Tim Latimer on Solving the Financing Problem for Geothermal

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1:31Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Tracy, we were recently down in Washington, D.C. I know. I really like D.C. It has sort of like old school vibe. Yeah. Lots of power lunches. I like it. It seems like a good city for power lunch. It's also, did you know, not to sidetrack too much, basically all the big fast casual innovation is from D.C., as far as I can tell. So Sweetgreen, I think, was founded. Kava, we talked about it. I did not know this. Both of those companies are from D.C. And I'm not going to lie, when I think of this sort of modal worker in D.C., I think of someone who eats a lot of fast casual lunches at their desk.

2:16Yes. Which is no judgment because that's how I eat my lunch. So I just want to make that clear. There's not a judgment on anyone. Right. But we are not actually here to talk about casual dining and takeout lunches. We were in D.C. for a very particular event, something very special. We were over at the Department of Energy's Deploy 24 conference. That's right. So regular listeners will have heard. We've done multiple episodes in the past with Jigar Shah, who is the head of the loan programs office at the DOE. It was the LPO part of the DOE that put on this conference. And of course, the big theme that, you know, when you think about the loan programs office is this impulse to figure out a way to solve the financing problem for early stage energy in which there's some sort of proven technology out there.

3:03But the funding ecosystem for various reasons, unfamiliarity, risk, et cetera, doesn't exist. And so a lot of the conversations are like, how do you solve that chicken and egg problem in energy finance? Absolutely. And we do indeed have the perfect guest. We spoke with Tim Latimer, the CEO of Fervo Energy, which is that big geothermal startup that is doing some interesting things with fracking technology. So take a listen. Hello, and welcome to a live episode of the OddLots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. And we are joined here by Tim Latimer, co-founder, CEO of Fervo Energy, Advanced Geothermal.

3:44What is that? And when we think about America's energy mix or America's energy portfolio, how big can advanced geothermal be? Very big. That's the short answer. So first off, great to be with you all. I'm a regular OddLots listener, so it's a treat to be with you all. Geothermal. What is geothermal and what is advanced geothermal? It's a great question. So geothermal isn't new, and even power generation from geothermal isn't new. The first power plant for geothermal came online actually over 100 years ago in Italy. So it's been something that's been around for a long time. But historically, even though it has really everything you want in an energy resource, it's carbon free, low environmental footprint.

4:23It works 24-7. It's been very limited to very specific geology. So up until very recently, the story of geothermal is you either have the geology of Iceland, where steam is literally coming out of the ground or certain hot spots like Northern California or New Zealand, or you don't have geothermal. And those were kind of the only two options. So those places blessed with it had a great energy resource, but it certainly wasn't widespread. Advanced geothermal or enhanced geothermal systems is really the whole concept that you could use new technology to go to deeper resources or impermeable rock where the hot water or the steam wouldn't flow on its own and still make geothermal work.

5:00And so in enhanced geothermal systems, oftentimes you're going deeper. And in many cases, you're doing something to create permeability in the reservoir so it can work in more places. and the key there is you get all the positive attributes of geothermal, but you're not limited to just doing it in places like Iceland's geology. So the opportunity is huge. In the U.S. today, geothermal only accounts for about three gigawatts of power, so it'll be less than 1 % of the U.S. electric grid, but the resource potential is massive. You know, we just worked on a paper that was published as a collaboration with Princeton that actually showed pathways to get up to 750 gigawatts of geothermal power by mid-century.

5:35So if we unlock it with the right technology, This could be an enormous resource. So you're a fracking guy. What's the technological overlap between fracking for oil and gas in like the Permian Basin or somewhere like that versus doing fracking for geothermal in Utah or something like that? And I have to admit here, my only knowledge of drilling comes from like Bruce Willis in Armageddon, which I assume was an accurate depiction of the industry. But you tell me. That's right. Yeah. Armageddon, actually, I thought it was a documentary the first time I saw it. Great. And you're right, I actually started my career as a drilling engineer in the oil and gas industry.

6:12And there's a lot of technology overlap between oil and gas and geothermal. And that's why the shale revolution and all the technological development that's happened as a result of that has had spillover effects that have moved the needle on geothermal technology. But there's also a lot that's different. And actually, the origins of Fervo, I got the ideas for this when I was drilling in the Eagleford Shale in South Texas. And the Eagleford had been a resource that people had known about for over 100 years, but it lacked the permeability to produce economic quantities of oil. And so it was ignored really until the late 2000s.

