Interview: Lack of understanding and relevant policy holding back geothermal in Latin America

Petrevén drilling rig on site of the Cerro Pabellón project, Chile (source: Petrevén)

Alexander Richter 4 May 2020

The funding entities of the Geothermal Development Facility (GDF) for Latin America recently shared an update on the challenges and opportunities the GDF and geothermal development face after 4 rounds of funding.  The update can be found here (pdf), we also reported it in February 2020.

The position paper had some interesting points related to explore what holds back geothermal development in the region, despite a good and productive funding program by GDF. So ThinkGeoEnergy wanted to dig a little bit deeper and was able to connect with Chris McCormick, Chief Investment Officer for the GDF program in a short interview to learn more about the challenges and opportunities the GDF and geothermal development face after 4 rounds of funding.

The GDF was founded by the German Development Bank KfW with funding from the European Union.  IDA Fund Management, a consortium of Interlink Geothermal (2/3) and Dewhurst Group (1/3), was selected in 2016 to design and operate the funding vehicle for a period of 10+2 years.  The GDF executed it first call for proposals in 2017 and completed its 4th call in 2019 which seems to provide a good data set for the status of geothermal development in Latin America.

Chris, thank you for taking the time to engage with us on this follow up on the GDF position paper. How are things going?

Alex, I’m doing pretty well.  My family and friends and colleagues have not been too adversely affected by COVID-19 and I’m really happy to say that and I hope that is true for everyone in the geothermal development community but I fear that statistically can’t be the case.  My positive thoughts and best wishes go out to everyone.  I certainly hope that is true for you, your family and friends.

Thanks, and appreciated that very much, so how is it going as it relates to efforts of the GDFLA?

As you know, I’m not one to put rose coloured glasses on the activities of the geothermal industry.  In short its going well, but not great, and certainly could be going much better.  On the positive side, the GDF through 4 rounds of applications, has seen over 50 submissions of projects for either surface studies or drilling grants.  While I can’t say for sure that we’ve seen every active project within our 10 mandated countries, I would say we’ve certainly identified and received submission from the great majority of projects.  This is a positive in both the number as well as the interest and intent of both public and private developers to leverage the vehicle.  The negative is the reality that only a few projects have actually broken ground, and we have yet to complete an exploration drilling project to the end.

What do you think the reason is that drilling has yet to occur?

Wow, hard to answer that in a short interviews.  It would be a great business school case study.  I’d start by suggesting everyone read the document on the GDFLA website that is our perspective on the challenges to development after our analysis of the applications we have received through 4 rounds of calls for proposal and 3 years of the Technical Assistance Forum as part of the GEOLAC conference agenda.  Please put the link in your article  (http://gdflac.com/wp-content/uploads/2020/02/GDF-Latin-America-Foundation-012020-publication.pdf    I know you’ve heard me say before that geothermal development is a very delicate balancing act between, technical, finance and policy.

I would have to say the biggest single problem I see and which we tried to highlight in our report is that governments, on the whole, do not have a policy that differentiates between base load or firm power and intermittent renewables, which can also be extrapolated to a total cost for operation.   There are some qualitative indications of intent but nothing that is sufficient to accurately quantifying the value.  This policy gap is outside of GDF’s purview: we aim to create impact through financing projects and certainly lowering the risk to equity finance.  Without advances in policy, geothermal will grow at embarrassingly slow rates, just as the global rates are embarrassingly slow with the exception of Turkey.  Shout out to Turkey, their policy setting officials as well as the developers and development agencies who ultimately created a framework that differentiates its intermittent power from firm power.

I should caveat my comments with one point:  We have had national power companies apply for grants and let’s assume they set the public side of policy.  While they have not made it clear in their applications that they recognize and can quantify the value of firm power within their specific application, we can extrapolate they see its value within the generation mix so they do deserve some of the benefit of the doubt- if they take material action.  This is a hopefully indication of the future.

What is the GDF doing to influence the evolution in policy?

