermal competencies to provide high efficiency solutions for high enthalpy applications by utilizing our binary enhanced cycle and technology;

 

 

Manufacturing and Providing Products and EPC Services Related to Renewable Energy designing, manufacturing and contracting power plants for our own use and selling to third parties power units and other generation equipment for geothermal and recovered energy-based electricity generation;

 

 

Expanding into New Technologies - leveraging our technological capabilities over a variety of renewable energy platforms, including solar power generation and energy storage. We may acquire companies with integration and technological capabilities that we do not currently have, or develop new technology ourselves, where we can effectively leverage our expertise to implement this part of our strategic plan.

 

16

 

The map below shows our worldwide portfolio of operating geothermal, solar PV and recovered energy power plants as of February 25, 2021.

 

z02.jpg

 

* In the Sarulla complex, we include our 12.75% share only.

 

The map below shows our portfolio of operating storage facilities as of February 25, 2021. 

 

z03.jpg

 

17

 

Industry Background

 

Geothermal Energy

 

There are several different sources or methods of obtaining geothermal energy, which are described below.

 

Hydrothermal geothermal-electricity generation — Hydrothermal geothermal energy is derived from naturally occurring hydrothermal reservoirs that are formed when water comes sufficiently close to hot rock to heat the water to temperatures of 300 degrees Fahrenheit or more. The heated water then ascends toward the surface of the earth where, if geological conditions are suitable for its commercial extraction, it can be extracted by drilling geothermal wells. Geothermal production wells are normally located within several miles of the power plant, as it is not economically viable to transport geothermal fluids over longer distances due to heat and pressure loss. The geothermal reservoir is a renewable source of energy if: (i) natural ground water sources and reinjection of extracted geothermal fluids are adequate over the long-term to replenish the geothermal reservoir following the withdrawal of geothermal fluids and (ii) the well field is properly operated. Geothermal energy power plants typically have higher capital costs (primarily because of the costs attributable to well field development) but tend to have significantly lower variable operating costs (principally consisting of maintenance expenditures) than fossil fuel-fired power plants that require ongoing fuel expenses.

 

EGS — An EGS is a subsurface system that may be artificially created to extract heat from hot rock where the permeability and aquifers required for a hydrothermal system are insufficient or non-existent. A geothermal power plant that uses EGS techniques recovers the thermal energy from the subsurface rocks by creating or accessing a system of open fractures in the rock through which water can be injected, heated through contact with the hot rock, returned to the surface in production wells and transferred to a power unit.

 

Co-produced geothermal from oil and gas fields, geo-pressurized resources — Another source of geothermal energy is hot water produced as a by-product of oil and gas extraction. When oil and gas wells are deep, the extracted fluids are often at high temperatures and if the water volume associated with the extracted fluids is significant, the hot water can be used for power generation in equipment similar to a geothermal power plant.

 

Geothermal Power Plant Technologies

 

Geothermal power plants generally employ either binary systems or conventional flash design systems, as briefly described below. In our geothermal power plants, we also employ our proprietary technology of combined geothermal cycle systems.

 

18

 

Binary System

 

In a geothermal power plant using a binary system, geothermal fluid (either hot water (also called brine) or steam or both) is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to a vaporizer that heats a secondary working fluid. This is typically an organic fluid, such as pentane or butane, which is vaporized and is used to drive the turbine. The organic fluid is then condensed in a condenser, which may be cooled directly by air or by water from a cooling tower and sent back to the vaporizer through a pump. The cooled geothermal fluid is then reinjected back into the reservoir. The operation of our air-cooled binary geothermal power plant is depicted in the diagram below.

  

z04.jpg

 

Flash Design System

 

In a geothermal power plant using flash design, geothermal fluid is extracted from the underground reservoir and flows from the wellhead through a gathering system of insulated steel pipelines to flash tanks and/or separators. There, the steam is separated from the brine and is sent to a demister, where any remaining water droplets are removed. This produces a stream of dry saturated steam, which drives a steam turbine generator to produce electricity. In some cases, the brine at the outlet of the separator is flashed a second time (dual flash), providing additional steam at lower pressure used in the low-pressure section of the steam turbine to produce additional electricity. Steam exhausted from the steam turbine is condensed in a surface or direct contact condenser cooled by cold water from a cooling tower. The non-condensable gases (such as carbon dioxide) are removed by means of a vacuum system in order to maintain the performance of the steam condenser. The resulting condensate is used to provide make-up water for the cooling tower. The hot brine remaining after separation of steam is injected (either directly or after passing through a binary plant to produce additional power from the residual heat remaining in the brine) back into the geothermal resource through a series of injection wells. The flash technology is depicted in the diagram below.

 

 z05.jpg

 

In some instances, the wells directly produce dry steam and the steam is fed directly to the steam turbine with the rest of the system similar to the flash technology described above.

