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Global revolving geothermal exploration drilling fund as possible de-risk solution

Global revolving geothermal exploration drilling fund as possible de-risk solution Drilling rig on site of 30 MW Bald Mountain geothermal project (source: Oski Energy)
Alexander Richter 27 May 2013

A recent white paper by Bloomberg New Energy Finance and Rinova International introduces the concept of a revolving global Geothermal Exploration Drilling Fund that would offer debt financing to exploration phase projects and could attract up to $9.6 billion in investment.

With only a small fraction of the overall geothermal potential tapped, geothermal provides a great opportunity for development, but so far the exploration risk is the main hurdle for the industry to attract investment and move forward.

The industry has discussed various options to target the risks in exploration and there have been efforts by the private sector (an exploration risk insurance for investors), governments through grants and insurance products (Australia and Germany), and the World Bank Group through a Drilling Fund.

In 2012, John McIlveen of Jacob Securities presented a paper on “A Geothermal Incentive Design”, in which he discusses the bottle-neck of geothermal development, namely the drilling. He highlights the fact that the drilling risk is the main obstacle for development. In the paper he suggests a “tailor-made geothermal incentive program”, which would provide a “front-end subsidy”. A non-repayable subsidy like this, he described as difficult in the current political and budgetary environment and that it might be necessary to structure a self-funding subsidy. He described the possible self-funded subsidy as covered through “royalties from developers that benefit from the subsidy, optional drilling insurance paid for by the developer, or repayment of the subsidy from project-generated cash flow after commissioning. ” (McIlveen, John, “A Geothermal Incentive Design”, published August 2012 for the National Geothermal Summit in Sacramento, California).

With this paper in mind, I heard on a work done by Bloomberg New Energy Finance in cooperation with Rinova International. Both have now released a white paper that introduces the concept of a Global Geothermal Drilling Fund of $500 million. This fund – so the authors – would not provide subsidies – as discussed in John McIlveen’s paper, but provide debt funding at high(er) rates but still favourable rates compared to the price of equity funding for developers in the drilling phase of development.

Mark Taylor, lead geothermal analyst at Bloomberg New Energy Finance and co-author of the report, said: “The problem is that wells are expensive to drill and the often modestly capitalised developers find it difficult to raise either equity or debt finance because investors fear that the company concerned will be one that drills unsuccessfully and then fails. The proposed fund would be big enough to take losses, in the knowledge that the winners will outweigh the losers. It would be a particularly valuable source of finance in developing countries, where the majority of world’s unexploited geothermal power is located,” Taylor added.

The authors discuss that “using a 7% cost of capital would result in a 17% interest rate to market developers, while a fund with public sector support and a 3.5% rate of return to public sector contributors could offer loans at a 14% interest rate.”

With a $500 million fund around $9.6 billion in new investments in geothermal projects could be achieved. This would therefore indirectly finance the drilling of around 470 MW of geothermal power generation capacity with an impact for up to 2,400 MW of development in total, which represents about 50% of current development in the U.S. or 10% of global development.

It would be interested to learn a bit more details on the geographical regions that the authors looked at. One can assume that efforts by the World Bank in Africa and Asia might make a fund like this less attractive for development in the growth regions for geothermal in Asia and East Africa, but we will follow up on that.

Source: Bloomberg New Energy Finance, actual White Paper (pdf)