6:43And really, it was the process of horizontal drilling, where you could drill deep and then horizontally across the shale layer and the hydraulic fracturing process to create permeability that allowed those wells to be economic and kind of launch the shale boom. And I was looking at what I was doing in my career as a drilling engineer there. and I learned what geothermal was at the time. And I got really excited because I realized that the technological gap of getting high flow rates out of low permeability formations really was the exact same whenever you looked at geothermal. That's what held shale back.

7:12That's what was holding geothermal back. And the fact that these new technologies had opened up oil and gas meant it could be done for geothermal too. But the process of taking that technique and applying it to geothermal has involved an enormous amount of technical work because there's a lot different between oil and gas and geothermal. The first thing that's probably pretty obvious is we look for much higher temperatures. So, you know, the Eagleford, when I was drilling in South Texas, was actually considered very hot for an oil and gas basin on shore, but it's only like 300 degrees Fahrenheit.

7:41That's considered cold for geothermal. And so we needed to figure out how to develop the tools and techniques to go much higher temperature than that. We're now doing products up to 440 degrees Fahrenheit in our drilling, and that has taken an enormous amount of tech development to make that happen. And it also turns out that the places that are hot geologically overlap very often with granite, which is a much harder rock type than shale. So in order to take these technologies from oil and gas and make them work in geothermal, we had to develop techniques to deal with the fact that the geology is different and it's much harder, oftentimes a much more challenging engineering environment.

8:12And so our company has been around for seven years now. And a lot of that work has been trying to figure out what are now solved problems in oil and gas. How do you solve them in a completely different context, oftentimes where the rock is harder and the temperatures are hotter and the operation of the reservoir is very different? What do you have today in operation such that you can say these tech problems are provably solved? Because obviously, as you think about the future, there are many things you have to get the financing right. You have to get the customers lined up. You have to figure out how to scale it.

8:43But just in terms of like, okay, where we are December of 2024, what can you show us if we were on a site that say, okay, we've shown that we can solve the tech set? So the gold standard for new tech deployment is actually an operating project, right? So since this is a deployed tech-focused conference, I'll say TRL 9, technology readiness level 9, the final hurdle along that way, which is actually the project working in its intended environment and operating conditions. And that's something we achieved with Enhanced Geothermal Systems actually just over a year ago when we brought our first project online.

9:15So going back to 2021, we created a partnership with Google as part of their 24-7 carbon-free energy initiative. And we actually selected a site in northern Nevada where there was an existing producing geothermal power plant there. But it had been troubled by the same challenges that had held back geothermal for decades, principally what we call dry hole risk. They'd actually drilled a bunch of wells. Some of the wells were successful. A lot of the wells weren't. And so as a result, the power plant wasn't producing as much as it could based off its capacity. So we actually partnered with the operator there and we drilled a set of new wells, including the first two horizontal well pair for geothermal.

9:50And we actually created that project and brought that power online in late 2023. And so we really needed to prove a few things. One, that we can actually drill and deliver those wells, even though it was through granite and much higher temperature. Two, that we could get highly productive flow rates out of those wells. And the important one, and the one that's harder to prove because it takes time, is that the temperature profile and the production profile of those wells would stay constant over time. So one of the really exciting things for Fervo, in October, we actually hit the 12-month mark, where not only did we achieve all the technical objectives of the project, but it was actually producing geothermal energy connected to the grid, producing electrons for over a year.

10:26And we saw no evidence of production decline in that year. So we can say with a lot of confidence now, this is a completely proven technology, mainly because we've actually done it. We have a project that's producing electricity for the grid today. So what's your funding mix like at the moment? Because I imagine part of the reason you want a working project that you can show everyone is so that you can issue more debt, like sort of more traditional energy companies, older energy companies, and maybe move away from equity. Yes, that's exactly right. And we've had an interesting funding journey that's probably very similar to many of the companies here at Deploy.

10:59You know, early on, we were back from many grant contributions from the Department of Energy. We partnered on many aspects of new geothermal technology development. We actually were part of the Activate program at the Lawrence Berkeley National Lab. So we were back in 2018, got kind of our start through some DOE research programs and grant funding. And on the private side, it was really venture capital funding. So funds like Breakthrough Energy Ventures and Congruent Ventures stepped in and got us up early on, you know, those funds that specialized in looking at companies that were so early in their development that it was really just an idea or a PowerPoint slide, but would sit in and understand the technology with you.

11:33And then as we expanded, what we've brought in is a lot more institutional investors. We've actually gotten investment from the oil and gas industry now. we raised the Series D round in February of this year. That was a$244 million Series D, and that was actually led by Devon Energy, one of the leading independent oil and gas producers out of Oklahoma City with a$100 million investment. So the investment mix has changed over time. But for a lot of new technologies, there's this crossing the chasm level where, you know, a venture capitalist or a DOE grant writer will sit with you and understand the ins and outs of your technology.