 

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Our Proprietary Technology

 

Our proprietary technology may be used either in power plants operating according to the ORC alone or in combination with various other commonly used thermodynamic technologies that convert heat to mechanical power, such as gas and steam turbines. It can be used with a variety of thermal energy sources, such as geothermal, recovered energy, biomass, solar energy and fossil fuels. Specifically, our technology involves original designs of turbines, pumps, and heat exchangers, as well as formulation of organic motive fluids (all of which are non-ozone-depleting substances). By using advanced computational fluid dynamics techniques and other computer aided design software as well as our test facilities, we continuously seek to improve power plant components, reduce operations and maintenance costs, and increase the range of our equipment and applications. We are always examining ways to increase the output of our plants by utilizing evaporative cooling, cold reinjection, configuration optimization, and topping turbines.

 

We also developed, patented and constructed GCCU power plants in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power. Our Geothermal Combined Cycle technology is depicted in the diagram below.

 

z06.jpg

 

In the conversion of geothermal energy into electricity, our technology has a number of advantages over conventional geothermal steam turbine plants. A conventional geothermal steam turbine plant consumes significant quantities of water, causing depletion of the aquifer and requiring cooling water treatment with chemicals and consequently a need for the disposal of such chemicals. A conventional geothermal steam turbine plant also creates a significant visual impact in the form of an emitted plume from the cooling towers, especially during cold weather. By contrast, our binary and combined cycle geothermal power plants have a low profile with minimal visual impact and do not emit a plume when they use air-cooled condensers. Our binary and combined cycle geothermal power plants reinject all of the geothermal fluids utilized in the respective processes into the geothermal reservoir. Consequently, such processes generally have no emissions.

 

Other advantages of our technology include simplicity of operation and maintenance and higher yearly availability. For instance, the OEC employs a low speed and high efficiency organic vapor turbine directly coupled to the generator, eliminating the need for reduction gear. In addition, with our binary design, there is no contact between the turbine blade and geothermal fluids, which can often be very erosive and corrosive. Instead, the geothermal fluids pass through a heat exchanger, which is less susceptible to erosion and can adapt much better to corrosive fluids. In addition, with the organic vapor condensed above atmospheric pressure, no vacuum system is required.

 

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We use the same elements of our technology in our recovered energy products. The heat source may be exhaust gases from a Brayton cycle gas turbine, low-pressure steam, or medium temperature liquid found in the process industries such as oil refining and cement manufacturing. In most cases, we attach an additional heat exchanger in which we circulate thermal oil or water to transfer the heat into the OEC’s own vaporizer in order to provide greater operational flexibility and control. Once this stage of each recovery is completed, the rest of the operation is identical to that of the OECs used in our geothermal power plants and enjoys the same advantages of using the ORC. In addition, our technology allows for better load following than conventional steam turbines, requires no water treatment (since it is air cooled and organic fluid motivated), and does not require the continuous presence of a licensed steam boiler operator on site.

 

Our REG technology is depicted in the diagram below.

 

z07.jpg

 

Patents

 

As of February 24, 2021, we have 62 issued U.S. patents and one pending U.S. patent application. These patents and patent applications cover our products (mainly power units based on the ORC) and systems (mainly geothermal power plants and industrial waste heat recovery plants for electricity production). The product-related patents cover components that include turbines, heat exchangers, air coolers, seals and controls as well as control of operation of geothermal production well pumps. The system-related patents cover not only particular components but also the overall energy conversion system from the “fuel supply” (e.g., geothermal fluid, waste heat, biomass or solar) to electricity production.

 

The system-related patents also cover subjects such as waste heat recovery related to gas pipeline compressors and industrial waste heat, solar power systems, disposal of non-condensable gases present in geothermal fluids, reinjection of other geothermal fluids ensuring geothermal resource sustainability, power plants for very high-pressure geothermal resources, two-phase fluids, low temperature geothermal brine as well as processes related to EGS. 55 of our patents cover combined cycle geothermal power plants, in which the steam first produces power in a backpressure steam turbine and is subsequently condensed in a vaporizer of a binary plant, which produces additional power. The remaining terms of our issued patents range from one year to 16 years. The loss of any single patent would not have a material effect on our business or results of operations.

 

Research and Development

 

We conduct research and development activities intended to improve plant performance, reduce costs, and increase the breadth of our product offerings. The primary focus of our research and development efforts is targeting power plant conceptual thermodynamic cycle and major equipment including continued performance, cost and land usage improvements to our condensing equipment, and development of new higher efficiency and higher power output turbines. New realms for innovation include implementation of predictive maintenance software and automation of power plants performance analysis.

 

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Energy Storage Technology

 

In the energy storage segment, our engineering and R&D efforts include:

 

(a) developing optimization algorithms to optimize the dispatch strategy of a battery energy storage system (BESS) so as to optimize between potential market revenues and expected battery wear and tear;

 

(b) running an R&D laboratory to assess different battery cell technologies and their optimization with different energy markets in which we operate. We are testing different batteries under simulated operating criteria of various energy markets. Various inverter technologies are also assessed to identify deficiencies or synergies with the battery cells.

