Can you hear me? Okay. Good morning all, and thank you for coming to our 2024 Investor and Analyst Day. Thank you for making the effort all the way coming to downtown and join us here. We really appreciate that. We are honored here to have three of our directors. Thank you for coming, Stanley Stern, Mike Niggli, and Byron Warren. Thank you for coming. As speakers today, we are going to have Doron Blachar, our CEO, Assi Ginzburg, CFO, Ofer Ben-Yosef, Executive Vice President of Energy Storage and Business Development, and Paul Thomsen, VP of Business Development. In addition to our speakers, we are joined by Jessica Woelfel, General Counsel and Corporate Secretary.
We have also Shimon Hatzir, our Executive Vice President, Electricity Segment, Liza Tavori, Executive Vice President, Human Resources, Elad Zalkin, Senior Vice President, Projects, and Irit Brashko, Senior Vice President, Engineering. They will join us, and if you have any questions, you'll be able to ask them. So before we begin, I'd like to remind you all that during the course of today's presentation, we may have forward-looking statements that are subject to risk and uncertainties. This is for the lawyers here. Our actual results may differ materially from any forward-looking statements made today. So for more information, please refer to slide number three in our presentation. Now, it's my pleasure to invite Doron Blachar to kick off our presentation. Thank you.
Enjoy the day.
Good morning, everyone, and thank you for joining us here and also through the web. We'll start the presentation with a short introduction about Ormat. I assume most of you know Ormat, but for those who are watching us from far and are less familiar. So Ormat, in a nutshell, is a leading renewable energy company in the world. We have over almost 60 years of experience. Ormat started in 1965 as a renewable energy company, and next year, we are going to celebrate our 60th year. We have about 1.4 gigawatt of operating assets that we own and operate. Most of them we actually developed and built. Some were acquired through M&A transactions. We have 1,600 employees spread globally.
About half of them are in the US. In 2023, we had $829 million of revenue, $482 million of adjusted EBITDA, and $124 million of net income. We're operating in three segments: the Electricity segment, where we have all of our generating electricity power plants, most of them geothermal, some REG, and solar a little bit account for 80% of our revenue and a bigger part of our EBITDA. The Product segment has about 16% of our revenue in 2023. This is the external part, but the Product segment is part of the foundation of the Electricity segment because they built all the power plants for the Electricity segment.
Asi, in his presentation, he will show you the combination that we do between the Product and the Electricity segment. The third segment is the Energy Storage that today is 4%, and I'm sure that after today presentation and Ofer's presentation, you'll understand that this is a real segment with very high potential of being a very, very profitable growth engine for Ormat. Ormat is the only real company that is totally vertically integrated. So we do the entire chain for the geothermal. We start from the exploration and the drilling through the business development, engineering, designing the power plant based on the resource parameters, construction, and operation.
When you look on the storage, we actually are doing a big part of the storage value chain as well. We are not manufacturing batteries. We have some ideas about it, and we'll talk about it later in the day. But the development, the engineering, the system integration, construction, and operations, which are quite similar between the two segments, we are doing all of them together. And if we talked about 1.4 gigawatt that we are operating, 1.2 gigawatt is in the geothermal part, and 190 MW is in the energy storage. You will see our forecast for the coming years.
We'll show the targets that we are putting for the end of 2028, which show a very accelerated growth on both segments. We had an analyst and investor day just more than two years ago, 2022, here in New York. And these are the main achievements that we have done. We did in that period of time, the capacity went up 29%, revenue up 25%, Adjusted EBITDA 20%, net income went up 75% in two years, and in this period of time, we have invested $1.2 billion in new projects. Some of it already matured into a real project, generating revenue and EBITDA and net income, and other are still in construction. You will see later, a lot of the...
A big part of the investment was done in exploration that we've increased significantly over time. We are building constantly, investing constantly, and getting projects online through the term. Another important part is that in 2022, we put targets what will be at the end of 2026. We are two and a half years into this perod of time. The same target exists. We are still on track to meet the same target that we told you will be in 2026, and today, we'll show you the targets for 2028. That was a short overview of Ormat and what we've done in the last two and a half years, and now I will go through and discuss some of the market insight.
So the U.S. is the second largest country growing with renewable energy, and second only to China. And what is more impressive is actually the graph on the right. We've all seen the rapid investment in the renewable energy over the last five years, but the forecast is that the growth in the next five years will be more than double of the growth that was in the last five years. So the reality is that the U.S., as well as every other country, are going to the renewable, accelerating the move to renewables. And as company that is part of this renewable energy team, we will enjoy fully. And when we look at it, most of the renewable energy will come solar.
We know what it does, it does to the grid, how the grid is impacted with this intermittent energy. And if we drill down into the US, there are a few key forces that are driving this demand. It starts with the regulatory boost, demand, and decarbonization. And the regulatory boost, today, we have 23 states in the US that have a target of 100% renewable energy. The road is very clear where we're going. The IRA, that was enacted by both parties' support, is a game changer. It pushed the industry to invest much more in this space. It pushed company like Ormat to invest much more and to see better returns.
You will see in Asi's presentation, how much money we expect to receive through these tax incentives in the next five years, and that will support a big part of our capital expenditure going forward. States with incentives, targets that California has put, all of these are part of this move to renewable energy. And when you look at the demand side, in the past, we'd usually talk about two main things that will move the demand. One is the electrification, and the other one is the EVs. Both of them are very much relevant today. However, two new demand driver, very strong ones, came into play. On the right is the reshoring. Again, this is the IRA law, making companies look to manufacture things in the U.S.
The tax benefits that we, in, developers can get by utilizing American-made products is big, and what we see today is that solar companies trying to build manufacturing facilities in the US. Almost all the battery manufacturers that we talk with are looking to build in the US, manufacturing facilities. Inverters, the entire supply chain is looking to build manufacturing facilities in the US, and that will drive demand. And the largest, actually, drive is the data centers, and let's start counting, AI. That's first time I'm going to say it. The data centers and the AI are generating a demand that nobody forecasted before. 35-47 gigawatts is demand probably of the second or third largest state in the US.
It's probably the tenth or twelfth largest country in the world demand, and that demand will impact significantly the need for renewable energy. And the same company that are pushing AI are looking to decarbonize. So if you look on Google, you look at Amazon, NVIDIA, all of them have targets for zero emission, or zero emission, 100% renewable. All of these are new driving forces that you'll see their impact on the U.S. and specifically on Ormat as we move forward. And the outcome of this demand is this graph. In 2023, there were 3 billion kWh in fossil fuel and 965 in renewable sources. The expectation is that within 7 years, it will be 50/50.
So on one hand, the demand for electricity will grow in the U.S. by about 5%, and if we would be talking two, three years ago, the forecast was that it will be flat. Now, the forecast is that it will grow by 5%. Renewables are expected to grow by 116%, more than doubling, while all other sources will go down by 33%. Unfortunately, geothermal cannot support all of that, based at least on today's technology. So the reality is that most of it will be supplied by solar and wind. And you can see the expected growth in the next 5 years for solar and wind. And we've seen what's happening to states, to the grid, when you bring a lot of solar on board.
This is the famous duck curve, and what we at least heard, that people stopped calling it the duck curve, but the canyon curve, because it's getting wider and deeper, and I don't think that anybody in 2015 thought that in 2022 and 2023, there will be negative electricity prices in the middle of the day in California. This situation basically calls for something that will stabilize the grid, something that will be baseload. Basically, that is exactly the place that Ormat is operating today, and has been operating, and will operate. We have the electricity segment, the geothermal part, which are baseload electricity. We operate 24/7, regardless of wind, regardless of sun, regardless of fires, regardless of anything. We're able to give the electricity 24/7.
And would it have been able to have geothermal everywhere? Then that would probably be the renewable energy that everybody would have used. And what we see in places that have geothermal, that's what they're looking for. You go outside of the U.S. to countries that have geothermal, they put geothermal targets, not just renewable energy target, but geothermal targets. And the second part is the storage, the storage that comes to support the grid to deal with the intermittent solar and wind, electricity. We are building a standalone storage to support it. We'll have a long presentation with Ofer, with a lot of information about it, how the storage is supporting the grid. And today, we see in many, many countries, targets, specific targets to bring on, storage. And Ormat, as you know, is not operating just in the U.S.
We're operating also globally, and the growth that we see in the global market, and the trends that we see in the U.S., they are very, very similar to what we see in the global markets, so that we operate in. And this is the targets that we put for 2028. Today, we have at the end of 2023, we're over 1.3 gigawatt. The target for 2026 is the same as we had in 2022, 2.1-2.3 gigawatt, and by the end of 2028, we expect to be between 2.6-2.8 gigawatt, which is an average annual growth rate of between 15%-17%. You'll see later, in a minute, the dollars surrounding it.
But what's also very important is what we've seen is the great demand in the US, and we have shifted quite a lot of our efforts and capital from the international into the US. We are still working on the international. We will show later that we're still developing international projects. However, the US is becoming a much more important and available location for us, and you can see that if today we have 78% in the US and 22% outside of the US, by the end of 2028, we expect to be 86% US, and 14% international. This is a very, very big change. It's a change also in the risk profile of the company. It's a change in the way we're operating.
Translating megawatts to dollars, so we finished last year with $829 million. We expect 2028 run rate to be $1.2 billion-$1.25 billion, which is around 8-8.5% annual growth rate, and the EBITDA expected to go up from $482 million to $775 million-$825 million, 2028 run rate, which represents an annual growth rate of between 10%-11.5%. So the growth that we are seeing is profitable growth. The EBITDA is expected to grow faster than the revenue. And for the question, why megawatts are growing much faster than the revenue? The answer is that part of the growth of the megawatt is in storage, not geothermal.
Storage, revenue per megawatt is smaller than geothermal, and the storage are coming on the base of the geothermal. If we would look just at the storage, we would see that the EBITDA is growing significantly faster than the revenue and the megawatts. That's the first part that relates to the market, how we see the market, how we see the demand in the marketing. Very, very much focused on the on the U.S., but also looking into the international part. I will now dive into our electricity segment. So the U.S. is the world-leading country producing geothermal energy. They have about 3.9 gigawatts of operating assets. 95% of that is in Nevada and California.
If we look at Ormat, so Ormat is the number one geothermal operator in the U.S. We were number two when we discussed two years ago. We were 29% of the geothermal market. Today, we're 34% of the geothermal market, the largest one, and we are also the largest developer of new power plants in the U.S. You can see the split. The largest part that we have operating facilities is in Nevada. However, a big part of our Nevada assets are selling electricity to California, not just to Nevada. When you look at the total numbers of megawatts today, we have 772 MW in the U.S., and we expect to grow above one gigawatt end of 2028, representing a 32% increase.
There are, basically, five stars that needs to align in order to build a geothermal facility. In reality, other developers should have a sixth one, and that is the construction of the facility. However, since this is something that we do, and it's in our control, it's not, you know, a star. It is a star that is always aligned to for us to build. It's our land position, permitting, transmission, interconnection, exploration, and PPA. And, to discuss that position, I ask Paul to come on up.
Thank you, Doron, and thank you all for being here today. I think Doron did a really good job of kind of outlining that the U.S. has an incredible demand for renewable energy. It wants to invest heavily in it, and it needs a carbon-free capacity resource to meet and alleviate the duck curve or the canyon that you heard about. There are some key fundamentals to geothermal development, and we hear from a lot of companies, you know, who want to get into the market, and they, they want to try to meet this demand, and they're missing kind of one or two of these fundamentals that I'm going to go over. One of which is land position. Ormat has almost 378,000 acres of land under its purview for geothermal development. You'll see that we have about 200,000 available for future development.
