ThinkGeoEnergy – Geothermal Energy News

ESMAP Report – methods of risk mitigation with government as developer

Geothermal zone in the Bolivian high Andes along the Ruta del la Joyas (Source: Parker O'Halloran)

This brief report is one of four excerpted from The World Bank’s Energy Sector Management Assistance Program covering the Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation.

This brief report is one of four excerpted from The World Bank’s Energy Sector Management Assistance Program covering the Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation. The focus of this overview will be mitigating the risks of developing geothermal energy with “Government as Developer.”

Throughout the world geothermal energy presents an opportunity for many countries to diversify their energy supplies in a sustainable method. When properly developed geothermal is a reliable locally produced energy resource that provides environmental benefits at the global and local level providing power on a 24/7 basis. Geothermal has several advantages over traditional fossil fuels to consider; first, geothermal is often a less expensive option than utilizing fossil fuels when the environmental benefits are factored. Secondly, geothermal is exempt from the volatility of international commodity prices, which can severely affect economies of countries that become reliant on imported fossil fuels.

While geothermal has been in use for over 100 years, only approximately 15 percent of the known reserves are presently being exploited and producing electricity. There is an estimated global geothermal energy potential of 70 to 80 GW. One of the main reasons for the slow pace of geothermal development globally is the high costs during the early stages of the multi-stage development process. Whether it is a real or perceived risk, private capital is risk averse to investing in geothermal, in particular, during the exploration-drilling phase of a project.

To address this challenge, four approaches have been implemented in various countries around the world to advance geothermal development and to mitigate risks. The four approaches of risk mitigation include:

1) Government as a developer
2) Cost-shared drilling
3) Resource risk insurance
4) Early stage fiscal incentives

This brief overview will explore the first approach, Government as a Developer as a method of stimulating the expansion of geothermal energy according to World Bank‘s Energy Sector Management Assistance Program (ESMAP). The key feature of this approach is that government, or government supported agencies, explore and develop geothermal resources over the entire development cycle – from exploration through the building of the power plant. This approach has been applied in many countries including: Costa Rica, El Salvador, Nicaragua, Mexico, France, Indonesia, the Philippines, New Zealand, Iceland, Turkey, Ethiopia and Kenya. The advantage of government as a developer is that it mobilizes large-scale financing from public sources supported by governments that can afford these expenses. Secondly, the strength of the government can manage the risks of such large-scale capital investments. However, the disadvantages are clear when some governments are not able to afford the large-scale investments due to the negotiations of expenditure of public funds. Many countries may not have the public sector agencies, skills, or capacity to undertake geothermal development. Furthermore, government bureaucracy may be burdensome when mobilizing financing of projects, particularly the first project. The involvement of many government agencies to initiate a project may also cause conflicts, delays, and even the cancellation of projects.

Not surprisingly, government as a developer can tremendously impact the pace of geothermal power production. In those places where governments and agencies were committed and capable of funding projects, geothermal growth was accelerated. Conversely, where governments and agencies were not as capable and/or as well funded, growth slowed or even stalled. In those places where development was successful, operations and management oversight of the resource is carried out by the designated government agency with sufficient qualifications. Commonly, these government agencies will improve their capacity by contracting with external contractors and specialists in a particular area.

When government is the developer they assume all the risk in the many cases. There may be development partner assistance, such as in the form of grants and loans, but the latter will require payback by the government, often with interest. When there are public-private partnerships of government agencies, for example KenGen in Kenya, the private sector will then hold a portion of the risk.

Overall, government as a developer has been a successful strategy for those countries that were committed and capable of supporting geothermal development such as Costa Rica, New Zealand, Iceland, and the Philippines. The strategy has been moderately successful in countries with significant geothermal resources but less government support and developmental strategies in place, such as El Salvador, Indonesia, and Kenya. Smaller, less developed countries with more urgent needs for limited government funds such as Ethiopia, Djibouti, and Bolivia have struggled with government as a developer.

As with any risk mitigation approach, there are multiply perspectives to take into consideration. The strategy clearly works in developed countries with strong finances and streamlined bureaucracies. Furthering geothermal projects in developing countries is the focus of the World Bank’s ESMAP funding instrument.

Source: World Bank Group, ESMAP, Washington, DC, March 2016.

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