 

(c) developing self-integrated BESS, leveraging Ormat’s decades of experience in system integration so we can bring to market cost-effective BESS more rapidly and more optimized to the specific use cases and target revenue streams.

 

Additionally, we are continuing to evaluate investment opportunities in companies with innovative technology or product offerings for renewable energy and energy storage solutions.

 

Market Opportunities

 

Geothermal Market Opportunities

 

Renewable energy in general provides a sustainable alternative to the existing solutions to two major global issues: climate change and diminishing fossil fuel reserves. Renewable energy is sustainable, clean and decarbonizes the grid. These environmental benefits have led major countries to focus their efforts on the development of renewable energy sources in general and geothermal specifically.

 

Based on the IGA, as of  January 2021, geothermal power is generated in 29 countries with a total installed power generation capacity of 15,600 MW at the end of 2020. The leading countries are the U.S., Indonesia, the Philippines, Turkey, Mexico and New Zealand. The IGA estimates an additional 4,000 MW will be added by 2025.

 

Having realized the importance of renewable energy including geothermal alternatives, various governments have been preparing regulatory frameworks and policies, and providing incentives to develop the sector.

 

United States

 

Interest in geothermal energy in the United States remains strong for numerous reasons, including legislative support, RPS goals (as described below), coal, natural gas and nuclear power plant retirements, and an increasing awareness of the positive value of geothermal characteristics when compared to intermittent renewable technologies.

 

Today, electricity generation from geothermal resources is concentrated mainly in California, Nevada, Hawaii, Idaho, Oregon, and Utah, and we believe there are opportunities for expansion in other states such as New Mexico due to the potential of its geothermal resources and recent legislation that has increased its renewable energy goals to 100% by 2045 for investor-owned utilities.

 

Geothermal energy provides numerous benefits to the U.S. grid and economy. Geothermal development and operation bring economic benefits in the form of taxes and long term high-paying jobs, and it currently has one of the lowest LCOE of all power sources in the United States, according to the U.S. Energy Information Administration's report published in February 2019. Additionally, improvements in geothermal production make it possible to provide ancillary and on-demand services. This helps load serving entities avoid additional costs from purchasing and then balancing intermittent resources with storage or new transmission.

 

At the end of 2020, the United States Congress passed one of its most significant energy legislation in over a decade as part of the omnibus spending and coronavirus relief package. The legislation includes a budget for the Geothermal Technology Office to support geothermal research and development, a one-year extension of the production tax credit, and specific language to improve permitting efforts for renewable projects on federal land.

 

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State level legislation

 

Many state governments have enacted an RPS program under which utilities are required to include renewable energy sources as part of their energy generation. Under an RPS, participating states have set targets for the production of their energy from renewable sources by specified dates. Renewable energy generation under RPS programs are tracked through the production of RECs. Load serving entities track the RECs to ensure they are meeting the mandate prescribed by the RPS.

 

Currently in the United States, 42 states plus the District of Colombia and four territories have enacted an RPS, renewable portfolio goals, or similar laws or incentives (such as clean energy standards or goals) requiring or encouraging load serving entities in such states to generate or buy a certain percentage of their electricity from renewable energy or recovered heat sources. The vast majority of Ormat’s geothermal projects can be found in California, Nevada, and Hawaii which have some of the most stringent RPS programs in the country.

 

We see the impact of RPS and climate legislation as the most significant driver for us to expand existing power plants and to build new renewable projects.

 

Below are RPS targets in the states in which we are operating:

 

State

RPS Target

Year

Remarks

California

60

%

2030

RPS targets set for future years: 44% – 2024, 52% – 2027, and 60% – 2030. 100% zero carbon by 2045.

         

Nevada

50

%

2030

RPS target of 50% by 2030 and 100% zero carbon by 2050.
The state has a credit multiplier for photovoltaic and on peak energy savings.

         

Hawaii

100

%

2045

RPS targets set for future years: 30% by 2020, 40% by 2030, 70% by 2040 and 100% by 2045

         

Oregon

25

%

2025

Increased RPS of 50% by 2040 applies to IOUs who have a share of more than 3% of the state’s load; for utilities with a load-share of 1.5% – 3%, requirement is 10% in 2025, and for utilities with a load share of less than 1.5%, it is 5% in 2025

 

States also provide incentives to geothermal energy producers. Nevada provides a property tax abatement of up to 55% for real and tangible personal property used to generate electricity from geothermal sources. The abatement may extend up to twenty years if certain job creation requirements are met. The California Energy Commission provides favorable grants and loans to promote the development of new or existing geothermal resources and technologies within the state. In Idaho, geothermal energy producers are exempt from property tax and, in lieu, pay a tax of 3% of gross energy earnings.

 

Global 

 

We believe the global markets continue to present growth and expansion opportunities in both established and emerging markets.

 

Operations outside of the United States may be subject to and/or benefit from increasing efforts by governments and businesses around the world to fight climate change and move towards a low carbon, resilient and sustainable future. According to a recent report by the International Renewable Energy Agency entitled Toward 100% Renewable Energy, in 2019, a total of 61 countries had set a 100% renewable energy target in at least one end-use sector, up from 60 countries in 2018.