When you look at other developers, they pale in comparison to Ormat for that ability. That allows our resource teams and our geologists to go out and find this geothermal resource. Those acres, you can see that almost 80% of them are operated by the Bureau of Land Management or are federally operated. That's a blessing, and it's a curse. We get a fixed federal royalty rate, but we have to permit that through the federal government, and permitting has been one of the, critical, you know, components to project development. And we've seen some really good progress in permitting, in the last two years and during this administration, which I'm going to highlight, which hopefully removes permitting from being a critical path, a barrier to development, and allowing us to move projects quicker.
Lastly, you'll see that we continue to look at new prospects, and when we look at mergers and acquisitions, we tend to acquire additional prospects. You'll see that since 2020, we've acquired 11 new prospects. Seven of them are on BLM land or BLM prospects, and four we acquired through mergers and acquisitions. Now, let me give you an example of that. When we acquired U.S. Geothermal, we acquired a project called Santa Maria. You look through our records, we now call that project North Valley. That turned into a 25 MW project for us, and we were able to, you know, be accretive in looking at constant growth for the company.
North Valley, we're looking at a North Valley Two, which would be another 10 MW, and in our most recent Enel acquisition, there's a resource called Surprise Valley, which we are very bullish on and believe, you know, holds a profound geothermal resource for development. So we are constantly growing and expanding our land position to be able to meet that demand, and the goals for the U.S. moving forward. So let's talk permitting, one of my favorite topics. When I started at Ormat 18 years ago, I tried to stay as far away from permitting as I could. Some are chuckling here, and now I'm in front of all of you discussing permitting, and I'm responsible for it in Ormat.
We're gonna cover three big areas of reform, and I'm gonna get a little bit into the weeds, but I'm gonna try to keep it high level. Geothermal goes through some of the most rigorous permitting of any technology out there. Prior to the categorical exemption, which I'll talk about, we had to go get a permit that took 12-24 months to do exploration drilling. So from a finance perspective, we had to spend a lot of money to go get a permit to determine if maybe there was a geothermal resource there. If we did that, we could then maybe drill exploration wells to try to prove that resource, and then we have to go get a utilization permit. The first bullet here, the NEPA categorical exemption, is an arbit...
It's a tool used by the federal agencies, and they could do so at their discretion. So we had some BLM offices who allowed us to go do categorical exclusions. We had some that didn't. What's changed is that BLM is aggressively pursuing categorical exclusions. They've taken language from the Department of Defense, from the U.S. Fish and Wildlife Service, and we have pending legislation in Congress to say, "You have to allow for categorical exclusions." This means we can go do core drilling, small diameter wells. We can drill where, you know, because we may not have a long-term impact on the environment, to determine if there is a resource, that then we want to invest the time and energy to get a full drilling permit moving forward.
There are probably 3-4 categorical exclusion bills in Congress today, so we're very optimistic that we will see one come out. But just the idea of having pending legislation has kind of kickstarted the agencies to deploy this tool more frequently moving forward. Second, the Fiscal Responsibility Act of 2023 put a time limit on the permits. So we, you know, Ormat, has the patience of a saint, and we have permitted projects that have taken between 8 and 10 years to get an environmental assessment. What the Fiscal Responsibility, or FRA, did was say that an environmental assessment will take 12 months, and an EIS will take 24 months, or 2 years. So we've started to see these BLM offices really trying to meet these timing targets and are paying attention to meeting this new mandate through CEQA.
And last but not least, you know, Ormat has been doing this geothermal thing for a long time, and we've been working with Congress to try to constantly put forward permitting reform. H.R. 7370 is our latest bill that we introduced, and what it does is say, once we get a permit, the BLM has to issue subsequent administrative permits within 90 days or three months. Why, why is that needed? Because we saw—we started to see what was developing, that I like to call regulatory capture. These BLM offices would get through the permitting of the NEPA, give us our, you know, big, huge... We used to pop the bottle of champagne and start to celebrate, and then we'd have a district office who says, "I don't know how I feel about that.
I, I'm not gonna give you the right of way permit or the notice to proceed for the power plant." And we started to see this timeline creep from what used to take a couple months, to 6 months, to 24 months, and so we took it to Congress, and they said, "That's completely inappropriate." And so this bill is introduced. It's. You know, maybe geothermal can bring Congress together. It was introduced by a Republican from Utah. It was seconded by a legislator from New York, Alexandria Ocasio-Cortez, two unlikely partners to start supporting geothermal. This got unanimous consent in the House Resources Committee. If any of you have paid attention to that, it's a Wild West in that committee. And it's looking to see movement here in the House and the Senate in the coming year.
So how does that impact our permitting timeline? That pre-drilling exploration I talked about used to take 12-24 months. Now, we can go do that immediately if we get a categorical exclusion. Doron is gonna talk later about our aggressive core drilling program because we need to drill more to get more geothermal fluid to the surface, so we can turn it into electricity. The exploration EA I talked about used to take anywhere from 12-24, you know, maybe sometimes 36 months. Now, we know that the agency has to meet a 12-month goal. If we find that resource, and we are confident that we can, viably build the geothermal power plant, we then move to the utilization EA. That EA process was an additional 12-24 months. Now, it is also mandated to be 12 months.
Finally, the permits I talked about at the end, once we get the finding of no significant impact and go for a right of way or the notice to proceed to build the power plant, what was taking 36 months or 24 months is now taking 3 months. The legislation hasn't passed yet, but again, having the legislation pending before the committee, we've seen BLM already aggressively start to try to tamp down those times and issue those permits more quickly. The big takeaway from this is that our permitting timeline has shrunk by more than half, from about a 5-7-year window to 2-3. Now, this doesn't correlate, you know, exactly to a project development timeline being shorter, but what it does do is reduce this critical path barrier that has been really, the bane of the geothermal industry's existence.
Because we have to look subsurface and get that permit, and build a power plant on the top. Very different from solar and wind, who just has to put up an anemometer, figure out what the irradiance is or how the wind blows, and then can permit just one of these two pieces. So this, you know, we have a very complex permitting structure, but Ormat is navigating it very well, and I don't think that there's a better company to move through this process, because we've been doing it for so long, and it's really gonna pay off in our current or future drilling campaigns to meet that U.S. demand. And last but not least, transmission and interconnection. Maybe the most boring thing you're gonna hear about today, but also critically important.
So once you build a power plant, you have to interconnect it to the grid, and then you have to be able to wheel that power to your offtaker or provide transmission. We've had developers come to us and say, "I've got this great prospect in Nevada. I don't have transmission. Ormat, do you have some to offer me?" For all of the projects you're gonna hear about or have heard about prior to 2028, we have full transmission service for all of those projects. We've been looking ahead for the last five to 10 years, procuring transmission service agreements and interconnection, so that we are ready to meet this unparalleled demand we are seeing in the U.S. today. For interconnection, the same goes.
For all of our projects prior to 2028, and almost all of them beyond 2028, we already have interconnection to get them into the grid. When you look at Nevada, which is kind of a unique state, we have one big power line that runs from northern Nevada to southern Nevada, called the ON Line. It has about 900 MW of capacity. Our utility controls about 600 MW. Ormat controls the other 300 MW. So it's put us in a really strategic, advantageous position to be able to wheel our power to other places. But beyond 2028, for all of our geothermal projects that we're looking at in the large portfolios you're gonna hear about, if we are delivering them in NV Energy service territory, we have transmission service.
If we look to wheel them to California or something, we will use our available transmission on the ON Line, and look to seek additional transmission moving forward. Again, it may be boring, but these are some of the critical details for project success moving forward, and I think puts Ormat in an unparalleled position to meet the demand and really, benefit from the surge in carbon-free capacity pricing that we are seeing, and that you're gonna hear about later from Doron. Thank you, all.
Okay. So Paul discussed the first three stars that are impacting our development, and I will deal with the other two. Successful exploration. What you see on the chart here are the exploration wells that we have been drilling. The dark blue are small-diameter wells, and the light blue are full-size well. When we go to release a project, before we release a project, we have to drill three full-size wells, injection, production, in order to see the flow, to do a flow test, to get confirmation, what is the resource that we have, what its parameters. And what you see here, before that, we do small-diameter wells. The small-diameter wells are the ones that give us the confidence on the location, where to drill the full-size well.
A full-size well can cost between $4million -$8 million, depend on the location and how deep it is. A small-diameter well can cost between $500,000-$1.5 million. What you see here, that in 2019 and 2020 until 2021, due to the permitting issues that Paul discussed, as well as COVID, that some of us maybe forgot, but did hit us, we weren't able to drill too much. And what you see in 2022, 2023, and going forward, is the planned exploration that we are doing. 2025 and 2026, these are not the, the work plan.
These are the plans that the exploration team has, that we still need to review and make sure that are good, but I can tell you that their plans are much higher than this. The confidence that we have going forward is based on the fact that we have started to do cold drilling. And you can see the numbers of the cold, the cold and the small-diameter wells that we are doing, that will translate over time into projects. And you see that the more as we move forward, the more full-size wells we're drilling. The more full-size well we're drilling, it means we're getting closer to releasing new projects.
And the drilling that we do in 2025 and 2026 are the base for the 2027 and 2028 construction, and building on CODs that we expect. This is a major change. It also impacts the CapEx. As you can assume, 2019 to 2021, CapEx related to exploration was very small.... going forward, 2022, 2023, this is CapEx that is increasing, that we're investing in in the exploration. This is CapEx that will generate revenue and EBITDA, but in future years. At the first stage, it's just CapEx, additional CapEx that we do. And Paul talked about our land position, and I will try to explain. It's a complicated slide, so we do it in phases.
So the phase , if we take all of our potential prospects in the, in the U.S., and I'm talking only about the U.S., we believe that there is between 700 to 1 gigawatt of potential electricity. The gap, the difference is very large, of course, because these are places that we haven't done exploration yet. So these are based on models and the different assumptions that we have. We need to take into account also that, as Paul said, this is not all what we will have, because as Paul showed, we buy new land directly from the BLM. We find other locations, we get locations through M&As. So this is what we see today, and over time, as we develop projects, we bring on new prospects. So out of this total prospect potential, in the
until the end of 2028, we believe that we can develop between 245-460 MW. That's the total amount that we believe we can develop in the next five years. A big majority of it is in 2027, 2028. As you saw, a lot, many of these small diameter wells will evolve into projects in the later years of the five-year plan. And everything else is obviously beyond 2028. Now, in our targets that we presented to you, we have included 155 MW out of the 245-460. There are various issues why we decided to put 155. Some of it is permitting. We do not always get all the permits on time that we want them.
We might have some oppositions in some places that will delay us. Exploration takes time, not always a perfect process. Sometimes we get delays, and sometimes we're also unsuccessful. So in the numbers that we've shown you, we've included 155 MW and obviously, everything on top of that that is not included in the plan is beyond 2028. When we have a project or a site that we have confirmation for the resource, we put it in our presentation, we update you on the name. So Price Valley, as Paul said, it's a new site. We didn't do full exploration over there yet. We got it from the Enel acquisition.
Actually, we acquired additional land position from another company in order to have the full location available for us, and it's not even in any of these numbers. So this is something that is evolving. It's not stopping. It keeps on growing, like any other pipeline. We develop, we COD, and we get new ones into it. And as Paul said, the 155, all of them have GIAs, and in the future, 70% have GIAs. And now to the PPA part. So we're showing here the graph for the last 8, 7 years. In 2017, Ormat signed the first-ever portfolio PPA for 150 MW with SCPPA. The price was $75.
After we've signed that PPA, we've seen a dramatic reduction in PPA prices and the circles that you see, if you're able to see in 2018, 2019, 2020, and 2021, these are actually PPAs that we've signed for recontracting or for developing projects. You can see that the lowest that we got was in 2021. We got to around $61-$65 PPA price. That was the lowest that we got. In 2021, the CPUC issued its order to acquire one gigawatt of zero emission project, and that was the first change.