12:05And they'll see, is this feasible or not? And you can actually have a good conversation around that. Institutional money that wants to do project debt, they don't really want to understand how your technology works. They just want to see that you've done it many, many times before. And that kind of gets to the chicken and egg problem that's with this funding. So often when we approach those larger infrastructure sources of funding, the answer is, well, bring us 12 months of data or bring us an independent engineering report that says 0 % chance this will ever, ever fail. And that's kind of a big hurdle to jump.

12:34So we finally crossed that chasm earlier this year, because we brought that project online, we announced in July$100 million construction loan from Excalibur Rural Capital. That was the first time we brought in project finance. So we're finally moving away from the expensive venture capital sources of funding and down into the more sustainable long-term infrastructure style of funding. But it took us seven years from inception, an operating fully successful project, and a lot more work to finally cross over that funding mix barrier.

13:06Thank you.

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14:14EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. So obviously, we want to talk more about the chicken and egg problem, because in a way, I mean, that's the entire premise of all of this. But just before we dive more into that, you know, you mentioned shale and there is this story that people tell, and I only maybe like 50 percent believe it or 60 percent believe it, that the shale boom was like partly a tech story and partly a low interest rate story or that a funding story. And there are various theories about how the Fed helped cause the shale boom. Again, not totally sure if I buy it.

14:47That being said, for any sort of renewable or clean energy project or anything that has a lot of upfront capital costs, the rate conditions in the beginning matter quite a bit to the math. And I imagine here in 2024 versus when you're seven years ago, that picture looks very different. Talk to us about the sort of, I guess, mathematical implications of where we are with interest rates in terms of making geothermal projects pencil out. Yeah, it's a great question. And the fact that we've gone through such a big movement in interest rates over the last five years has meant we've kind of gone through multiple business cycles in this sector in a very compressed period of time.

15:24You know, as interest rates started to rise a couple of years ago, there were two sectors or areas that sort of bubbled to the surface as being challenged by a high interest rate environment. That was, number one, startups that were based on very long term growth and number two, capital intensive businesses where it's a lot of capital up front with a long payback period. that was a double whammy because we were running a capital intensive startup. And so the interest rate environment was very challenging to try to get new capital to come into the space as those interest rates went up. And, you know, one of the things about renewable energy, and this is true about solar and wind, but also true about geothermal, is these are oftentimes high capex, but long payback period projects.

16:00And they're also projects that are interesting because you end up with a different profile than a lot of other energy infrastructure projects. Because, you know, all of our projects we build, we have 15-year offtake agreements with locked-in pricing. So we don't have to worry five years from now, what, you know, is the price of our product going to go up or down? We also don't have any fuel cost. And so we're not exposed if there's a big run-up in fuel cost. And so we eliminate a lot of that volatility. So as a result, renewable energy projects like geothermal have always been viewed as historically much safer investments because you're not exposed to a lot of the volatility mix that impact other infrastructure investments.

16:35That's a good thing in general because it means you can bring low cost capital in the space because it's perceived as safer investments. But it also means your spread off the risk free rate is a lot tighter than if you were talking about a fossil fuel project or a project with more risk in it. And so when those rates move, the sort of relative impact for something with a low spread is a lot bigger. And so the interest rate environment, it hits startups and it hits infrastructure projects, particularly renewable infrastructure projects in a big way. And that's one of the things that companies are navigating now.

17:04there's so many tailwinds looking for more and more power. We need more reliable power. We need more power, period. Everything from data centers to industrialization to onshore manufacturing to, I mean, the AI world is what's driving so many of our conversations right now. There's all these tailwinds helping the sector out. But the headwind, that interest rate environment, is still something that's limiting both deployments of new innovation and also broadly the renewable sector overall. I mean, presumably this is when someone like the DOE could step in and potentially help. What kind of support have you seen from the DOE so far?

17:38Yeah, so we've gotten great support from the DOE. As I mentioned, we've gotten multiple grants over the years to work on anything from high temperature tools to novel data sensing methods. Earlier this year, you know, there was a provision in the bipartisan infrastructure law where there was$84 million earmarked for geothermal energy development. FERVO was actually the recipient of the largest grant of that, which was a$25 million grant. And so that kind of early demonstration funding can be very critical for a technology that's just taking off. I don't want to make any enemies. I know there's a lot of different technologies out in the audience here, but if you read the Department of Energy's commercial liftoff report for geothermal, they've got a nice chart in there where it almost looks like a data error because they put the$84 million that geothermal got up against the$10 billion for nuclear and the$9 billion for carbon capture and the several billions for long duration energy storage and other things.