 

We believe that several global initiatives will create business opportunities and support global growth of the renewable sector. One such initiative is the historic Paris Agreement that was approved by the Twenty-first Conference of the Parties to the United Nations Framework Convention on Climate Change on December 12, 2015. The Paris Agreement, for the first time, created a commitment by parties to this agreement to setting nationally determined efforts with the view to strengthening the global response to the threat of climate change and reporting on their progress. Following this agreement, the EIB and other multilateral institutions have committed to provide $100 billion of new financing for climate action projects over the next five years to assist countries in reaching their targets. Although former President Donald J. Trump officially withdrew the United States from the Paris Agreement in 2020, President Joe Biden signed an executive order to recommit the United States to the Paris Agreement. The Paris Agreement will enter into force for the United States on February 19, 2021.

 

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In addition, in 2015, a group of 20 countries, including the United States, United Kingdom, France, China and India, pledged to double their respective budgets for renewable energy technology over five years as part of a separate initiative called Mission Innovation.  Mission Innovation celebrated its fifth year in 2020, and has since grown to 24 countries and the European Commission. Over the past five years members have raised the profile of clean energy innovation and increased investments by $4.9 billion annually.

 

Also in 2015, the Breakthrough Energy Coalition was launched by a group of 28 private investors with the objective of bringing companies with the potential to deliver affordable, reliable and carbon free power from the research lab to the market. In the same vein, in 2020, several global organizations joined the Rockefeller Foundation to form a coalition aimed at providing sustainable energy for one billion people by 2030. Joining this call to action include the African Development Bank, CDC Group plc (the UK’s development finance institution), European Investment Bank, International Energy Agency, IRENA, United Nations Development Programme (UNDP), U.S. International Development Finance Corporation and U.S. Agency for International Development (USAID). The coalition aims to unleash the full potential of distributed renewable and sustainable energy systems, including technologies such as mini-grids, grid-connected local generation and storage, renewable power solutions for industrial and commercial clusters, and stand-alone commercial appliances.

 

We believe that as a general matter these developments and governmental plans will create growth and expansion opportunities for us internationally.

 

Outside of the United States, the majority of power generating capacity has historically been owned and controlled by governments. Since the early 1990s, however, many foreign governments have privatized their power generation industries through sales to third parties encouraging new capacity development and/or refurbishment of existing assets by independent power developers. These foreign governments have taken a variety of approaches to encourage the development of competitive power markets, including awarding long-term contracts for energy and capacity to independent power generators and creating competitive wholesale markets for selling and trading energy, capacity, and related products. Some foreign regions and countries have also adopted active government programs designed to encourage clean renewable energy power generation such as the following countries in which we operate, sell products and/or are conducting business development activities:

 

Europe

 

Europe has the fourth largest geothermal power capacity, the majority of which stems from Italy and Turkey. A significant part of our European operations is in Turkey. We are looking for opportunities to expand in Europe.

 

Turkey

 

Until recently, Turkey was the fastest growing geothermal market worldwide with the theoretical potential for 31 GW of geothermal capacity and with a proven geothermal capacity of 4.5 GW, according to the Turkish Mineral Technical Exploration Agency. Due to the economic situation in Turkey, there has been a slowdown.

 

Since 2004, we have established strong business relationships in the Turkish market and provided our range of solutions including our binary systems, to over 40 geothermal power plants with a total capacity of over 950 MW, of which one power plant is currently under construction.

 

The incentive plan and regulation for renewable energy generation in Turkey was renewed at the beginning of February 2021 for another 5 years. The updated FIT is lower than the previous one and the structure of the incentivized local manufactured items is not published yet, but will also change, to increase locally made parts. The structure of adjusting the exchange rate of the USD to the YTL has changed dramatically, both with applying the adjustment only once every three months, and by having an adjustment mechanism that takes into consideration changes not only on the USD / YTL rate, but also local indexes and the Euro exchange. Turkey’s external debt and economic status also create big  burden on any project financing process. Until things improve, we estimate that the slowdown in development of new sites will continue.

 

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The potential for geothermal growth in Turkey is still high, specifically in center-south and east areas of the country. In addition, there is a growing interest in waste heat utilization to generate electricity.

 

Latin America

 

Several Latin American countries have renewable energy programs and pursue the development of the geothermal market. We currently operate in some countries in Latin America and are looking for opportunities in others.

 

Guatemala

 

In Guatemala, where our Zunil and Amatitlan power plants are located, the government approved and adopted the Energy Policy 2013-2027 that secure, among other things, a supply of electricity at competitive prices by diversifying the energy mix with an 80% renewable energy share target for 2027.

 

Honduras

 

In Honduras, where we operate our Platanares power plant, the government set a target to reach at least 80% renewable energy production by 2034.