The IRA that came into effect was the second change, and what we've seen that in 2022, we signed two portfolio PPAs, one with NV Energy and one with CC Power in California, for a total of 260 MW for a similar price on average of $75. What we've seen from there is an increase in pricing. The pricing that we show here, about one hundred and more dollars per megawatt, these are things that we are negotiating as we speak. We have contracts that we are... But we can say that we're in final negotiation phases, or probably everything is agreed, and we're just waiting to the formal approval of PPAs above $100. We know that NV Energy signed a PPA, went to the Nevada PUC with a PPA for $107 flat.
We just had yesterday a discussion with Paul and the team who to sell all the project that we have from 2028 and onwards, to 2029 and onwards, because everybody wants the geothermal. It was a utility, it was a another utility, and a data center. And the reality is that they will want whatever megawatts that we can give them. And just think about the situation, we are in 2024, and we are recontracting or negotiating recontracting projects that end the contract at the end of 2033. This is 10 years ahead of time. Once we finish the discussion, negotiation, and sign this new portfolio PPA, one, two, or three of them, we will be basically contracted until the end of 2033 for every project going offline and for every project we will ever develop.
Paul will not retire at that time. So this is the, the PPA, and, and if we were able to develop more, the demand exists. It's not a question of demand. And this is a slide that we're trying to illustrate the impact of recontracting. So in 2026, we have one contract in Heber going offline, 51 megawatts, that's PPA is around $90. We are negotiating the very final stages negotiations of a contract with a higher PPA price for another 25 years. 2027 and 2028, we have contracts coming off contract. They will be part of the portfolio PPA that we signed with CC Power and with NV Energy. And in 2029 to 2034, we have 229 MW coming off contract. They are at $88, which is a very, very nice price for geothermal.
But today, we are negotiating, as I said, above 100. Just think about it, because the above 100 for recontracting, there's minimal CapEx associated with the recontracting. So the reality is that the profitability over the years will improve due to the new contract that we signed. The biggest impact will start in later years, not in this years, but as we move forward, this is increase in revenue and increase in gross margin, EPS, EBITDA, in all of the profitable parameters. This is an illustrative model for a project that we would build in the U.S. today. A greenfield that we build in the U.S., the 26 MW example. Today, unlike the past, we are allowed to have solar to supply the auxiliaries of the geothermal facilities. That means effectively, that we are building solar and getting geothermal PPA pricing.
All of our new PPAs have this optionality. The old ones didn't have that. PTC, we are assuming here 30%, PTC or $27.5 per MWh . So the prices that I showed before of around $100, on top of that, we would get PTCs for $27.5 for the first 10 years for every megawatt hour we generate. So the reality is that this, the IRA, was the game changer. The requirement from the CPUC to buy geothermal, the move to renewable, the data centers, the AI, all of these are driving pricing much higher, and we will enjoy them over the the coming years. And as you can see, we get to a post-tax project IRR of 13%-15%, which is a payback period of 5-6 years.
This is a U.S. project before leveraging. In the U.S., we sometime leverage at the project side, sometime we leverage at the corporate side, depends where we get the better interest. So that was the U.S. But as I said, you know, we're also operating globally, and this is our Kenya facility that is generating 150 MW . I think as we speak, it is 145 or something in that range, and the PPA maximum is 150. The same trends that I talked before are relevant in globally. Latin America, the Caribbean, Indonesia, New Zealand, all of them have renewable energy target. Indonesia, that has a lot of geothermal, have specific geothermal targets. We have yesterday responded to 2 RFPs in geothermal in Indonesia for projects in geothermal. A third RFP came out a week ago
The amount of projects that are available in Indonesia is huge. This is the growth that we see on the global side. We have in Guatemala expect to increase generation by 5 MW. Dominica and Guadeloupe, each one is 10 MW. Dominica is a new place that we've signed a BOT for 25 years that we are developing. It will come online at the end of next year, similar to Guadeloupe. Dominica are speaki with us on the next phase. In Guadeloupe, we have another greenfield site. We're starting to do exploration over there... Few of the islands in the Caribbean that saw Ormat operating in Guadeloupe, saw the agreement we signed in Dominica, are discussing with us and negotiating with us to build power plants in these islands.
This is becoming a very nice hub for us, where we'll be able to support multiple sites from a location. In Asia Pacific, we have the 50 MW project in New Zealand, and we have two projects in Indonesia. One of them is Ijen, that will come online end of this year, beginning of next year, and the other one is Wapsalit, that we are now in the process of upgrading our license over there, and we expect to continue exploration drilling or finalize the exploration drilling next year. All in all, we expect to go from 280 MW to 385 MW, which is a 37% increase just outside of the US. This growth might have been bigger, but as we said, we are focusing on the US.
The upside and potential in the U.S. is huge. I believe this is the last slide that shows the total electricity segment going from 1.1 gigawatts at the end of 2023, going up by more than 50% by the end of 2028, to 1.65-1.75 gigawatt, which is 8%-9% annual growth rate. So we see a significant growth. We have the CapEx available, and Asi will elaborate, and he will see that we have much more capital available than what we're going to use. And we have the best exploration team that is looking in the different areas, looking for new land position, developing the exploration.
The business development team that Paul stands here, on one hand, have very challenging work with permitting and interconnection and land, but Paul showed you how to do. On the other hand, on the PPA side, they enjoy life. So it's a balance. We need to work across all of that. And with that, we'll finish the electricity part. Ofer will come and present the storage part, which is just as exciting as the electricity part. Just this.
Where is the... Thank you. Welcome to the best part of the day. My name is Ofer Ben-Yosef, and in the next 30 minutes, I will try to convince you that we have a credible plan to accelerate growth and profitability. Now, in order to do it, certain conditions needs to be met. First, we need to have a strong demand. Without a strong demand, you cannot grow. The second thing is we need to have a supportive regulation. When it comes to renewable, we depend on supportive regulation. And then we need some other market dynamics, like good pricing. All of these are external conditions, which is not in our control, and this is not enough. Even if we have all those conditions aligned for us, we still need to have a robust pipeline that will support this growth.
We need to have very good execution capabilities and strong financial position. So, as Doron explained, there is a strong demand for energy storage. The reason is the installation of all the other renewables. Specifically, we are talking about solar and wind. Now, when you have solar and wind, it create instability. The grid managers need to shift energy from hours with low demand to hours with high demand, and the best tool that they have is the energy storage. Let me give you example from today. I didn't schedule it, it just happened, but sometimes we are lucky. So in PJM, yesterday, today, and tomorrow, they reached the annual peak capacity that they planned for 150 gigawatts of demand. This create a big issue.
Usually, you build the network to meet the peak load, capacity, but for some reason, there is a shortage. Probably, one of the generating unit went down and the grid manager have a problem. Not a challenge, problem, because people will not get electricity. What he does, he call us and ask all our sites to supply and, help him to stabilize the, the network. So in the next three days, we know that we are going to make six times more, revenue than what we planned in our plan. I already told our CFO that it's going to be a very good month. He was not happy. Never happy. It's not enough for him, but still, it's not about our revenue.
We are really here solving a real problem for the grid managers, and this energy storage stuff is the most powerful tool that the grid manager have because it respond very, very fast. Also, 75% of those installations are being done by the utilities. We serve the utilities. This is where we are. We know how to work with the utilities. This is our focus, so we are in the right place from demand point of view. If you look on the growth trajectory for the solar and wind, you can see we are talking about 4x in the next five years, so this trend will continue. This is US front-of-the-meter, where we are focusing.
We are not focusing on behind-the-meter, but front-of-the-meter, 'cause those are big projects, utilities, easier, we know how to work with them. The math is very simple: as long as this trend will continue, the trend of the renewables and the energy storage will continue as a tail. Let's talk about regulation, because regulation is key for us. We need the support from the regulators for renewable, and I want to talk about two major ones. The first one is the IRA, which basically take the CapEx down by 30%-40%, depend on the location. But this being slightly offset by the tariff on Chinese equipment manufacturers, which will take it 10%. So if you take these two trends, we are 20%-30% down on the CapEx.
Now, you see it as a straight line. I put it just to illustrate, but in reality, it's not straight line. Why? Because the equipment cost will continue to decline. Okay, this is not just batteries. The overall cost of the equipment will continue to decline. You can see that in 2022, we had a spike because of the market condition, the war in Ukraine, and the supply chain issues. But the trend is going down, and we see it. We're getting quotes now which are lower than what we got six months ago, a year ago, et cetera, and this trend will continue. So if you take these two regulatory items and add the reduction, we'll probably see a reduction of 20%-30% immediately, and going forward, additional reduction on the equipment cost.
Let's talk a little bit about the pricing and market conditions, and I will focus on the two main markets that we have. The first one is CAISO in California. What we see is a shift from the type of agreements from 10 years RA agreement, and the rest is merchant, to 20 years tolling agreement. 20 years tolling agreement is exactly like 20 years PPA, and the prices are going up 20%-30%. So today, we are closing a PPA agreement or tolling agreement in California with a very fair, favorable price, much higher than what we used to have in the past. If you look on Texas, Texas was fully merchant market, and recently we see tolling agreement for 5-7 years. Texas will follow California going forward.
I'm sure that this trend will accelerate and maybe expand. But this is good news for us going forward, because we know that we can close deals, long-term deals in good pricing in our two biggest markets. Another regulatory enhancement or law, which is very important for us, is the FERC Order 2023. I think we talked a lot about interconnection. Interconnection is the long pole in the tent. In every project, this is the time, this is the longest time that usually impact the project schedule. And what we see that in the past it used to be something like two years. Today, interconnection request can be processed up to five years. Now, this is a big challenge.
If we say that there is a demand, and the market really needs the energy storage to grow and follow the growth in the solar and the wind, the market cannot live with such a long interconnection process, and this is the purpose of the FERC Order 2023. The idea is to shorten the time in the queue and to release the queue from all the speculative players that just, you know, holding queue position and trying to do a quick round by selling it to others. And how they are doing it? It will cost you money. So there are a lot of aspects for that. I will just mention three. First, you cannot submit queue position without having site control.
Second, you need to deposit $5 million for every queue position that you ask for, and if you withdraw it, it will be reduced from your deposits, depend on the phases. Later, the whole $5 million, earlier part of it. So now, if you are a small speculative player, you bet with your real money, and that's challenging if you multiply it by a few projects you would like to promote. It's not trivial for small players. So what we will see over time, those small players will disappear. They will try to sell their stuff to companies like us, and if we will see a good opportunity to promote ourself by getting a faster queue position, we will definitely leverage on it. But over time, it will shorten the time for the interconnection, and this is very important for us.
It also will put timelines for the utilities to build the interconnection. So all in all, it will help the whole industry to solve the interconnection issue. So, we covered the market, we talked about pricing, we talked about the demand, we talked about the regulation, the supportive regulation, the shortening of the interconnection. This is all great, but this is not in our control. So it's necessary, but not enough. Now, we need to come and do additional things in order to be able to translate those favorable market into a real growth. So let's first talk about the current installations that we have. Today, or by the end of 2023, actually, we have 190 MW, 318 MWh of operating facilities.
We are now constructing 335 MW, a bit more than 1 gigawatt of MWh. This is project under construction. We bought the equipment, we have everything, site control, we have the interconnection, we have the permits, and now it's just about constructing those projects. So part of the growth that we will present you by 2028 is already being processed. It's not that today we are waiting, and we are starting to build everything. We are already processing part of this growth, and we have a big and robust pipeline of 3.5 gigawatt, 12.2 gigawatt per hour. Now, why it is important? The conversion rates between pipeline and real project, in our case, it's about 25%.
