Why one green energy sector could heat up under Trump

Welcome back. Many readers will remember the bold proxy campaign waged in 2021 by hedge fund Engine No. 1, which won three seats on ExxonMobil’s board by arguing that the oil giant was not paying proper heed to the risks of a fast transition away from fossil fuels.

Now, Engine No. 1 is taking a very different tack — forming a joint venture with another oil major, Chevron, to build fossil gas-powered power plants. The fund’s founder Chris James denied that this was a volte-face, telling the FT that he was pursuing a consistent strategy focused on efficient capital allocation.

It’s a powerful reflection of a wider shift in sentiment, as momentum around the energy transition stutters in the US. To James four years ago, efficient capital allocation meant getting on top of an accelerating shift away from oil and gas. Today, it means gearing up for a surge in demand for fossil-powered electricity, driven by data centre expansion and the supportive policies of Donald Trump.

But other funds are using similar logic to invest not in fossil fuels, but in a resurgent corner of the green energy space. Read on for the details.

Geothermal energy

Tapping the energy under your feet

For many clean energy businesses, Donald Trump’s return to power looks like bad news, as the new US president pledges to dismantle his predecessor’s “Green New Scam” of policies boosting the sector. But for at least one of them, the outlook appears much more favourable.

Chris Wright, Trump’s nominee to head the energy department, is the founder of oilfield services company Liberty Energy, which in 2022 made a strategic investment in geothermal power start-up Fervo Energy.

During a confirmation hearing in the US Senate this month, Wright said he would cut his financial ties with Fervo to avoid conflicts of interest — but stressed his determination to boost US use of this “tremendous potential energy source”.

“I’m still passionate about it,” Wright said. “I’m going to be a champion for it.”

Geothermal power plants have been around for over a century, using heat from underground fissures to drive electric turbines. Today, they provide less than 1 per cent of global power generation. But a recent surge of venture capital investment into “next-generation” geothermal start-ups highlights the potential for much larger deployment of this low-carbon power source.

Fracking goes green

The key constraint for geothermal power so far has been that suitable subterranean cracks are found in relatively few places, like Iceland and the western US. Developers need to do expensive exploration work to find suitable hotspots — and run the risk of finding nothing.

But what if they could create their own fissures? That’s the idea that former oil engineer Tim Latimer has been pursuing since founding Fervo in 2017, deploying hydraulic fracturing and horizontal drilling techniques that unleashed the boom in US shale oil production.

“I realised that really none of that was being applied to geothermal, because it was such a small industry that didn’t have access to the same capital that oil and gas did,” Latimer told me.

By drilling and fracking to create fissures within granite rock formations several kilometres underground, where temperatures reach about 200C, Latimer wants to pioneer a new sort of geothermal plant that can be rolled out far more widely than the conventional type.

Fervo’s business has been gaining momentum, having signed over 500 megawatts-worth of power purchase agreements with customers including utilities Southern California Edison and Nevada’s NV Energy, the latter through a partnership with Google.

Demand from Big Tech companies is a key potential driver of demand for geothermal, as they seek to fulfil the surging energy requirements of data centres amid the artificial intelligence boom, without totally jettisoning their promises to reduce carbon emissions.

Geothermal plants can operate around the clock, giving greater certainty of supply and enabling developers to sell their power at a premium. Recent PPA prices for geothermal power have been around $70-$100 per megawatt-hour, the US energy department said last year. That compares with prices of about $57 per MWh for solar and $66 for wind, according to clean energy marketplace, LevelTen Energy.

“There is no other credible source where you can add gigawatts of green energy that’s on 24/7, 365 days a year,” says Ion Yadigaroglu, managing partner at Capricorn Investment Group, an early investor in Fervo.

Capricorn was among the investors that pumped $499mn into Fervo over two fundraising rounds in February and December last year. While Fervo is the most high-profile business in “next-generation geothermal”, it’s part of a wider wave of research and development that is generating bullishness among prominent energy analysts.

In a report on the sector last month, the International Energy Agency predicted that “with continued technology improvements and reductions in project costs, geothermal could meet up to 15 per cent of global electricity demand growth to 2050”. That would mean the addition of up to 800 gigawatts of geothermal capacity — equivalent to the current average electricity demand of India and the US combined.

Into the valley of death

But those future advances in technology and project costs are not guaranteed. In principle, virtually the whole of the US “west of the Mississippi” could offer suitable terrain for next-generation geothermal power, said Eric Toone, technology lead at Breakthrough Energy Ventures, the clean tech investment vehicle founded by Bill Gates that is another investor in Fervo. The biggest downside risk, he said, was around availability of financing.

While Fervo has managed to secure the risk-hungry venture capital it needed to pursue its first projects, it now needs to find other sources of cash to build plants on a larger scale. And as a relatively young business still very much in the growth stage, it may face a struggle to attract investment from infrastructure funds seeking long-term, low-risk debt investments.

“There’s lots of people willing to put money into venture, where you take enormous risk because there’s a possibility of generating enormous returns,” Toone told me. “There’s lots of people who are willing to put money into just building out existing businesses, basically taking no risk for a very low reward.” But between those two pools of capital, he warned, there was a worrying gap.

As I wrote last year, geothermal is far from the only sector facing this “valley of death” dilemma. Still, in a weak environment for climate tech start-up funding last year, geothermal stood out as a relatively strong performer.

As well as Fervo’s two funding rounds, US rival Quaise Energy raised $21mn last year for its approach, built on using proprietary technology to generate power at geothermal temperatures far higher than have been used by others. Investors included Khosla Ventures, whose billionaire founder Vinod Khosla told me before the round closed that “super-hot geothermal” was one of the energy technologies he was most optimistic about.

In September, Sweden-based Baseload Capital raised €53mn for its contrasting approach, which uses fluids with low boiling points to exploit lower-temperature geothermal resources. Investors included the Equitix Next Generation Fund (in which Ingka Investments is the sole investor), Breakthrough Energy Ventures — and Baker Hughes, an oilfield services business that competes with Wright’s Liberty Energy.

The oil sector’s interest in this area is telling. Far more than most other parts of the clean energy space, next-generation geothermal has clear synergies with their existing businesses — particularly for businesses involved in the US shale sector. To develop its plants, Fervo is using the same rigs deployed by shale oil and gas producers; to drill its boreholes, it procures machinery from the same suppliers used by frackers.

Small wonder, then, that the likes of Wright see geothermal as a promising way of managing the risk they face from the long-term global shift away from fossil fuels. And there is ample scope for more supportive policy, said Latimer, especially to speed up the permitting process for new geothermal plants.

While geothermal producers did benefit from tax credits created by Joe Biden’s clean energy legislation, he added, they got far less generous targeted financial support than did other subsectors, such as green hydrogen.

Even so, Biden’s energy department was strongly bullish on this industry. In a report last year it estimated that thanks to technological advances, the US now had enough usable geothermal resources to provide 5,500GW of power: four times the country’s entire power generation capacity from all sources today. The geothermal sector was on track to lower prices to $45 per megawatt-hour by 2035, making it highly cost-competitive with other energy sources, the government report added.

“Geothermal has been a pretty sleepy space,” said Yadigaroglu. “But the scalability of this is unbelievable. What we call oil rigs today will be geothermal rigs — we’ll be a bigger user of those than oil and gas will be.”

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