 

Caribbean

 

Many island nations in general and specifically the Caribbean nations, depend almost entirely on petroleum to meet their electricity needs. Caribbean nations have quite significant renewable energy potential, yet most have relatively small demand.  Other than in Guadeloupe, where the geothermal power plant that we acquired has been operating since 1985, there are no other operating geothermal projects in the Caribbean region. Although few, we believe there are geothermal opportunities for us in the Caribbean islands of St. Kitts, Nevis, St. Lucia, Dominica, and Montserrat.

 

New Zealand

 

In New Zealand, where we have been actively providing geothermal power plant solutions since 1988, the government’s policies to fight climate change include a net zero GHG emissions reduction target by 2050 and a renewable electricity generation target of 90% of New Zealand’s total electricity generation by 2035. We continue selling power plants and products to our New Zealand customers, secured two projects in the last two years and intensified our cooperation with other potential customers for adding more geothermal power generation capacity within the coming years.

 

Asia

 

Indonesia

 

 In Indonesia, where we hold a 12.75% equity interest in the Sarulla complex, we are currently conducting exploration activity in the Ijen geothermal power plan in East Java, in which we own a 49% equity interest and whose first phase we plan to commission by the end of 2023. The government intends to increase the share of renewable energy sources in the energy mix, aiming to meet a target of 23% of domestic energy demand by 2025, and announced its intention to reduce the country’s carbon dioxide emissions by 26% by 2020. Under the current local regulation, the tariff policy for geothermal PPAs is mainly determined based on the location of the relevant power plant.

 

We consider Indonesia an important geothermal market, where potential for future development is significant along with an active geothermal industry that is supported by regulatory incentives and commitment from the local government.

 

In addition to project development, we are also pursuing various supply opportunities in Indonesia, and in other countries in Southeast Asia, including several optimization projects.

 

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China

 

In China, where we supplied our equipment to one of our clients’ geothermal projects, the National Energy Administration will adopt the 14th Renewable Energy Development Five Year Plan by March 2021 that establishes targets for renewable energy deployment until 2025. Key objectives under the plan include, among others, to increase the share of non-fossil fuel energy in total primary energy consumption to 20% by 2030.

 

Japan

 

The installed capacity of Japan places ninth in the world, the potential output of 23,470 MW is third in the world after the United States and Indonesia. In 2018, the Japanese government established as its goal a target of 22% to 24% renewable energy of the Japanese energy installed base by 2030. This outlook expects new geothermal plant installation in the range of 380 MW to 850 MW - 1,000 MW. State-owned resources agency JOGMEC will conduct test bores as part of the financially risky early phase of development on behalf of potential developers starting in the fiscal year from April 2020. Japan's Ministry of Economy, Trade and Industry (METI) determined 24 successful applicants for the full year 2019 Research Project for Developing Resources for Geothermal Power Generation managed by State-owned resources agency JOGMEC.

 

East Africa

 

In East Africa the geothermal potential along the Rift Valley is estimated at several thousand MW. The different countries along the Rift Valley are at different stages of development of their respective geothermal potential.

 

Kenya

 

In Kenya, there are already several geothermal power plants, including our 150 MW Olkaria III complex. The Kenyan government has identified the country's untapped geothermal potential as the most suitable indigenous source of electricity, and it aspires to reach 5 GW of geothermal power generation by 2030.

 

The Kenyan government is aiming to reach 10 GW of power generating capacity by 2037, under the Least-Cost Power Development Plan 2017-37 with a target of 62% of such capacity generated from renewable energy sources (including large hydro and solar). 

 

Other Countries

 

The governments of Djibouti, Eritrea, Ethiopia, Tanzania, Uganda, Rwanda and Zambia are exploring ways to develop geothermal resources in their countries, mostly through the help of international development organizations such as the World Bank.

 

Ethiopia electrification targets for 2025 require additional investment in generation capacities. Such growth in demand was expected to be principally met with the GERD. However, IPP’s are encouraged to participate directly in the renewable development in order to meet expected local growth. Moreover, the current government sees electricity export to neighboring countries as a strategic asset. The country recently completed an interconnection with Kenya and plans to further increase connections to Djibouti, Sudan, South Sudan, Rwanda, Burundi. These exports will improve foreign exchange reserves in Ethiopia . We hold rights for four geothermal concessions in Ethiopia, for which we have completed initial exploration studies.

 

In January 2014, energy ministers and delegates from 19 countries committed to the creation of the Africa Clean Energy Corridor Initiative (Corridor), at a meeting in Abu Dhabi convened by the International Renewable Energy Agency. The Corridor will boost the deployment of renewable energy and aims to help meet Africa’s rising energy demand with clean, indigenous, cost-effective power from sources including hydro, geothermal, biomass, wind and solar.

 

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Energy Storage

 

Globally, there is a continued increase in the use of renewable energy. In the United States and Europe, this increase is placing strains on the electric grid as adding wind and solar PV power creates situations where a significant amount of power plant capacity must be available to ramp up and down to accommodate wind and mostly solar PV daily output cycles and variations due to atmospheric conditions. Furthermore, the output from wind and solar PV power plants can change significantly over short periods of time due to environmental conditions like cloud movement and fog burn off and cause instability on the electric grid. As a result, energy storage is becoming a key component of the future grid.