So if you take 25% out of the 3.5 gigawatt, you'll get close to 800 MW of real projects that we know that we can process from our existing pipeline. You also need to understand that in parallel, for releasing project and processing part of or converting part of the pipeline to project, we continue to increase our pipeline going forward to support the growth beyond 2028. You can see o the bottom the different markets that we serve today. It will change, and I will talk about it. Also, you can see the spread of the revenue per the different markets. And something very important, that we will talk about it, in the next slides, is the portion of contracted revenue versus merchant revenue. So today, most of our portfolio is merchant.
There is a good thing about merchant, it can gives you very high upside, but, the downside of it, it's not a predictable revenue. So we would like to shift our portfolio to be, on one hand, more predictable, but yet to keep the merchant opportunities in the places where it makes sense. So I will talk about it in the next slides. The key message that I want you to take from this slide is on the left side, you can see the number of projects that we are doing in parallel. If in the past years ago, we used to do two projects every year, three projects every year, now we are processingeight projects every year. On the right side, you can see that the average size of a project is much bigger than what used to be in the past.
So let me share some numbers. Our biggest project so far was 20 MW for 4 hours, 80 MWh in California. In two months time frame, we are going live with a project in California, which is 80 MW, 320 MWh. All our projects now in California are going to be between 80-100 MW for four hours. In Texas, all our projects are gonna be 60-100 MW for two hours. I will talk about the difference, why two hours in Texas and four hours in California. But if you take the number of projects and the increase in the size of the projects, the conclusion is that the growth will be non-linear growth.
On the left side, I want to show you that all the projects that we released are entitled to ITC. Some of them 30%, some of them 40%. The additional 10% is for energy community zone, but all of them entitled to ITC, which is very important. On the right side, you can see that all the projects that are under development, the signed contract portion is 37-63 merchant in 2022, and in Q1 of 2024, we'll already see a significant improvement on this picture, while more project will be shifted to be contracted, so we can predict the revenue on one hand, and we'll still have a portion of merchant for potential upsides, like we have today and in the next few months, probably in the summer. Let's talk about the pipeline.
You can see the amount of pipeline that we have, as I said, 3.5 gigawatt, and spread across many markets. So you can see that there are some markets here that are expansion for us. We are developing projects in a non-ISOs market on top of CAISO, ERCOT, and PJM, we will expand to more markets. You can see the amount of pipeline that is continue to grow, although we release more and more projects, so in parallel we are increasing the pipeline. And the most interesting fact is that 84% of our pipeline is already being processed in the queue for interconnection. So it's real. The pipeline is real, and we have high confidence that those projects will be able to be processed in the coming years.
Some of it already have a GIA, which is approval and a firm date of the interconnection, and some of them are in different processes in the queue. There is first study, second study, and I will not go to all those details, but once you start the process, you know that you have good chances to predict where the interconnection will happen. Let's talk a little bit about the markets, the main markets, at least. So the first one is CAISO. You can see our growth on the left side in CAISO for 30 MW in 2021. Today, we have 135, and by the end of 2028, we will have 435 MW for four hours. Okay, so megawatt hours, just multiply it by four.
In California, the way the market is working, there is something that's called co-optimization. You can play with different products, energy, ancillary, and the four-hour batteries is almost the standard in California because this is what you need in order to get a RA agreement, resource adequacy. It's basically you are being paid to participate in the market. And this is a good income for us, for everyone. That's why in California, you will see four-hour batteries for all the suppliers, and you can see the shift from contracted revenue to merchant from now to 2028, which means that most of our revenue in California, in CAISO, will be contracted.
Again, just want to remind you that we said that the prices of the PPA in California are attractive. That's why we prefer that most of our assets in California will be contracted. This is not the case in other markets necessarily. What you can see here is an example of typical project. So we are talking about 100 MW, 4-hour battery storage. The ITC will be 30%-40%, again, depend on the location. The total CapEx is $110 million-$120 million. And you can see that we are talking about average gross margin of 33%-37% and average EBITDA margin of 72%-74%.
You can see that the project IRR is 9.5%-12.6%, or 11.3%-15.2% with ITC tax equity, and the payback on the project is 5-7 years. I will move to ERCOT, which is our second largest market, and you can see the growth trajectory for ERCOT. We are moving from 33 MW today to 443 MW in 2028. Until now, our sites were 1-hour batteries. From now on, all the sites that we are building are going to be 2-hour batteries. Why?
ERCOT is going to move to something similar like CAISO, which is the co-optimization, the real-time co-optimization, and in order to capture more revenue opportunities, the optimal is two-hours battery. That's why we are going to build a two-hours battery. And you can see that also in ERCOT, we are planning to move to a portion of contracted revenue, but in ERCOT, we want most of our portfolio to be merchant. And now let me tell you a story. If you take 365 years, days a year, sorry, on 360 days, we are making 20% of the revenue. On 5 days in ERCOT, we are making 80% of the revenue.
Those 5 days, usually, days with temperatures about 105 degrees Fahrenheit and no wind, and we are waiting for those days because on those days, the revenue is very high. Now, part of it is already contained in our forecast for revenue. It's not that it's out of... But we believe that with the global warming, we will see more days like this on one hand, plus once every year, we will have probably a severe winter event in Texas, like Uri in 2021, and those can bring us a very big upside. So that's why we want to keep... relatively high portion of our sites in the ERCOT is merchant. You can see a typical project in ERCOT. We are talking about 100 MW for 2 hours.
Again, you can see the gross margin, 31%-33%, and the EBITDA margin, 68%-69%. You can see the ITC, the payback period is a bit longer than it is in CAISO. And as I explained, not all the upside potential is contained in these numbers, because those really severe weather event on top of what we already see, is not something that we can predict. We believe that there is a potential upside on those numbers as well. On the East Coast, we are currently operating in PJM. You can see that we have also one site in ISO New England, but you can see that currently we have a 102 MW. We enjoy very high prices in PJM, but we will not grow above certain level.
Actually, we have only one more project that we are developing right now because of the demand. We don't want to overbuild. We want to make sure that we continue to earn and get high return on our existing one. We will continue to monitor PJM, and we will change our decision only if they will start to develop a capacity market, which today does not exist in PJM. So all the things that we are doing in PJM is ancillary service, and basically it's one product called RegD, which helps, basically, to stabilize the frequency. Our most profitable market so far. So let's talk about our planned growth.
As you can see, we are planned to grow from 170 MW by end of 2023 to 700-800 MW by end of 2026, and to 950-1,050 MW by end of 2028. We are talking about 6x growth. And if you look on the market growth, which is 4x, it's very simple, we are growing faster than the market. So I talked about improving the revenue, accelerating the revenue and the profitability, and you can see that our revenue target is growing from $29 million last year, to give or take $160 million by the end of 2028. You can see the gross margin growth from 6% to 25%. The Adjusted EBITDA margin targets 34% to close to 60%.
And you can see the balance of our portfolio, which will be 50/50 between contracted and merchant by end of 2028, which will enable us to be more predictable on one hand, on our revenue, but also to capture the market opportunities with our merchant portion. And I think that if you compile everything together, on one hand, the pricing, the enhanced pricing that we are getting, the reduction in the CapEx, the favorable regulation that we see, and on top of it, the pipeline and the plans that we have, it's pretty understood why we will be much more profitable and why we will have a significant growth.
So just to sum marize the key takeaway, the demand is there, the supportive regulation is there, the CapEx will go down, we will enjoy higher profitability, and we will have larger projects with reduced CapEx. So we believe that we will have, or we have a credible plan to accelerate the growth and profitability. Thank you.
We have a break now?
No? Q&A.
Okay.
So just before the break, so we thought we'll have a short Q&A session, if anybody has any questions regarding what we have presented so far. Now, after the break, we'll discuss some innovation, some product financials and summary. So any questions on the electricity, market, storage?
Hi, Ryan Levine with Citi. In terms of the 13%-15% return threshold or target that you laid out in your illustrative example, what are you assuming for the well cost? Are you assuming $1 million per well, and are you assuming any efficiency gains around permitting or any other opportunities that you identified in the presentation?
We, I don't think we've broken down the cost by wells versus construction, but we assumed around $4.2 million-$4.5 million cost per megawatt, combining the drilling and the construction, the EPC itself.
... I didn't understand the second part. Permitting?
You laid out some opportunities around permitting. Are there, are any of those assumed in your forecasts around return thresholds?
Permitting mainly allows us to move faster on projects. We do assume some of the things that Paul mentioned that will happen, that we will be able to get better permitting. On the core program that we are doing, we're already enjoying some things, as Paul mentioned, the BLM offices and other are understanding the spirit of the law even before it was enacted, and acting accordingly. So we definitely see some change, not as much as we want, and we put it into the forecast of the growth that we have.
Then how do those returns look like on a levered basis? And do you expect those returns to evolve, given the over time, given the forecast you laid out today?
I think today, if we do a project finance, it's the interest would be between 6-6.5%, depends on the location. If the returns are 13-15, yes, it will get us closer to 16%-20% on a levered project, levered return specific projects.
Good morning. Noah Kay from Oppenheimer. Given a lot of numbers and some pretty interesting signals around an improving development environment, this may also partly be a question for Paul, but I guess I first just want to clarify the slide around the permitting timeframe going from, you know, 5-7 years down to 2-3. How do we think about the timeframe in which that starts to really reflect in actual capacity additions? Because it seems like the 155 gigawatts that you earmarked for 2027, 2028 could potentially be higher. It feels like you're maybe taking a conservative tack there.
What keeps that $155 from, you know, frankly, being, you know, 50% or 100% higher than that, if you really are able to build these things now, and it's an environment with, you know, a significant inflection in demand?
Well, Ormat reputation is that we put very realistic numbers. Every number that we put in, you know, is backed up by a detailed plan, one, it's-- what, what's going to happen over the course of the time. Can we do more than 155? The simple answer is yes. Permitting is something, exploration is something. Paul mentioned the permitting timeframe, it's not the construction timeframe, obviously, the processes that you need to do between the permitting elements. But I've showed the, what's the total amount that can be developed from these prospects. We thought it's appropriate to put 155. Hopefully, the permitting will be faster and exploration successful, and we'll be able to show some upside.
Question on the storage side. I guess, sort of philosophically, 50/50 contracted versus merchant. Understand that there were some market-level factors playing into that. But is a portfolio with 50/50 contracted versus merchant, where you're targeting kind of lower unlevered returns versus geothermal, the right balance? Given that, you know, you can basically allocate capital and geothermal at higher returns, and you have these, you know, 20-25 year PPA agreements. I guess the question I'm trying to ask is, why does it make sense for the company to you know, allocate that level of capital to storage, at lower returns with a fair amount of merchant exposure?
So the capital allocation between the projects, between the energy storage and the geothermal is the capacity that we have. We do not hold back on geothermal. I agree with you, the numbers are better on geothermal today.
Mm.
They weren't better a few years ago, but they are better today. And with PPA pricing going up, they can be better. We are not holding back on the geothermal anywhere. But as we said, I think many times, we have much more capacity, much more manpower, much more availability to do more.
Mm.
The numbers that we see today on the energy storage are very nice returns, between 11%-15% in California. If we, and if we do tax equity, that it can be even better. Obviously, we don't assume all cost reduction into these numbers, so they can be better. And the ability to do more is better than what we see. The returns are good. Again, these are projects return, they are not leveraged also on the storage side. And if we do have contracted assets on the storage, they will be easily levered. I think we are trying to get to the right balance. We're definitely not holding back any geothermal project that we can do.
Appreciate it. Thank you. Oh, I'm sorry. My bad. Thanks.
