Geothermal Firm Going Full Steam
As recently as 1987, the geothermal brines that flowed in superheated, subterranean rivers coursing beneath this Imperial Valley agricultural hub were thought to be commercially unsuitable for power generation.
Several power developers tried and failed with geothermal projects in the Salton Sea area 120 miles east of San Diego, including a San Diego Gas & Electric-led group that closed a $188-million experimental plant in 1987 after two years of effort.
The problem was that the geothermal resource--a liquid of up to 600 degrees Fahrenheit that is found between 3,000 and 9,000 feet beneath the earth’s surface--contained too many dissolved solids. The salts, silica and other particles tended to clog pipes and confound the chemical engineers who tried to separate out the power-giving steam.
Magma Power Co. seems to have solved the riddle of dealing with Imperial Valley brine, thanks in large part to technological and financial assistance from Dow Chemical Co., which owns 42% of the company’s publicly traded stock.
Magma Power, based in San Diego, has put three new geothermal plants totaling 126 megawatts of power on line since January, 1989. Except for a two-week period in June when hurricane-force winds toppled power transmission lines, all three have been operating at or near maximum capacity, except for scheduled maintenance. That performance has earned Magma Power a reputation as one of the most technologically advanced geothermal companies.
“Magma has been able to use geothermal resources that most everyone else thought were unusable,” said Claude Harvey, senior vice president of Pacific Energy, a power-generating subsidiary of Commerce-based Pacific Enterprises that operates geothermal plants in the Mammoth Lakes area.
Magma Power’s quadrupling of its power-generation capacity and ability to deliver it profitably to its sole customer, SCE Corp.’s Southern California Edison power utility unit, has made it one of the fastest-growing publicly owned companies in California--in terms of sales, profit growth and stock value. The company’s financial performance has been enhanced by royalties from its vast geothermal rights leases, which cover 48,000 acres in California and Nevada.
But just as Magma Power and other geothermal producers appear to be finding their way on the new geothermal frontier, and as the specter of war and disrupted oil supplies in the Middle East seem to suggest that nonfossil-fuel energy may become more attractive, the market for geothermal energy is in flux.
The federal and state programs that in the early 1980s provided incentives to alternative energy producers such as Magma Power have lapsed and not been replaced. Moreover, most California utilities now say they have all the generating capacity they need for several years.
Even if utilities were in a mode to buy more capacity, geothermal producers would have to supply it at prices comparable with natural gas, the utilities’ lowest-cost source of energy. Geothermal companies say they cannot match that rate.
The success of Magma Power highlights the importance of state and federal incentives to alternative power producers. A 1983 federal law forced utilities to sign power purchase contracts with independent alternative power producers, including Magma Power, at fixed, escalating rates. The program was designed to help wean U.S. utilities from their dependence on imported petroleum.
By virtue of those power sales agreements with Edison, Magma Power was able to secure $210 million in financing from J. P. Morgan & Co. for construction of the three new geothermal plants. Morgan was also influenced by a $24-million guarantee from Dow to help Magma Power finance construction of 65 miles of power transmission lines and by Dow’s long-term technology agreement with Magma Power.
A geothermal plant, with current technology, is three times as expensive to build as a natural gas plant.
Magma Power took a $210-million gamble that it could build and operate the costly plants according to schedule and provide power profitably to Edison according to the terms of its sales contract--while breaking new ground in geothermal technology.
The gamble seems to be paying off. Magma Power reported a 1989 profit of $22.3 million on revenue of $63.1 million, up from a 1988 profit of $9.3 million on revenue of $26 million. The successful construction of the plants has boosted the company’s stock value to more than $750 million from $30 million in 1981, when Magma Power was formed.
Magma Power’s explosive rate of growth will level off after fiscal 1990, the first full on-line year of its fourth geothermal plant, because no new generating plants are in the works. But analysts are optimistic about the company’s prospects for continued growth at more modest rates because of escalation clauses that provide for a 7.5% annual increase in the price Edison pays for its power.
Despite its growth, the company does little to publicize itself and until recently declined to give interviews. In that sense, Magma Power is a reflection of its chief executive, Arnold L. Johnson. He took the helm in 1987 after retiring as treasurer of Dow Chemical USA following 30 years with the chemical giant.
Johnson is a no-nonsense, no-glitz executive who moved the company’s headquarters from Los Angeles to San Diego’s Rancho Bernardo suburb in 1987 to be closer to the Imperial Valley. Johnson is one of four ex-Dow executives now at Magma Power.
When Johnson arrived, the company was in sad financial shape. Magma Power owned widespread, lucrative mineral rights that had been secured by company founder and geothermal pioneer B. C. McCabe, who helped develop the Geysers geothermal area north of San Francisco. But Magma was losing money on its two geothermal power plants in the Imperial Valley, one of which subsequently was sold.
Johnson, who had been a Magma Power director since 1984, took the chief executive job only after he received commitments from Dow for technical and financial assistance. Johnson saw the enormous profit potential in the power sales contracts but knew that Dow chemical-process technology was essential to dealing with the problem of treating Imperial Valley brine.
Dow Chemical, which has been a venture capital investor in Magma since the early 1970s, not only agreed to give additional financial backing but also technological assistance in exchange for stock. Both companies agreed that all geothermal technology developed would become the property of Magma Power.
“I knew (Dow) had the technology,” Johnson said. “At Dow, there’s this confidence that they are able to run any kind of a chemical-process plant. You change this, observe that, tweak the process a little and see what happens.”