 

Energy storage systems utilize surplus, available electricity that enables utilities and grid operators to optimize the operation of the grid, run generators closer to full capacity for longer periods, and operate the grid more efficiently and effectively. As penetration of wind and solar resources increases, so does the need for services that energy storage systems can provide to “balance the grid”, such as local capacity, frequency regulation, ramping, reactive power, black start and movement of energy from times of excess supply to times of high demand. Common applications for energy storage systems include ancillary services, wind/solar smoothing, peaker replacement, and transmission and distribution deferral.

 

According to Wood Mackenzie's (formerly GTM Research) Energy Storage Monitor for Q3 2020, approximately 3.3 GWh of new energy storage projects were installed in the United States in 2020 and this number is expected to grow more than seven times to approximately 24.4 GWh in 2025.

 

2020 saw  record growth in BESS deployment in the United States, despite the challenges presented by COVID-19, and significant growth in BESS deployment is expected to continue primarily for  grid-connected (also referred to as “in front of the meter”) applications, but also  for “behind the meter” applications, where end-users, such as small municipal utilities, electric cooperative, educational and health facilities, commercial and industrial customers, benefit from savings through demand charge reductions and create revenues through active market participation. Many power systems are also undergoing significant challenges and changes such as grid aging, grid congestion, retirement of aging generators, implementation of greenhouse gas emission reduction rules and increasing penetration of variable renewable energy resources.

 

We own and operate several grid-connected BESS facilities, where revenues come from selling energy, capacity and/or ancillary services in merchant markets like PJM Interconnect, ISO New England, the ERCOT and the CAISO. We are pursuing the development of additional grid-connected BESS projects in multiple regions, with expected revenues coming from providing energy, capacity or ancillary services on a merchant basis,or through bilateral contracts with load serving entities, e.g. investor owned utilities, publicly owned utilities and community choice aggregators. We are also pursuing the development of storage plus Solar PV facilities. We put in place financial instruments, where appropriate, to hedge some of the merchant risk.

 

C&I and Community BESS

 

The electricity industry continues to shift from a purely centralized topology where electricity flows only in one direction from centralized power plants to consumers, into a more distributed architecture, that includes distributed energy resources and consumers selling excess electricity generated on-site to the grid. Many C&I companies, campuses, and communities (e.g. electric cooperatives and small municipal utilities) are motivated to purchase renewable energy to meet sustainability goals and reduce costs. While the C&I industry could be a natural expansion of our customer base, our current  focus is on the much larger and rapidly growing utility-scale front-of-the-meter applications, as well as on utility-scale behind the meter applications. The opportunity is mainly with municipal utilities and electric cooperatives, such as our Hinesburg project with Vermont Electric Cooperative, where one of the revenue streams our BESS generates comes from selling peak load contribution reduction services to the local utility, which allows it to reduce the demand charges paid to the local RTO/ISO.

 

Solar PV

 

The solar PV market continues to grow, driven by constant decline in equipment prices and an increasing desire to replace conventional generation with renewable resources that are commonly supported by favorable regulatory policies.  We are monitoring market drivers with the potential to develop solar PV power plants in locations where we can offer competitively priced power generation. Our current focus is in adding solar PV systems in some of our operating geothermal power plants to reduce internal consumption loads, developing standalone solar PV projects in targeted regions where economics are favorable as well as developing combined solar PV and BESS projects. In 2019 we successfully placed in service a solar PV augmentation system at our Tungsten Mountain geothermal power plant in Churchill County, Nevada. We are also constructing the 20 MW(AC) Wister solar PV project in Imperial County, California, for which a power purchase agreement with San Diego Gas & Electric is in effect and we are currently targeting commercial operation in 2021. Additional potential projects are undergoing feasibility analysis, and some are in earlier phases of development.

 

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Other Opportunities  

 

Recovered Energy Generation  

 

In addition to our geothermal power generation activities, we are pursuing recovered energy-based power generation opportunities in the United States and worldwide. We believe recovered energy-based power generation will ultimately benefit from the efforts to reduce GHG emissions. We have built 23 power plants in North America which generate electricity utilizing “waste heat” from gas turbine-driven compressor stations along interstate natural gas pipelines, from midstream and gas processing facilities, and from other applications.

 

Several states, and to some extent the federal government, have recognized the environmental benefits of recovered energy-based power generation. For example, 18 states currently allow electric utilities to include recovered energy-based power generation in calculating such utilities' compliance with their mandatory or voluntary RPS and/or Energy Efficient Resources Standards. In addition, California modified the Self Generation Incentive Program to allow recovered energy-based power generation to qualify for a per watt incentive. 

 

At the end of 2020, the United States Congress passed legislation including a provision that makes recovered energy generation property eligible for the energy investment tax credit. Recovered energy property that begins construction in 2021 or 2022 is eligible for a 26 percent tax credit, and property that begins construction in 2023 is eligible for a 22 percent tax credit.