18:30So I think other technologies benefited far more than geothermal did. But even that kind of move was sort of catalytic to get things off the ground. And then, of course, the DOE has a big message and a big audience that reads these things. So actually, this liftoff report that came out earlier this year changed a lot of people's minds, because one of the problems with the chicken and egg problem is there's so many investor meetings that we don't even get to have, because we reach out and they say, geothermal, I know geothermal, we're not looking at that. And the meeting never even happens. And you have something like the geothermal liftoff report come out that's got the DOE logo on it.

19:03They know it's been well-vetted, well-researched work. And all of a sudden, it may be there's some investors who may have written off geothermal that say, well, maybe there's a new shot here. Maybe there's new data that we weren't aware of. And so that kind of awareness and technology validation is pretty critical as well. So one of the obviously nice things about your technology is that it's clean, it's carbon-free. There are some people that don't care about that particularly much. They don't rank that particularly highly. You know, for some people, the biggest priority is cheap energy. When you think about the future, how important is it that either the public sector or private sector actors who've made various commitments over the years about net zero, other sounding things, how important is it that those priorities stay firm?

19:45Or if they're sort of changing moods, we're in the private sector. This is not as important to us as it was a few years ago. How does that affect your outlook? Yeah, it's a good question. And honestly, my view on this is I don't think people actually, there's not really that much of a divide, I think, in what people actually want out of their energy resources. I think it can get politicized and there's a lot of food fights and political fights in this, but people want three things out of their energy resources. They want the energy to be cleaner. They want the energy to be more affordable and they want the energy to be more reliable.

20:18Does everyone really want it to be cleaner? I mean, just serious, because I get totally cheaper and reliable seem unambiguous. When it comes to cleaner, I could see if I were anyone. I don't know. It's less important. I do think everybody wants it to be cleaner. And that's true. If we talk to people on both sides of the aisle, I don't think it matters where it is. I think where a lot of the debates come up is where is the tradeoff between clean and affordable and reliable? But I think you'd be hard pressed to find anyone other than maybe some very French people who are just trying to instigate.

20:50Joe, you stand alone on that one. No, I don't have I don't have an opinion here. No opinion. You're the one out there that doesn't want cleaner energy. I'm a journalist. All right. Journalist. I like it. But I think that what happens is that depending on where people are coming from, you know, which side of the aisle they're on, what their priorities are, they may rank those three things differently. And then there's a lot in the macro environment where those things get ranked differently. Like very clearly affordability is top of mind for everyone. right now. And so what you see is over time, depending on what's going on in the geopolitical environment, the macro environment, the political environment, those orders may get flipped.

21:23But I think what most people here are working on is something that is cleaner, is reliable, and is more affordable. And the thing is, it's not going to get there overnight, but everybody's working on technologies that are on a path to achieve one of those three things on a better dimension. And I think one of the things about geothermal is we emphasize it checks all three boxes. It's cleaner, It's reliable. And we're on a cost trajectory where this is going to become one of the most affordable ways to get energy in the near future. It doesn't matter if you're talking clean or dirty or intermittent or baseload or whatever jargon you want to put on it.

21:56Geothermal, the cost trajectory is moving so quickly that we're going to get a great answer on the affordability very, very soon. And so I think emphasizing that we do those three things and it doesn't matter what is going on in the macro environment. Those three things are still the things that matter is kind of how we stay resilient through the different cycles. So you make a very convincing pitch. And I guess I'm kind of wondering when you go to talk to potential offtake customers and you say, well, we have cheap, clean and reliable energy that ticks all the boxes, do they immediately jump and go like, yes, we'll take it?

22:30And I imagine that can't be the case, right? Because this is still new technology. They probably, presumably, don't have geologists on staff who can review all this stuff. What are those conversations actually like? And what are, I guess, the sticking points to everyone becoming your customer? Yeah. You know, I mentioned this a little bit before where it's a chicken and egg problem. This is a lot in a lot of ways, entrepreneurship, particularly if you're doing a real hard tech development like what we're doing at Fervo is trying to solve dozens of simultaneous chicken and egg problems all at once, you know, because you've got to get the financiers to believe in it.

23:05You've got to get the customers to believe in it. And it's fascinating. I can talk through our journey. Our first offtake agreement was with Google, and that went back all the way into 2021 that we announced that deal. And it wasn't an accident that it was Google that did that. They'd put out a white paper in 2018, and nobody was paying attention to geothermal back then. It was written off as a dead sector. But they put out a white paper in 2018 that said they had actually achieved their 100 % renewable energy goal. And so they were looking at what is the next target we want to get to. And they came up with a new concept of 24-7 carbon-free energy, which is actually hourly matching.