... Hi, Justin Clare with, with Roth Capital. I wanted to ask about, interconnection. So it sounds like you have the approvals for transmission and interconnection, but when you actually go to connect a project to the grid, I'm imagining there could be upgrades that might be needed to substations, and there's been long lead times for high voltage equipment, transformers, circuit breakers. So just wondering what the potential risk might be, resulting from delays when you actually need to make that connection to the grid.
When we said that we have interconnection, it mean that we have the date, we have the costs. The costs are already embedded into our numbers, in the forecast, the upgrade of the system, the system. If we're not doing it, you know, we are based on the other parties to do it, but we are managing them. I can tell you that if we see that they are too slow, we offer to them that we will do it instead of them, and they will pay us once we finish. We've done that a couple of times, and we're looking to do it in more projects. When we have the interconnection, we know the cost, we know the time, that's embedded into the forecast of the growth that we have in the numbers.
Also, projects equipment with a long lead time, we purchase in advance because there are specific equipment parts that we know that will take more time, so we purchase them even before we release the project.
Got it. Okay, and then one on permitting. So it sounds like the timeline for permitting is reduced by half here. Wondering about the success rate of actually securing the permits, though. How is that evolving? You know, are you having more or less success in actually getting the permits that you need?
I suggest that instead of me quoting Paul, Paul will answer that.
So I, I affectionately tell everyone that we've never not gotten a permit that we've applied for. That being said, the most complicated one that we're currently dealing with is a project called Dixie Meadows. And this is a case where the U.S. Fish and Wildlife Service listed a toad as an endangered species after BLM had issued the permit, so we still got the permit. And it has asked for supplemental information to make that permit not an environmental assessment with a finding of no significant impact, but to move it to an EIS, to say, "If there is an impact, how are you gonna mitigate it for this species moving forward?" We're proceeding through that process. And so I would say, again, we've never not gotten a permit.
It has been the timing, and this will significantly impact that timing. Now, the last thing... We are also looking, however, to try to avoid places where there may be a special species assessment or an endangered species, you know, moving forward. We've learned the lesson from Dixie Meadows that that is going to take a longer, you know, it's got a longer permitting timeline. So we are being very strategic, I think, in that pipeline, and as Doron talked about, trying to... If there's something kind of pending or in the works, we may go and develop the other projects first and come back to that one. Dixie Meadows, for example, we knew there was a toad. We, you know, we don't. We've actually also never had a take permit, so we don't try to impact a species, whether it's endangered or not.
So we thought we could proceed and, you know, BLM and Fish and Wildlife Service would be happy about it. They're. They will be, they're modifying their opinion, but because of that time delay, we're gonna be very strategic in looking at projects to make sure they are not near a special species, until we get better clarity for those projects moving forward, so we can be more aggressive.
I can give you a very simple example. Lone Mountain, which is a project that we have, Fish and Wildlife are actually now analyzing whether,
A fish.
A fish. A fish is an endangered species or not. We were ready to start a core program over there, and we stopped it, and we're waiting for them to finalize their review. Then we will work with them because we do not think that we are impacting it, so we'll be working with them in order to avoid the situation where we started and stopped.
Hi, Vikram Bora, GSAM. I know you said you're not turning down geothermal. I guess the question from me is: What would it take to sort of accelerate, you know, the path of geothermal development? Is it passage in the Senate of that bill, you know, permitting, improvements? Is it something else? Yeah, just curious on, on that part. And then the, then the second question, which is on storage, is: Can you sort of walk us through what, you know, the 9%-15% IRRs, like the ranges? Does the 15% IRR assume, you know, sort of, a lot of, I guess, weather events occurring? Like, what, what sort of gets you closer to 15% versus 9%?
So yeah, one question on geothermal development, the acceleration of that, and the second one is on the ranges of unlevered returns for storage.
Geothermal development is subject to three main items. One is the permitting that Paul discussed, and if they are becoming faster, it will expedite development. The other is interconnection and transmission, which we do have, as we said. And the last is finding the resource. In every location, doing the exploration part takes between 2-3 years. We start with a core drilling program that can take a few months. Once we analyze it and we find the right location to do full-size wells, we would drill full-size wells. That will take between 6-12 months, depends how deep the wells are and the time of the year. If it's winter, it might be more complicated. Then there is an analysis in order to release the project.
The more, the more sites we find, the more projects we will develop. There is a limit how many sites in parallel you can drill. We've drilled in the past, as we've shown, 2 to 3 locations. Last year, we were at 6, 7. Next year, I believe we will be at around 8 locations in parallel. So that's a lot of effort. It's not a question of money, it's a question of management, taking the risk of the project.
Got it. So it's more geothermal. And then I guess on the permitting side, in terms of the Senate potentially putting it up for a vote and passing it, what's your best sense on what the timing for that might look like?
Um, Paul?
... Like I said, I think, yes, you know, maybe the next 12 months.
On the numbers that you've asked, so the 9.5% is a 30% ITC-
... sold as an ITC transfer, which are sold today at about $0.90 on the dollar, $0.92 on the dollar. The 15.2% is assuming a 40%, ITC and a tax equity transaction. Tax equity transaction has different characteristics than a, an ITC transfer and can have a better impact. Tax equity transaction are almost impossible to do on very small projects. You need to have large projects. They should be contracted usually, so we'll probably see more tax equity transaction on the storage than just ITC transfers. So different parameters.
Doron, maybe we should add that the CAISO market is mostly contracted, so it's not assuming a weather event or anything like that. So this is based on the current price we can contract.
Okay, we need a break now. So, we'll come back after the break. We'll start with the innovation, product, finance, and summaries. Thank you.
Thank you.
Hello? Hi, everyone. We want to continue. Okay, so, we will continue. Each one of you has a book, geothermal children book that you can take with you. Actually, it was written by a lawyer in Ormat. So, whoever wants can enjoy it. We're going to talk about innovation, and if Ofer was the best part of the day, so this is going to be the most creative part of your day. So, innovation in Ormat is another jewel that is less known and less visible. It is something that we continuously do in Ormat. It's something that is in our DNA. Ormat is not just called Ormat Technology. Ormat started as a technological company. The binary technology is something that we developed and we own.
We have many, many patents. So technology innovation, all of these are things that are deeply embedded into Ormat's DNA. And I will talk about three main items. Each one of them can fill, you know, a full analyst day, but we'll talk about them in a high level, and as they develop, we will keep on updating you. So on new technologies, so, since we have such an amazing group of talented people in Ormat, they keep on coming with different ideas. So if I start with the right side of the slide on the internal innovation, we have developed a platform in Ormat to assist the employees that have innovative ideas that are related either to existing operations that we do, or to new technologies to develop them.
We have trained 25, what we call them, iChampions, in each location, in each group, that are gathering all the ideas from the employees, and will bring them to the management. The better ideas, you know, we will develop into the company, into the operations. We are obviously utilizing AI in all of our operation, manufacturing, engineering. This is something like every other company, we're learning. We're learning through how we develop it more and use it more. It's something that is starting. On the left side, we can see what we call in-house startups. Basically, ideas that came from employees that are being developed as some kind of a startup. The most interesting one is a long-duration energy storage technology that we have developed.
It is based on CO2 gas liquidation. We have been investing in it for the last two years. We have finished a prototype that sees... We've seen quite a lot of technological challenges over the course of the time, and we solved most of them. Now we're in the process of trying to build a pilot here in the U.S., speaking with the DOE to get the right funding and support, and once it will become real, we'll be very happy to discuss it with you. It's a totally different energy storage. It's a long-duration storage, and it can solve quite a lot of issues and challenges that we have today with the batteries and the lithium-ion batteries.
The other, the second part that we have been doing is, two years ago, we've opened a corporate VC. Basically, it's a few people within Ormat, one from the engineering and one from the business and finance, that are constantly looking at new startups. They have two main goals. One is to find new growth engines for Ormat, and the other is to enhance existing business that we have in Ormat. The idea is, through investing in startups, we get a view to new technologies coming to the market, we see where the market is going, and we invest in the ones that we believe can be successful. But we're investing not as a financial investor, we are investing in them in order to see how we can work with them going forward. We've done one investment.
We signed with that also a commercial agreement, that we can enjoy the success of the startup, if it will be successful, and implement it into our operations. They are looking at, on one hand, disruptive technology to the places that we are operating in or new markets, energy storage, like what we talked before, and other alternatives, hydrogen and carbon capture. These are not the main places that Ormat is working today, but since we are working in the renewable energy, we are looking at the this area and the surrounding area of it and everything that impacts it, to see what can Ormat enjoy, what can Ormat invest in, and how can Ormat grow?
These are things that will probably not have an impact on the short term, but I hope and expect that in the medium term and long term, they will have an impact. And obviously, we cannot have a presentation on geothermal today without EGS. Ormat actually did EGS 18 years ago in our facility, Desert Peak, in Nevada. We acquired Raft River from U.S. Geothermal, that also has EGS in it. It's a technology that exists in the past. It wasn't economical. Based on the DOE, it is still not economical today. You can see the graph, the cost per megawatt is $14.7 million. This is an estimation. We build between, as I said before, around $4-$4.5 million.
And there are many, many technical challenges that companies are working on to deal with. Ormat is in the geothermal. We are doing exploration, we are doing drilling, we are looking into this. We are focusing on what the market is doing, and we're trying to see when is the right place and how is the right place to work and develop EGS in Ormat. If and when EGS will be successful, the answer to the question, we'll be able to do many, many more geothermal projects. The question that you've asked before, we will not be tied to a specific location, a specific resource. It will be different locations, different requirements, but that exists in more places than finding a resource today. So there's a lot of potential upside.
But even if you take the DOE numbers, you know, they're talking about 2030, 2035, is this technology being relevant economic-wise? The last slide regarding ESG, it always strikes me funny to discuss ESG when Ormat is a geothermal company. Everything we do is no emissions, clean energy baseload, but still. We do have some steam project that we acquired, so we expect to avoid by the end of 2028, 1 million tons of CO2. Our board that was just appointed includes four women, so 44% of our board is female. And obviously, all the reporting, TCFD, SEC, and we are meeting all of them.
We do believe that Ormat as a green, clean, renewable energy company needs to be in the forefront, and that's where we stand on ESG. With that, I will pass it to Asi to take you through the next phase.
Thank you, Doron. Extremely excited to be here with you guys, and thank you for coming, and the people on the webcast, thank you for joining. You know, we started here in 2022. It was the start of the end of the COVID, and as we spoke earlier, Doron mentioned that revenue since then went up by 20%, the capacity went up by almost 30%, EBITDA went up by 20%, and what I'm most proud of, that I lost 25% of my weight. So you see a direct correlation between Ormat's growth and the health of the CFO. We are planning to double over the next few years. I cannot cut it by another half, Doron, so... But I will, I will do-
We'll double.
I will, yeah. But I will do my best. In the first part of my presentation today, I'm gonna cover the product segment, then I will go into the details of the financial plan, discuss our capital allocation, a growth target, provide the EBITDA bridges, and basically lay out how much it's gonna look like, as we're exiting 2028. Our product segment, as you all know, is not just supporting third-party revenue and the manufacturing of third-party business, it's also supporting the growth that Doron spoke earlier of our electricity segment. When we stand here in 2022, I would say we hit the bottom on third-party development business, and Ormat took the chance to invest more and more in its assets.
Over the last few years, we have seen a full recovery of the product segment, with the 2023 revenue already topping $100 million. 2024, the guidance is again above $120 million. So all in all, we are seeing this business is continuing to be profitable, and we see this business continue to support our electricity segment. The key for the growth over the last few years, and the key for the growth over the next few years, is to be able to compete not only with the binary technology, but also to be able to compete with the steam technology, which is also a big part of the world growth. Over the last few years, Ormat developed a new turbine, much more efficient.