 

In Europe, and specifically in Turkey, we see increasing interest in waste heat utilization to generate electricity.

 

In 2016, the Canadian government ratified its commitments in the Paris Agreement, which features a commitment to reduce emissions by 30% from 2005 levels by 2030. Pursuant to the Greenhouse Gas Pollution Pricing Act, Canadian provinces must have an emission reduction plan in place or be subject to a federal carbon tax in 2018. 

 

This comprehensive climate policy, once fully implemented, will encourage the development of renewable energy technologies, including waste heat recovery, throughout Canada. We believe that Europe and other markets worldwide may offer similar opportunities in recovered energy-based power generation.

 

In summary, the market for the recovery of waste heat converted into electricity exists either when already available electricity is expensive or where the regulatory environment facilitates construction and marketing of power generated from recovered waste heat. However, such projects tend to be smaller than 9 MW and we expect any growth to be relatively slow and geographically scattered.

 

Operations of our Electricity Segment

 

How We Own Our Power Plants

 

We customarily establish a separate subsidiary to own interests in each of our power plants. This ensures that the power plant, and the revenues generated by it, will be the only source for repaying indebtedness, if any, incurred to finance the construction or the acquisition (or to refinance the construction or acquisition) of the relevant power plant. If we do not own all of the interest in a power plant, we enter into a shareholders’ agreement or a partnership agreement that governs the management of the specific subsidiary and our relationship with our partner in connection with the specific power plant. Our ability to transfer or sell our interests in certain power plants may be restricted by certain purchase options or rights of first refusal in favor of our power plant partners or the power plant’s power purchasers and/or certain change of control and assignment restrictions in the underlying power plant and financing documents. All of our domestic geothermal and REG power plants are Qualifying Facilities under the PURPA and are eligible for regulatory exemptions from most provisions of the FPA and certain state laws and regulations.

  

How We Explore and Evaluate Geothermal Resources

 

Since 2006, we have expanded our exploration activities, initially in the United States and in the last few years with an increasing focus internationally. It generally takes two to three years from the time we start active exploration of a particular geothermal resource to the time we have an operating production well, assuming we conclude the resource is commercially viable and determine to pursue its development. Exploration activities generally involve the phases described below.

 

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Initial Evaluation

 

We identify and evaluate potential geothermal resources by sampling and studying new areas combined with information available from public and private sources. We generally adhere to the following process, although our process can vary from site to site depending on geological circumstances and prior evaluation:

 

 

We evaluate historic, geologic and geothermal information available from public and private databases, including geothermal, mining, petroleum and academic sources.

 

 

We visit sites, sampling fluids for chemistry if necessary, to evaluate geologic conditions.

 

 

We evaluate available data, and rank prospects in a database according to estimated size and perceived risk. For example, pre-drilled sites with extensive data are considered lower risk than “green field” sites. Both prospect types are considered critical for our continued growth.

 

 

We generally create a digital, spatial geographic information systems (GIS) database and 3D geologic model containing all pertinent information, including thermal water temperature gradients derived from historic drilling, geologic mapping information (e.g., formations, structure, alteration, and topography), and any available archival information about the geophysical properties of the potential resource.

 

 

We assess other relevant information, such as infrastructure (e.g., roads and electric transmission lines), natural features (e.g., springs and lakes), and man-made features (e.g., old mines and wells).

 

 

We estimate potential generation capacity using several methods and based on analogous producing geothermal fields. This assessment is refined throughout the exploration process.

 

Our initial evaluation is usually conducted by our own staff, although we might engage outside service providers for some tasks from time to time. The costs associated with an initial evaluation vary from site to site, based on various factors, including the acreage involved and the costs, if any, of obtaining information from private databases or other sources. On average, our expenses for an initial evaluation range from approximately $10,000 to $50,000 including travel, chemical analyses, and data acquisition. 

 

If we conclude, based on the information considered in the initial evaluation, that the geothermal resource could support a commercially viable power plant, taking into account various factors described below, we proceed to land rights acquisition.

 

Land Acquisition

 

We acquire land rights to any geothermal resources our initial evaluation indicates could potentially support a commercially viable power plant. For domestic power plants, we either lease or own the sites on which our power plants are located. For our foreign power plants, our lease rights for the power plant site are generally contained in the terms of a concession agreement or other contract with the host government or an agency thereof. In certain cases, we also enter into one or more geothermal resource leases (or subleases) or a concession or an option agreement or other agreement granting us the exclusive right to extract geothermal resources from specified areas of land, with the owners (or sublessors) of such land. In some cases, we first obtain the exploration license and once certain investment requirements are met, we can obtain the geothermal exploitation rights. This usually gives us the right to explore, develop, operate, and maintain the geothermal field, including, among other things, the right to drill wells (and if there are existing wells in the area, to alter them) and build pipelines for transmitting geothermal fluid. In certain cases, the holder of rights in the geothermal resource is a governmental entity and in other cases a private entity. Usually the duration of the lease (or sublease) and concession agreement corresponds to the duration of the relevant PPA, if any. In certain other cases, we own the land where the geothermal resource is located, in which case there are no restrictions on its utilization. The BLM and the Minerals Management Service regulate leasehold interests in federal land in the United States. These agencies have rules governing the geothermal leasing process as discussed below under “Description of Our Leases and Lands”.

