Can Heat-as-a-Service unlock geothermal scale?

High upfront costs remain one of the barriers to wider geothermal heating deployment, and Heat-as-a-Service can offer one way to finance projects without requiring the end user to own the infrastructure.

But the model also changes the relationship between the customer, asset owner and operator. For larger utilities and public heat-network owners, questions around control, long-term contractual commitments and operational responsibility can be just as important as access to capital.

These issues were discussed at the European Geothermal Heating & Cooling Days in Dublin, where Kyotherm and Pioneer Point Partners outlined how Heat-as-a-Service and portfolio financing can support geothermal deployment.

Under such models, an investor finances and owns the thermal infrastructure, while the customer pays for heat under a long-term agreement.

For geothermal technology providers, this can remove one of the obstacles encountered when selling capital-intensive systems.

“Very few customers will pay the upfront costs,” said Elise Heath, Investment & Business Development Manager at Kyotherm.

Partnering with a financing provider can instead allow a geothermal supplier to offer a turnkey solution without requiring the customer to fund the full initial investment.

Selling heat instead of infrastructure

Kyotherm focuses on investments in thermal energy infrastructure, including shallow and deep geothermal projects.

Heath explained that the company generally becomes actively involved once a project has reached a sufficient level of maturity.

Kyotherm is an investor rather than the initial project developer. Technical feasibility work and, where relevant, exploration therefore need to be sufficiently advanced before the company can take an active role.

Once that point has been reached, an investor can contribute to financial modelling, legal structuring and the allocation of project risks.

The model can be particularly relevant for commercial buildings, industrial heat users and other customers that want access to lower-carbon heating without taking on the full capital burden of owning the infrastructure.

For technology providers, it can also make a geothermal offer easier to sell by separating the technical solution from the customer’s ability or willingness to provide upfront capital.

Ownership and control remain part of the equation

Heat-as-a-Service is unlikely to suit every geothermal project or customer.

Larger utilities, municipalities and district-heating operators may be more cautious about transferring ownership or operational control of strategic heat infrastructure to a third-party investor, particularly where assets are expected to operate for several decades.

Long-term contracts can provide the revenue certainty investors need, but they can also reduce flexibility for heat-network owners if market conditions, technologies or regulatory requirements change.

The commercial structure therefore needs to address more than the heat price.

Asset ownership, performance guarantees, maintenance responsibility, contract duration, termination rights and future investment obligations can all influence whether a Heat-as-a-Service structure is acceptable to the customer.

For smaller and more standardised projects, these questions may be easier to resolve. For larger geothermal assets and district-heating systems, they can become central to the investment decision.

Long-term contracts underpin the model

Heat-as-a-Service depends heavily on long-term contractual relationships.

For investors, a heat supply agreement provides visibility over future revenues. For the customer, it can provide greater certainty over heating costs.

During the Dublin discussion, participants referred to heat offtake agreements that can extend over 15 to 25 years.

Julius McGillivray, Principal at Pioneer Point Partners, said volatile gas prices can make this proposition more attractive to customers.

A geothermal provider able to offer a fixed heat price over a long period can reduce exposure to future fuel-price movements.

That revenue stability also changes how investors assess the geothermal asset. Instead of relying only on expectations about future energy prices, they can assess a contracted stream of payments from identified customers.

This links to another theme raised during the Dublin event: the value of geothermal can lie not only in energy savings, but also in lower uncertainty and greater cost predictability.

Smaller projects face a financing challenge

Heat-as-a-Service does not remove every barrier to geothermal deployment.

One of the main challenges is scale.

Many ground-source heat pump and smaller geothermal projects are individually too small to justify conventional project-finance structures.

The cost of financial, legal and technical due diligence can become disproportionate to the value of a single installation.

This is where portfolio aggregation can become important.

Pioneer Point Partners described an approach in which smaller projects are initially financed with equity and grouped together until the portfolio reaches a scale that becomes more attractive to lenders.

McGillivray referred to a strategy of building towards approximately EUR 50 million to EUR 60 million of investment and EUR 15 million to EUR 20 million of EBITDA before introducing financing at portfolio level.

At that point, lenders are no longer assessing one geothermal installation.

They are looking at a diversified group of operating assets with multiple customers and contracted revenue streams.

From individual projects to infrastructure portfolios

Aggregation could have significant implications for the geothermal heating market.

A single ground-source heating installation may resemble a specialist construction project. A portfolio containing tens or hundreds of contracted systems begins to look more like an infrastructure investment.

This changes the way risk can be assessed.

If one installation experiences higher costs or performs below expectations, its impact can be absorbed across a wider portfolio. The investor is also less dependent on a single site or customer.

McGillivray said Pioneer Point takes this portfolio perspective when evaluating investment risk.

The model could be particularly relevant for residential developments, commercial buildings and public-sector properties where similar geothermal systems can be replicated across multiple sites.

Rather than financing every system separately, investors and developers can standardise technical and contractual structures and build a larger portfolio.

That does not mean aggregation is automatically suitable for larger district-heating or utility assets.

For those projects, ownership structures, public responsibilities, long-term operating strategies and local governance can make individual project structures more appropriate.

Cooling can strengthen the business case

The panel also discussed cooling as an increasingly relevant part of the geothermal investment case.

Heath said customers are showing growing interest in thermal systems that provide both heating and cooling.

In some projects, different prices can be established for the two services because the technologies they replace are different.

Heating may be compared with gas or another heating fuel, while cooling is typically compared with electricity-based systems.

Daniela Bachner, Energy Sector Expert at the European Investment Bank, said some of the latest projects followed by the EIB combine heating and cooling through low-temperature or ambient-temperature networks supported by heat pumps.

Using the same infrastructure for both services can improve asset utilisation and strengthen the long-term business case.

Cooling could become increasingly relevant as demand rises across Europe, particularly in commercial buildings and urban heat networks.

No single financing model

The discussions in Dublin highlighted that geothermal financing is unlikely to converge around one universal commercial structure.

For some customers, Heat-as-a-Service can remove a significant upfront investment barrier.

For smaller projects, portfolio aggregation may create the scale required to attract larger pools of capital.

For utilities and larger district-heating operators, however, long-term ownership and control may be equally important considerations.

The challenge is therefore not simply to aggregate as many projects as possible.

It is to develop commercial structures that balance investor requirements with the long-term needs of heat users and asset owners.

Heat-as-a-Service and portfolio financing can form part of that toolkit, particularly for repeatable smaller projects. For larger geothermal and district-heating assets, ownership, control and risk allocation are likely to remain central to the financing discussion.

The wider task for the geothermal sector is to develop business models that are not only financeable, but also acceptable to the organisations expected to rely on them for decades.