We already installed it in one of our U.S. power plants, but uniqueness about it, that it can also get to a 50-megawatt turbine. So we can compete head-to-head now with the steam manufacturer, and this turbine will have much more downtime, which enable the capacity of the plant to be, I will say, higher throughout the operation. This is something quite unique that we have done, and it will support both the electricity segment margin and the ability to compete and get more product segment revenue throughout the next few years. In addition to that, we continue to try and expand and reduce the cost to build power plants, and we opened a new tube facility in our manufacturing facility in Israel.
It reduced the dependency on third-party, it accelerate the ability to build power plants, and as you can see from the last few years, allow us really well to compete in the market. When we look at the overall market, you can see that, over the last five years, 1.9 giga was developed worldwide. Of that, 60% is the binary technology. So, when you look at Ormat, we are still focused on binary. Binary is the leading technology that is being installed worldwide. And as you look on the right part of the slide, 74% of the market share, and in some cases, 100% of the market share, was supplied by Ormat. Ormat is the leading manufacturer of equipment. Once you bought an Ormat equipment, you usually don't go anywhere else.
That's the uniqueness about us, because we can support these customers long term.... As we look forward for the next few years, the key markets that we plan to focus are the Asian market. As you can see on the bottom right of the slide, between Indonesia and New Zealand, we see a lot of growth coming, and the LATAM area is growing, and of course, the U.S. is also growing, mostly by Ormat. I would like to go and do some deep dive into the different countries that we will focus and what are the key drivers for the growth over there. Looking at New Zealand, a very small population, but 1 gigawatt of geothermal is already installed in the country, 40% of it in Ormat.
As we sit here today, Ormat is building 3 power plants in New Zealand, 50 MW each, very large projects, 2 of them for third party and 1 of them for Ormat. The third parties that we're building those assets for them, as we speak, already announced that they are planning to add over 0.5 gigawatt of geothermal over the next few years in the country. Some of them are already talking to us. We expect to sign contracts in the next few months with them, and we do believe that our knowledge in New Zealand is probably doesn't come second to anyone. We can achieve good margin in this country, we're also building our own facilities over there, but overall, a key market for us.
In addition to that, when you look at the neighboring area of Indonesia, the government there has a very favorable tariff to develop geothermal assets, so very supportive regulation. They plan to add 3 gigawatt of geothermal over a period of 10 years. They don't have too much other competing technology to the geothermal for electricity production in that area, and Ormat will participate in that growth, both through our product segment and the geothermal electricity segment. As you can see on the top left, as we speak right now, Pertamina, which is a public company, traded in the Indonesian stock market, is planning to add over 300 MW of geothermal to its plant only by adding a bottoming unit, which mean no risk for drilling, and only basically enhancing their plants, and we are in discussion with them.
We have an MOU with them. In addition to that, we are seeing for the next few years, that the country will add one gigawatt of total capacity, and within our electricity segment, we are aiming to add more into it over the next few years. The nice thing about operating in Indonesia, that it's an investment-grade country on one hand, very supportive regulation, but also the government announced many programs, partnership programs, that helps finance and reduce the risk of, of the development, either it's with the PLN, the, state-owned utility, or through banks that operating in that area that offers a much cheaper loan, global banks. So overall, when you look at those two markets, it really puts our next few years at the product segment in a very good place, and it should enable us to improve margins and improve sales.
But at the same time, as we said earlier, being fully integrated does allow us, through the product segment, to support all of the growth that, Doron spoke about it earlier, and make the plant more efficient, make the plant more profitable. Bottom line, the solution that Ormat offer to our customers and to our electricity segment is extremely favorable solution. We are gonna focus from a product segment perspective on Indonesia and New Zealand, but we're still looking at the Caribbean, the LATAM, as the Doron mentioned earlier, to develop our own plans, but also to sell, if possible, to others. We do have a few of those on the books. And then, finally, by the improvement in the technology, we do believe, and we already sure, that, we can compete very favorably with the steam manufacturer.
That's something that Ormat did not have in its tool bag until recently. Now, I turn the presentation probably to the at least for me, as the CFO, the most fun part of the day. I know Ofer mentioned that his is the best part of the day, but Ofer, I can tell you that for the analysts, numbers usually are more interesting than the others. We can argue about it later. Ormat, over the next few years, is planning to double its capacity. Doron mentioned 155 MW of geothermal in 2027 and 2028. That may seem like a low number by some of you guys and ask, "Can we accelerate?" But bottom line, we are adding 0.5 GW over the next five years in the electricity segment, so it's around 100 MW every year.
Some of it we have done already through acquisition, early acquisition in 2024. The others are through assets that are being developed as we speak. So on average, every year for the next few years, as you can see on the bottom right, Ormat is adding 100 MW of capacity. We have never grew as fast as before. We have all the drivers to do that. We want to keep some upside in our numbers. We will try to always do better than that. Acquisitions are way to grow the company, which we have done very good in the last few years. Ormat did an acquisition in 2018, in 2021, and in 2024. So if I do the math, every three years, we're doing acquisition. It looks like in this period, there will be another one.
We cannot promise it, but definitely, if there is a good acquisition out there, specifically in geothermal and more commonly in the U.S., Ormat is a very good candidate to do so. The second driver of the growth, as Ofer mentioned earlier, is the storage. As you can see, we are planning to add 800 MW, much more MWh, over the next few years. I can tell you that when we look at 2027, 2028, if we will get more interconnections and more GA, we will add more capacity. The ability to contract now in California is unprecedented. We can get to a 15% returns over there. And please remember, by keeping 50% merchant exposure, there is a lot of upside to our numbers.
The merchant numbers that we have put there, here are the ones that have been over the last two years, which were not very favorable. So for us, by keeping this exposure, is actually an upside to the numbers, and we think that eventually, as more penetration of solar and wind into the system, we will see more volatility, and we will see prices of merchant going up. That's why, by the way, people are ready to commit as we speak today, to tolling in Texas, even though there is no capacity market. They are betting on more volatility than the numbers that we show you here. These are all very smart, sophisticated, companies that are ready to bet that what the market sees today on a merchant in Texas is gonna be lower than what the actual numbers will come as we go forward.
So by keeping the exposure in Texas, we're actually keeping a lot of the upside. But it was important for us first to stable the gross margin, the EBITDA margin of the business before we go to, develop a more merchant business. I mentioned about the, the good returns, and as you can see, bottom line, we are aiming to meet teens' returns on a project level. As Doron mentioned earlier, when you look at the equity IRR, this will be much higher. We are leveraging our company. Currently, when you look, we have around $2.5 billion of equity out of $5 billion of balance sheet, so on average, 50% of the project are being, financed.
Therefore, the actual return to the equity should be higher, and that's something that we have seen in the last few quarters being improved, especially with the support of the IRA. We see a lot of tax incentives in form of ITCs and PTCs. And maybe just to discuss the numbers, between 2025 and 2028, we're expecting $600 million between ITC and PTC benefits. The majority of it is PTC benefits related to the geothermal businesses, but as you can see, every time we bring a storage facility online, we get anywhere from 30%-40% of the cost at the day of the COD. I will mention, though, that there is more upside into these numbers.
When you look at the right, the new, tech neutral zero emission projects, will now, under the new guidance, the also proposed PTC and ITC, will be eligible to higher PTC value. It will be around $28 per megawatt. So that's one thing not in our numbers. Second, based on the new regs, all the expansions of power plants, geothermal power plants, will be eligible for PTC for 10 years. It is haven't been that situation before. So for example, all of the NL expansions that we just announced, all of them, according to the new regs, will have PTC coming with it. All of those new regs are not part of our projections.
So when you look at our numbers, we will probably get more than $600 million over the next few years, and it will probably make the returns even better because expansion of existing project will now be eligible for PTCs. To add to that, the fact that PTC, there's always a question for how long it will last, you know, when are we gonna stop it? Only recently, the new regs basically were informed that geothermal is gonna be part of the tech neutral zero emission new regs, and therefore, it will PTC will be eligible for us until all project that we will start construction 2032, and probably even later.
So again, supportive regulatory brings us dollars, and if you think about it, when we sat here two years ago, I mentioned that we will get $200 million over the next few years of PTC and ITC. I didn't know about ITC. It was just PTC. Now, we're talking about $600 million. So what it does to Ormat? It does a lot to it. It means for Ormat, that if we, in the past, needed equity to grow the company, we don't need it anymore. Ormat doesn't need common equity to grow its business. Between cash flow from operation, even taking into consideration the current interest rate environment and PTC and tax, ITC benefits, we are covering 100% of our CapEx needs for the next few years.
Ormat has never been in this situation when it grew so much, and its business covering all of its needs. Doron, I think I'm gonna take a four years vacation now, and I'm gonna coming back in 2028 when, when maybe you, the company will need some money... I will go with Paul. We do have to refinance some of our debt, of course. Every year, we have around $200 million to refinance. We also have a bond to refinance. That's part of what I'm going to do over the next few years. Also, of course, looking at acquisitions, but bottom line, the company is becoming free cash flow, and it's not just to cover maintenance CapEx. What it will do to us is that EBITDA will grow significantly.
Net debt should stay really more or less flat, resulting in probably one of the strongest balance sheets in the industry. You know, we are planning to deleverage the company by doing that, but I can tell you one thing: every time I come to the board and Doron with deleveraging ideas, Doron tell me it will not happen, we will find more project, we'll grow the company even further. So we hear what everybody here is saying about growth levels. The company will probably grow more than what we put here, and the most important thing is we have the capacity to do so, both from personnel and finance capacity. As you see today on the bottom left, we have $2.1 billion of net debt.
Almost all of it is actually fixed debt, put us in a very good position in a rising interest environment. Our balance sheet is very, very strong, and over the next few years, it's going to get stronger. I don't know of so many companies that can invest every year, $500-$600 million in our size and finance all of it within its own means. PTC and ITCs are game changers. The fact that they are here to stay makes our life even easier. Combine it with high returns to the projects, lower permitting time, and what I'm going to discuss in a second, which is the higher profitability of the storage business, really make how much business, plan for the next few years achievable and strong.
And I mentioned one of the key drivers for it, on top, of course, of the electricity segment, will be the storage segment. I joked around a few times, Ofer, you know, you laughed about me, but I'm going to laugh a little about you, that storage now is a hobby. If you have a revenue of $30 million and $10 million of EBITDA, Shimon, that sits here, which is the head of electricity segment, he will tell you, "That's what I'm going to do overnight." So Ofer and his team is turning the hobby into a real business. It's going to be contracted, and therefore, when we are saying 6% growth in revenue, 6% growth in megawatt, and I can tell you that almost all of that megawatt is already under construction.
It turns out, as you can see on the bottom right, that our EBITDA is going to grow more than 10 folds. I don't think any of it is in today's Ormat stock. I think investors are still looking at our lower EBITDA margin, at our lower, gross margin, which is history. Ofer said in the next two months, and hopefully in the next few days, Bottleneck will, will start, operating, and at that point, there will be a shift in the business. We will get to close to 50/50 between contracted and a merchant. EBITDA will start flowing, EBITDA margin will go up, and, anyhow, Ofer promised me a good quarter with everything that happened in PJM right now, so maybe you'll start seeing it already in the second quarter of the year.
So all in all, with a segment that was not performing and was very small over the last few years, now, through contracting and not act of God, we are turning it into a real business, that it has a lot of merits, very good returns on the business, and that's why we deploy and add capital to it. And then finally, I mentioned about storage, and there's certainly a lot of enthusiasm around it, but the key part that will drive Ormat growth is the electricity segment. So don't look at the 155 MW in the US between 2027 and 2028. Look at the journey. We are adding $170 million-$180 million of EBITDA to the electricity segment over a 5-year period, 4.5-year period, and that's the game changer in our company.