  

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For most of our current exploration sites in the United States, we acquire rights to use the geothermal resource through land leases with the BLM, with various states, or through private leases. Under these leases, we typically pay an up-front non-refundable bonus payment, which is a component of the competitive lease process. In addition, we undertake to pay nominal, fixed annual rent payments for the period from the commencement of the lease through the completion of construction. Upon the commencement of power generation, we begin to pay to the lessors long-term royalty payments based on the use of the geothermal resources as defined in the respective agreements. These payments are contingent on the power plant’s revenues. A summary of our typical lease terms is provided below under “Description of our Leases and Lands”. The up-front bonus and royalty payments vary from site to site and are based on, among other things, current market conditions.

 

Surveys

 

We conduct geological, geochemical, and/or geophysical surveys on the site we acquire. Following the acquisition of land rights for a potential geothermal resource, we conduct additional surface water analysis, soil surveys, and geologic mapping to determine proximity to possible heat flow anomalies and up-flow/permeable zones. We augment our digital database with the results of those analysis and create conceptual and digital geologic models to describe geothermal system controls. We then initiate a suite of geophysical surveys (e.g., gravity, magnetics, resistivity, magnetotellurics, reflection seismic, LiDAR, and spectral surveys) to assess surface and sub-surface structure (e.g., faults and fractures) and improve the geologic model of fluid-flow conduits and permeability controls. All pertinent geological and geophysical data are used to create three-dimensional geologic models to identify drill locations. These surveys are conducted incrementally considering relative impact and cost, and the geologic model is updated continuously.

 

We make a further determination of the commercial viability of the geothermal resource based on the results of this process, particularly the results of the geochemical surveys estimating temperature and the overall geologic model, including potential resource size. If the results from the geochemical surveys are poor (i.e., low derived resource temperatures or poor permeability) or the geologic model indicates small or deep resource, we re-evaluate the commercial viability of the geothermal resource and may not proceed to exploratory drilling. We generally only move forward with those sites that we believe have a high probability of successful development.

 

Exploratory Drilling

 

We drill one or more exploratory wells on the high priority, relatively low risk sites to confirm and/or define the geothermal resource. If we proceed to exploratory drilling, we generally use outside contractors to create access roads to drilling sites and related activities. We have continued efforts to reduce exploration costs and therefore, after obtaining drilling permits, we generally drill temperature gradient holes and/or core holes that are lower cost than slim holes (used in the past) using either our own drilling equipment, whenever possible, or outside contractors. If the obtained data supports a conclusion that the geothermal resource can support a commercially viable power plant, it will be used as an observation well to monitor and define the geothermal resource. If the core hole indicates low temperatures or does not support the geologic model of anticipated permeability, it may be plugged, and the area reclaimed. In undrilled sites, we typically step up from shallow (500-1000 feet) to deeper (2000-4000 feet) wells as confidence improves. Following proven temperature in core wells, we typically move to slim and/or full- size wells to quantify permeability.

 

Each year we determine and approve an exploration budget for the entire exploration activity in such year. We prioritize budget allocation between the various geothermal sites based on commercial and geological factors. The costs we incur for exploratory drilling vary from site to site based on various factors, including the accessibility of the drill site, the geology of the site, and the depth of the resource. However, on average, exploration costs, prior to drilling of a full-size well are approximately $1.0 million to $3.0 million for each site, not including land acquisition. We only reach such spending levels for sites that proved to be successful in the early stages of exploration.

  

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At various points during our exploration activities, we re-assess whether the geothermal resource involved will support a commercially viable power plant based on information available at that time. Among other things, we consider the following factors:

 

 

New data and interpretations obtained concerning the geothermal resource as our exploration activities proceed, and particularly the expected MW capacity power plant the resource can be expected to support. The MW capacity can be estimated using analogous systems and/or quantitative heat in place estimates until results from drilling and flow tests quantify temperature, permeability, and resulting resource size.

 

 

Current and expected market conditions and rates for contracted and merchant electric power in the market(s) to be serviced.

 

 

Availability of transmission capacity.

 

 

Anticipated costs associated with further exploration activities and the relative risk of failure.

 

 

Anticipated costs for design and construction of a power plant at the site.

 

 

Anticipated costs for operation of a power plant at the site, particularly taking into account the ability to share certain types of costs (such as control rooms) with one or more other power plants that are, or are expected to be, operating near the site.

 

If we conclude that the geothermal resource involved will support a commercially viable power plant, we proceed to constructing a power plant at the site.

 

How We Construct Our Power Plants.

 

The principal phases involved in constructing one of our geothermal power plants are as follows:

 

 

Drilling production and injection wells.