Economics of California's The Geysers Geothermal Steam Field

"The Geysers" is a geothermal steam to electricity field in California. Over a period of 60 years, The Geysers has witnessed the entry/exit of multiple firms as total steam production grew, peaked, and then began to decline. Using a conceptual model for the extraction of steam from a vapor dominated geothermal reservoir I show that this pattern of field development may, to some extent, be a result of spatial externalities. Spatial externalities arise because fluids in the reservoir are mobile. Production and injection decisions of one well operator can affect the flow rate of wells owned by other operators. When independently profit maximizing operators fail to take into account interdependence between wells, they extract fluids at a rate which exceeds that which would have maximized field-wide profits. The welfare loss that arises from the negative externality manifests largely in the form of over-capitalization, the building of too many wells and power plants. Results from a well-level spatial econometric model indicate that interdependence between wells at The Geysers is substantial. These results warrant further investigation of the common property nature of geothermal resources and a regulatory framework to manage spatial externalities that can arise in them.