The geothermal industry has been taking one step forward and two steps back over the last year. On the forward side are grants and interest-free loans aplenty, particularly from governments wanting to jump on the green-energy bandwagon. Pushing back is not only some tough geology with deep, dry-rock drilling projects, but also the public fear of earthquakes along with other environmental issues.

Overall, what we're seeing is a reality check for geothermal energy. It still leads the pack among the alternative energies as a sustainable source of base-load energy with no storage requirements. However, making the leap from tapping natural reservoirs to actually creating them, as EGS (enhanced geothermal systems) projects are trying to do, is proving harder than a lot of people have thought.

There is definitely a potential of earthquakes occurring in geothermal areas - case in point: the tremors at the Geox project in Landau, Germany. That was neither the first nor last time that these rumblings and geothermal projects have happened in the same neighborhood; after all, areas where hot rocks occur relatively near the surface also tend to be areas prone to earthquakes. The EGS process of fracturing rock layers via hydraulic pressure, necessary to inject and heat the water before pumping it back up, can also trigger seismic shifts in underground rocks.

On December 10, 2009, the Swiss government permanently shut down a geothermal project near Basel that was suspended in 2006 following a series of minor earthquakes. The Basel project was touted as the first commercial hot fractured dry-rock (aka EGS) geothermal project. The next day, AltaRock Energy told the U.S. Department of Energy it was abandoning its project at The Geysers in Northern California, an attempt to expand an existing conventional geothermal project via EGS.

AltaRock's project at The Geysers was supposed to be the flagship of the Obama administration's push for clean energy, enjoying the backing in millions of not only federal (read: taxpayer) dollars but also the likes of Google.org and other private investors.

AltaRock appears to have found that the deep drilling of EGS projects requires more than a government check and the tweaks to conventional techniques that some geothermal enthusiasts have suggested. In this case, the start-up company reportedly reached no more than 4,400 feet of its planned depth of 12,000 feet (3,700 meters) before a tricky layer of fibrous rock called serpentinized peridotite caused the holes to collapse.

More evidence that EGS drill programs are for neither the faint of heart nor the thin of wallet comes from Australia. Geodynamics, the only Australian company to reach "proof of concept" with EGS, has experienced a major delay at its Cooper Basin project in South Australia. The company's goal of a 50-megawatt plant by 2012 was recently set back some two years due to the corrosion and failure of the project's well casing.

Additional challenges in geothermal development are market access and the long stretch from drill rig to humming turbine. For example, MidAmerican Energy abandoned its Salton Sea project in California mainly due to lack of transmission resources and hence access to market.

In Canada, the Meager Mountain geothermal project north of Vancouver is the poster child for longevity in development. The area was recognized as a possible geothermal site in the mid-1970s, with both test and deep holes drilled for the next 30 years. These days Ram Power continues to pursue the prospect, but it appears the project is currently in stasis.

Quite a list. So what does it all mean for the future of geothermal energy, and particularly for us considering investment in it?

It's still true that EGS has the potential to unlock previously inaccessible layers of hot rocks and make steam with them - lots of it. However, large uncertainties that hover around several aspects of deep hot rock geothermal projects make it difficult to quantify the risk in exploring and developing them, including degree of alteration and competency of the rocks at depth and chemistry of the geothermal fluids. Hand in hand with technical uncertainties come investment uncertainties.

Then couple those risks with high capital costs, environmental hurdles, and long lead times, and you have some stiff challenges for micro- and small-cap companies with limited technical expertise. The super-green appeal, energy potential, government grants, and possible carbon credits make geothermal energy attractive to companies anyway... but this just adds to investor uncertainty. Not only can the government taketh away what it may give, but you also have the usual "me-too" amateurs muddling the field.

In the past, we at Casey's Energy Opportunity have reviewed a number of excellent companies pursuing geothermal projects. We still consider the upside potential high and will continue to pursue investment opportunities in the geothermal sector.

However, in response to an infusion of government grants (and many more to come) and venture capital, many companies have rebranded themselves as geothermal developers. A good portion of these companies lack the technical expertise or financial depth to be successful, even with the government carrying part of the financing. Seeing through them requires a sharp investment eye.

There's some hope on the horizon. The Canadian Geothermal Energy Association released in January the Canadian Geothermal Code for Public Reporting. Standardized reporting should help investors evaluate geothermal companies.

Meanwhile, on the technical front are several challenges in EGS to work out. In addition to learning how to drill that deep, and to drill that deep despite any unfriendly layers of rock in between, there's dealing with hot corrosive fluids. Precipitation of minerals in the system as water cools is another problem to solve. EGS projects are sending home some tough lessons that unlocking this considerable geothermal potential requires new technologies, not just extensions of established ones.

To sum it all up, the future of geothermal energy is still sound, and the sector is in the process of sorting wheat from chaff - both in techniques and in the companies using them. More than ever, good assets, technical expertise, and solid financials are the watchwords for geothermal.

Dr. Marc Bustin is an award-winning professor of petroleum and coal geology and one of the leading experts on unconventional oil and gas in the industry. As he says, geothermal resources are still a big contender among the "green energies," but caution and due diligence are a vital part of investing in that sector. Find out how to profit from geothermal stocks with sound fundamentals and great potential... learn more by clicking here.