In 2022, we had $400 million of EBITDA. 2028, we are planning to have a run rate exiting the year of around $800 million, eight hundred. We double the size of the company. The fact that wind and solar is kicking in changed a lot. Our business model made it much more profitable, and I can tell you that what we don't see here is that a lot of the current assets will be contracted 2028 and further at higher prices, which mean the run rate and the profitability of the company should grow even further. So I think when you take it to the bottom line, we're not talking just about growth, we're talking about hyper-profitability growth.
Revenue is growing x, profitability is growing 2x, and this is without taking into consideration merchant markets, without taking into consideration potential higher prices on the PPAs that we may sign that will impact even more 2027 and 2028. So bottom line, Ormat is in the best position financially that it has been over years, with a very strong, financial capabilities on one hand, allowing us to grow the EBITDA, as you can see, bottom right, CAGR of 10%-11.5% over the next few years, but it's basically doubling the company over a 5-year period. In today's world, you know, very hard to get without being an AI company.
So hey, don't want to say the word AI twice in my presentation, but I can tell you one thing, the fact that we are extremely enthusiastic about what we see today, bottom line, is the fact that the drive forces of our business are very strong now. We see a lot of tailwind. It's coming from data centers, AI, go directly to our customers, who are requesting us directly and indirectly to add more capacity at higher prices. It's very nice to be in a seller's market, and both of our geothermal and storage are now in a seller's market, and that allows us to grow our business for the first time over $1 billion, closer to $1.2-$1.25 billion, and double our EBITDA over since 2022.
So Smadar asked me to add a key takeaway slide, Smadar, even though I tried to reiterate the key takeaway every slide. But, basically, from a financial perspective, we are continuing to keep a very strong balance sheet, improve profitability. If I haven't said it enough, I'll say it again, profitable growth and self-funded. We still need to cover our maturities, but we are self-funded. I don't see us going tomorrow to the market unless there will be acquisition, something unique. We know how to manage our business, and, I will tell you one thing, a dollar of Ormat, it doesn't equivalent to a dollar of company that does a merchant. A dollar of Ormat is a secure dollar, and that's why we are so confident in our projections. Now, I'll turn it over to Doron for some key comments.
Okay, so this is the last part of the day before lunch. So, a few key takeaways to try to summarize everything that you've seen and heard so far. So our value proposition is premium solutions, strong growth capabilities, improved profitability. And if we go into each one of these slides specifically, so we are aligned with the industry. Actually, we're aligned with the world, not just the industry. The move to renewable energy mainly solar and wind, coupled by geothermal and energy storage, is the one that will make sure that lights will keep being open and the air condition will still work. The growth potential, we've shown you the demand that exists, and I've said the PPA pricing is the example.
We are negotiating in parallel PPAs, seeing that in prior years we were looking for PPAs. The low carbon footprint is what we basically generate. The growth capabilities, I think across today, you've seen the fact that we're vertically integrated. Asi showed you how we can move between internal, external. If we have more external or more internal, we can play around with the workload in the manufacturing facility that we have. PD, again, the barrier, apart from the resource barrier, the other barriers is transmission, land, interconnection, and permitting. These are the issues. We have a very, very strong team, both in the storage and in the geothermal, that are focusing day in, day out, to make sure that we are able to develop the project that we do. Asi talked about financial strength.
I don't have anything to add to that. M&A capabilities, we have done M&A. Every M&A that we've done so far proved to be much, much better than what we did expect when we did the acquisition. The way we do M&A is that when we do the due diligence, the people that do the due diligence are the people that will own the facility. They develop the integration plan, and more important, the enhancement plan during the due diligence. That's why if we close the transaction in January with Enel, we release the enhancement project already in April and May, and that's how we can maximize the benefits from M&A transactions. We talked a lot about profitability. We can do geothermal. We do as much geothermal as we can. If permitting will be faster, we'll not do 155 megawatts in 2027, 2028, we'll be more than that.
If exploration will be faster, we'll do more than that. The first, the one that has the better returns has the priority to develop, and then we do... Then we go to the storage. But we have the capabilities, as Asi showed. The first time that we did the presentation, I saw the lower leverage, I said, "Oh, so now we can increase growth." So the reality is that even if we want to stay in the leverage that we are for around four, which is where we used to be for many, for quite a few years, we have the potential to grow the business either through M&A or through more projects that will come in 2027, 2028. The storage, I think that Ofer and Asi really summarized it. It's becoming a real strong business....
And in a few years from today, generating the revenue and the EBITDA that you've seen will make it something that will push us more forward. And again, the availability to grow there is subject only to interconnection and permitting. So it's much easier to develop it because it can be developed everywhere. We are focusing on ERCOT, PJM, and California. We are looking all the time at other markets in the U.S. We have sites already acquired in different location. We're answering RFPs. We will see us developing it more locations. And the fact that we are able now to balance between the merchant and the contracted on the solar means that the storage will have a cushion.
It will have a minimum revenue contracted, and we'll enjoy the, the merchant prices. I believe that this slide summarizes everything that we've talked today, and I would like to open for Q&A.
Yes. I have a presenter, Shimon.
Yes. Well, everybody is ready, so at the end.
Hi, Vikram Bora at GSAM. So quick question, I guess, on the 200 megawatts that are currently under negotiation to be contracted. In terms of timing, when can we expect, I guess, some data points there? And then just sort of on returns, you know, the 13%-15%, are there any cost optimization functions based into that, or do you expect that's upside, I guess, potentially to, to those on a, on an unlevered basis?
Yes, you're referring to the geothermal, so we are-
Yeah, that's right.
So we are negotiating. I'll tell you, the issue here is that many times, yeah, until they don't get all the relevant approvals, we're not allowed to discuss it. I can tell you that, in California, there is at least one company that if we sign with them today, they finish the approval process in six months. So I hope we'll be able to share with you some more information soon. We are discussing the 13- to 15-return assumed, I think, 90- or 100-dollar, 90-dollar PPA. So the PPA will effectively be higher than that, and the returns will be higher than that. And that's what we are negotiating today. But disclosure, many times, is limited by the party that we're negotiating on.
Got it. And then on cost optimization?
When we put the 13-15, this is a lifetime management of the project. So if we expect to have a cooling in the facility, that it's already embedded into the cash flow forecast, if we expect to have makeup wells, maintenance, whatever, it's a 30-year model.
One last question on New Zealand. Just in terms of, like, the market dynamics for power just shifting there with the smelter life being extended most recently, like, how does that impact you, if at all? Is it in terms of adding generation or, or is there no impact, which is fine, too?
No, no, the fact. We've been there, working in New Zealand for many, many years, and we've been negotiating. And as Asi said, we're building 150 megawatts there. And the smelter recontracting or not was always some kind of a risk in the New Zealand market. The fact that they extended and signed a contract to continue actually brings a lot of clarity into the market, and we believe that will push more projects to be developed in New Zealand geothermal projects. We know that I don't know to say that all of our customers over there, which are four or five big utilities, if all of them are looking to expand, but most of them are.
Yeah, Ryan Levine with Citi. Just in terms of the, the venture capital style investment that you're speaking to, you know, why now, and what's the scope or magnitude of that potential opportunity for Ormat?
Why now? It's because we are looking at additional technologies. We've decided that we have the capabilities and the right people to look for it. We're looking to invest $a few million at the beginning, but if, you know, an investment will develop over time, and we will feel more comfortable with it, and we'll see its progress, we can invest more. But the main idea, as I said, is to invest either in totally out of our business, just to see if we can enjoy or invest in companies that are around our business, relevant to our business, and sign commercial agreements with them. So we've invested, I think, $2 million in the last start, in the first startup. We are now negotiating another 1 or 2 investments, but that's roughly the numbers.
In terms of the interconnection queue, do you have any unused capacity on the interconnection queue that you may be able to monetize or realize the value for shareholders?
Paul?
... No. You know, I think you've heard today about kinda how important that geothermal resource is, and we're very bullish and confident on our ability to bring it to market, and so we are holding on to that interconnection. It also costs money, so we really are strategic in balancing kind of the interconnection or more importantly, the transmission service agreements to meet our load today. So while we have people, like I said in my comments, people coming to ask us about it, we are holding on to that for our growth at this time.
No, because we want it for ourselves. You know, it's not that... We do have extra capacity, but we want to develop, you know, either to send more electricity to California or to develop more assets in Nevada. So to your first question, yes, we have extra capacity, and to the second question, no, we're not gonna sell it.
And if I can, I just want to elaborate on your question, I think on the VC or for innovation. You know, it's not. I don't think the right question is, why now? It's been part of who Ormat has been since it became a company in 1964. You know, we started by doing solar projects, solar pond projects, remote power units, binary geothermal units. You know, we've done combined cycle geothermal. There is an innovation expertise within Ormat's team that designed and engineered these projects for, you know, over 50 years now.
And so, I think it's really a lot of that work was kind of done internally and in our groups, and I think we're expanding that now with Nurit and her team looking at this and putting in kind of serious money to take this just kind of innovation engine that has always been a part of Ormat and bringing it, you know, to market.
Thanks for a great presentation today. A question on free cash flow, and return on invested capital. I think moving towards a self-funding model is a really important signal for the company and a sign of maturation that you could do that even as you're growing at a very aggressive rate. The plan that you presented suggests this can be done over the period of 2025 to 2028. At what point in that timeline is that going to be true, in other words, that the tax credit monetization plus the operating cash flow covers the CapEx? 'Cause it might not be true at the beginning.
So, it's true already for 2024, by the way. So when you look at 2024 at our expected EBITDA, and you add the $150 million that we expect to monetize of PTCs and ITC, we are covering all of our interest costs, we are covering our growth CapEx. So it's true already now. And across the time, what we will see is that because there is less development towards 2028, actually, that's where it's balanced. So it's true to how the way. I believe that what we'll see over time is that there will be more storage growth towards the second part of the period, and therefore, there will be more PTCs, more ITCs available for us. So it's in general, it's quite balanced.
I think the follow-up question to that is a little bit more philosophical, but most of the targets presented today, and indeed, how, you know, the company is incented, you know, by the board and the compensation targets, is around revenue growth and EBITDA growth and megawatt growth. At what point does that start to shift towards ROIC and cash generation? It's not apparent that, you know, the returns at the bottom line are necessarily working their way into the portfolio today when we look at, you know, low single-digit ROIC in the business. Will that start to shift?
I don't know if the compensation will shift, but definitely, we'll see a shift in the ROIC. Over the last few years, you know, if you look at the assets under development, they grew from $200 million-$300 million in 2020 to close to $1 billion on the books right now. So the ROIC is highly impacted by many projects that are on the books, being developed, about to generate cash, but they are not generating. So I believe that once you are consistently investing in project that has a double-digit return, it should turn into double-digit return to the return over invested capital. And since we have done the models and everything we showed you here without the leverage, it should close to be one-to-one to the return on investment capital. And of course, there is some G&A cost.
The project-level returns are not exactly the same like the company return. But when we look at project-level return, we take into consideration the tax expenses that we pay in each country, and I can tell you that in reality, we are in our model, assuming we will pay taxes in the U.S., but I don't believe that will happen so quickly. We do have a lot of reserved historical capacity that we can utilize and not pay taxes in the U.S. So, there's three board members in this room. You can go after that to one of them and suggest that they will change our compensation package.
Yeah. No, so, no, so I will just add, you know, the illustrative model that we showed you, that is exactly the model that we're bringing to the board, first we bring to the management and then to the board, in order to approve projects. These are the numbers that we see. But a growing company, as Asi mentioned, has a lot of investments that are not generating revenue or EBITDA.
Mm.
If you build a project, until it's one year after COD-... you do not see the full, impact on its, on EBITDA or net income, and that has a big, change. But every project that we bring to the board, that's what, the board sees. The board have set specific targets for returns, what they're willing to do and what they're not willing to do, and that's how we, we operate.
Thank you. Appreciate it.
All right, so, Justin Clair with Roth Capital. So, it looks like you can cover all of your CapEx needs with cash flow from operations and the tax credits. So given that, I was wondering, you know, how you're thinking about leverage, how much leverage might you add to the geothermal assets or the storage assets, just given that it's not necessary? It looks like you're actually gonna be de-leveraging over the next few years. So maybe just talk through the thought process there.
Thank you very much for the question. As you saw, Asi is laughing. He knows what I'm going to say. But basically, over the years, our net leverage was around 3.5-4 times EBITDA. What we've seen here is a reduction in the leverage to around 3.1. That means that, I have more money to grow the business. I don't think that, over time, leverage should be around 3.5-4 times EBITDA. What we put in here are what we think, is achievable and can be done based on what we have today. Usually, when you start to go, down the road to year 4 and 5 from now, it's much more complicated to guess or to estimate what project is going to come online.
If you look into the details, the storage are growing less in 2027, 2028, and I can assure you that there are high probability that that will not happen, they will grow faster. We need to find a project to go. In addition, this doesn't include any M&A acquisitions. As Asi said, we do every few years, and I hope that we will do and expect that we'll do one in the next five years. That also will impact leverage. And the simple answer is, the plan shows reduction in leverage. I think M&A, more growth will bring it at the end of the day to a similar level of today, and that's the answer for the previous questions. There is upside of growth here. The 155 MW is in years only 2027, 2028.
The actual total growth in the electricity is between 500-600 megawatts, so there is definitely potential to grow more.
Okay, got it. Then, just related to the financing strategy here, there are different options in terms of monetizing the tax credits. There's a transferability option. So, wonder if you could just speak to your strategy in monetizing the tax credits and whether there could be any change in the cash flow profile, depending on, you know, how you pursue it?
So with the geothermal is quite simple. The best way to monetize it, and since all of it is being contracted, is through tax equity transaction and not PTC transfer, and that gives us the best bang on the buck, including we are, you know, moving the depreciation to the tax equity partner and getting more on that. So that will bring, as you saw on the schedule above $300 million over the next few years, and we've been doing it year after years, I believe, since 2005 or so, many years of tax equity transactions. On the ITC, what we have done so far is ITC transfer, because all of the project that we have done so far were all merchant.
The ability to do tax equity for a merchant project, I will say, is not likely to happen. Maybe if you group few. We may shift throughout the period to do tax equity transaction on the storage. I will say one thing: the cash flow shouldn't change significantly, so we will get the cash upfront, similar to ITC transfer, but we will get more cash of it. We did not model it. So in our model right now, we did the focus on ITC transfer. Like Doron mentioned, you can get 90-92 cents on the dollar. Maybe we'll be able to get more. There will be shift in presentation if we go to tax equity transfer.
The cash flow will look quite the same, maybe even better, but the amortization of the income on the tax equity of storage will be, for a period of, certain years, still need to be negotiated, versus the ITC transfer today, that you pick up the income at the year of the COD. We are providing here cash flow, so if we will go to the tax equity market for storage, for contracted, you will see basically more cash flow coming in. The returns of the project will be higher, as Ofer and Doron mentioned, and it should, basically increase the EBITDA of the company even more. On the other hand, if we go to that market, the tax rate of the company will probably go up from where it is today, which is close to zero. Hopefully, I answered the question.
Yep, definitely. Thank you.
Alex Ennis with Van Berkom Global. You spoke about Indonesia briefly. Just given the change in regulation in that market, and the willingness to allow for 100% foreign-owned development, I know you already have some projects in the works, but maybe if you'd expand on the potential that you see in that market. It may not impact 2028 necessarily, but I'm interested in, in your, your willingness to invest more in that geography.
... As I think, as we said, during the presentation, there's quite a lot of potential in Indonesia. We have one project, Egen, that will come online at the end of this year, where we own 49%, and Medco is a local player, owns 51%. I'm not talking about Saula, that is, we have a minority interest over there. In Upsolit, we have 100%, and we're developing it. Tokatidong, the other one, we did some core holes there, analyzing it. We have 100%. There's an option for a local player to take 25%. We've responded to PLN tender for two additional projects between... Today, they're 10, they might go up to 20 MW each.
As a partnership with PLN, that they should hold 30%, and we hold 70%. Different areas, we feel very comfortable operating there. It's an investment grade country, very supportive regulation to geothermal. Financing is available. Egen was initially financed by local bank, and now it's being transferred to DFC, the US bank. Saula is financed by JBIC from Japan. We feel very comfortable over there. We have a strong presence of resource people, business development people, that are looking at projects. On the product side, as I said, PLN are expected to issue Pertamina so issue about 300 megawatt of project for bottoming unit. So it's a very nice market. The only risk here, it's timing.
It works much, much lower. So if you know, in 2022, we were much more optimistic that we'll be able to develop more over there, it is moving slower. We're still on the same places, the same growth, the same potential we see, but much slower.
Derek Patiser, Barclays. I just wanted you... Can you expand a little bit more on these PPA renewals, the slide that you showed us? Maybe dig into the different projects that are coming up over the next three years. Talk about that process, how you're, how you're able to renegotiate prices upwards. And then secondarily on that, how much of this is embedded in the EBITDA guides that you have given out, today?
In the EBITDA, going to be a while, but in the EBITDA guidance that we have embedded, we assume the PPA pricing that we see today for the new project that will come online. So we have a. We have contracts, the portfolio PPA that we have, and the portfolio PPAs that we have, that we know the pricing, so obviously they are embedded over there and other. And going forward, we have a contract that we're going to sign. On the PPA changes, the recontracting on the slide, this slide, what you basically you see, you see the expiration of contracts. So the 51-megawatt, that's Heber in California, the 25 megawatts is Galena, I think, and CD4, I think, and the 12-megawatt is Radio Desert Peak. One of them.
So Desert Peak. So, these contracts are already signed. I don't know if they're in the numbers. They are, they updated. They're in the numbers because the contracts are already signed. So I think the big impact will come after 2028, on the contracts we're signing today.
And then the contracts after 2020, is there any opportunity to pull those forward, or are those set in the beyond 2028, and you can't approach them until then?
It's an interesting question and a big challenge for Paul to see how we can buy out of a contract and get into a better contract. But I would say Ormat, in general, meets its contract and its responsibilities over time. So, I think it's not likely that we'll be able to, you know, end the contract earlier without paying the full penalty for it. But this is definitely... Once we will sign the PPAs for 2029 and onwards, this is something that we will look into if we have the option to terminate earlier according to the contract or and enjoy that earlier.
And then just last one from me on just all the data center hype. Maybe talk about that as far as your exposure. Which power plants could support data centers? Can you maybe give us some more insights as far as the conversations you're having today, and what that could potentially mean for further upside to pricing?
We are negotiating today with data centers in the areas where we operate in Nevada and California, mainly in Nevada. We are negotiating with utilities. There's a big question, who is willing to pay more? Because at the end of the day, utility company is regulated, so they have much more strengths over the long term. We're signing a 20-year PPA, 25-year PPA. So we need to balance between it. At the end of the day, if I would ask you if I don't know, Microsoft, Amazon, Google will be for 30 years, you will say probably yes, but what happens if in 10 years from today, they can find much, much, much cheaper electricity? How will they manage the contract?
Will they come, like what you said, and ask us to renegotiate it or not renegotiate it? It's a question. A utility company usually is regulated, that's less of a likelihood. So the question is on the price. Today, we see similar pricing, but if we are able to get better pricing for data centers, we'll definitely sign with the data centers.
Any way you can measure how many megawatts they were talking from the Ormat portfolio that you're thinking about right now?
How much the data center want to buy?
Yeah. What ever we can sell.
It's unlimited.
Thank you.
Unlimited number. Look at that, they're discussing with us 2029 to 2033. They're not asking for today. If we have today, they will take it today, but they're also talking about 2029. The number is unlimited, and that's why the discussions are challenging between managing between the utilities companies, data centers, who to sign with, who to give. We have very long-standing relationship with utilities company. You need to see what's the right location, maybe split between a few PPAs and not give every one whatever he wants, but actually split it between them.
Can you talk a little bit about the, I guess, the evolution of just, like, drilling techniques, what you're most excited about from a technology standpoint? The reason... And I think how that's influenced by the DOE projects you guys have done in, like, Nevada, I think in California, and, you know, maybe some of your peers, like Fervo, what they're doing. Just curious where you think the most interesting areas right now are from that standpoint.
I won't discuss Fervo and where they stand or what they did or didn't do. That's up to them. EGS is something that Ormat has done in the past. Actually, Ormat has patent on it. It's not something that Ormat is not aware of, or doesn't have a patent on it, or hasn't done it before. And we've done it before. We are looking into it today. Today, the DOE is putting a lot of money and efforts into this because geothermal is baseload. The potential becomes very big if you do find a solution. I'm sure that all of us know what fracking means and what connotation it has on environment, on who wants it or doesn't want it.
If EGS will be developed by Ormat or by any other company, it will significantly increase the market. It will enable Ormat to do more projects, to grow faster. But first, we need to make sure that all the technological challenges of EGS are passed, and that they can be tackled, and profitability is reasonable over there, and returns are reasonable, which today they are not, that it is bankable. You know, even if you do have a project, how many years it will last, this new technology? So there's quite a lot of challenges. That's why the DOE is talking about 2030, 2035, and onwards. And we're looking into this as well.
Do you have any applications into the DOE, either for grants or loans, as part of a loan program right now that are pending review?
Sorry. I think we do.
We currently have... Sorry, I'm Simon Webbison. I'm the Vice President of Exploration and Resource Management. We currently have a DOE-funded project, which is called Wells of Opportunity, and it's basically near-field EGS, like stimulating wells, into a hydrothermal system. And we're continuing to look at other opportunities as they come up for further grants.
Hi, Ryan Levine with Citi. One follow-up. Throughout the presentation, you speak to free cash flow, upside potential, and no equity needs, and a strengthening balance sheet. You know, as you're looking out over this forecast time horizon, the extent some of these upside cases play out, how are you looking at potentially returning capital to shareholders? Is that something that could be on the table in some of these more upside scenarios?
I think, the focus when you look at it right now is, as long as we can get double-digit returns, is to invest in the business. Of course, as time goes by and the, EBITDA and the tax credit continuing, if we won't have these investment opportunities, it should turn into a cash cow. You know, if we stop, tomorrow, the growth, Ormat can generate $hundreds of millions a year back to the investors. So I think we will focus for the next few years on growing the business. We do know that we have more leverageability capacity. It can turn into more investments. It can also look at a way of increased dividends. So we, we understand the appetite of the market, we've been in this market for many, many years.
The management is very known of what the market is requesting. I will say the focus right now is on growth because we are in a one-time era of demand, regulatory support, and very strong pipeline, both on storage and geothermal.
And if they were to play out in your response, you mentioned dividends. Is increased ordinary dividends the likely path of returning capital if that were to play out?
You know, there are two ways to return cash to shareholders. It's either through buybacks or through dividends. It all depends on where the stock price is at the time that you make that decision. So, I think we shouldn't make that decision today, but only when it's available for us.
Thank you.
I would go to the beginning of what Asi said. Ormat is a growth company. We're investing in the growth. This is where the focus of the management, this is where the focus of the board is, is looking at. And in this era of such a big demand, we believe that's the best return to shareholders. Okay. Thank you everyone for coming. Thank you for listening, whoever is listening on the web, and hope to see you soon again. Thank you.