Well, telling you without identifying any specific countries, that no one is currently doing enough to support geothermal.  We are really encouraging ministries to pursue technical assistance monies from the various very will Development Finance Agencies such as the IADB and WB who are clearly interested in supporting this work to research and understand the best policy framework to be in place to support geothermal energy proliferation.  With the advent of low cost intermittent power these ministries should know how much intermittent power their grids can absorb but also how much firm power they need to have and if that firm power is economically served by geothermal.  We aren’t against solar or wind, we are against not knowing or planning for the optimized penetration of intermittent power and optimized generation mix which differentiates intermittent from firm and ideal does this with a bias toward sustainability in both categories.

I should also add that the GDF is a funding entity so obviously we focus on the finance component of the three-fold challenge to the greatest extent.  We have tried to create a streamlined policy and we’ve improved this over time, which we also published on our website as well as shared with developers during the Technical Assistance Forum of the 2019 GELOAC.  We are looking at every way we can decrease the risk equity required up to and through exploration drilling as this truly is the critical issue.  The only way to know you have a project is to drill, and ideally drill effectively which is clearly a technical problem.    The gross amount of risk equity to get to a bankable stage project is orders of magnitude greater than for solar and a significant multiple larger than for wind or CCGT’s for example.

We need to figure out every way we can to level that playing field.  With that said, we also need to make sure that any developer has skin in the game so that they act prudently with theirs and our capital in parallel.  We, as a community, need to find a way to level the playing field on that risk equity stack.  Otherwise the difficult balancing act of policy, finance and technical makes it such that it is too easy to do other things even in cases where it is clear that geothermal power in operation will be very competitive.

In short we can’t deny that easier things to do are easier done…but that doesn’t mean they are the best thing to do.  I would even challenge the DFI community: they all know that the real money that matters is the exploration risk equity.  When they are still referencing benchmark projects that were commissioned 40+ years ago I am sure we can all agree to saying “Hey, let’s stop the BS and target the real issue: lets deploy money at exploration drilling”.

The DFI community can do this in parallel with GDF, through GDF or independent of GDF.  I should also give a shout out to IADB whose program through INEEL in Mexico does just that and they (and I) remain optimistic capital will get deployed into green field projects in Mexico.  I am bringing this up not to advocate for a specific country but to point out that the program is valid and the potential is much larger than the program can pursue.  In fact the potential is also larger than the GDF program can pursue.

We believe that a closer cooperation of all other DFIs with GDF, if they really will take exploration risk, would provide an ideal outcome.  Frankly we haven’t seen much willingness for DFI’s and ECA’s to take much let alone more of that risk.  To any DFI or ECA that is somehow in disagreement with this statement I challenge you to demonstrate bot the depth and breadth of money that has specifically been used to perform exploration drilling.  I would also say that any DFI, Foundation, Institution or wealthy philanthropic person who advocates for sustainability and wants to actually drive geothermal development should target this issue and remains invited, welcomed and encouraged to contribute to the GDF…..or should create their own vehicle.

Because you mentioned Mexico, Is Mexico of interest to the GDF?

Yes in several ways.  First any program that actually results in drilling getting done is of interest to the GDF whether it is the GDF, synergistic with the GDF or a program the operates independently of the GDF.  Anything that gets drilling done is a win.  Second, we all know there is tremendous unrealized geothermal potential in Mexico the IADB program coordinated by INEEL is constrained and even with the hope for complete success cannot come close to the potential within the Mexican market.  We want the IADB program to be wildly successful but we also know it can’t even come close to achieving the potential that Mexico must achieve.  For this reason we have announced Mexico to be the 11^th country to be included in the 5^th EOI round.  I can share that the EOI round, which is still open to any developers already include applications from Mexico as well.

I should point out that the GDF has a limited amount of capital and we have no bias to one country over another.  I brought up Mexico to highlight our expansion there but we still believe in the potential of the other 10 countries in the GDF framework, and a few others that are not,  Our goal is to deploy capital where wells will get drilled and by obvious extrapolation power projects get built with corresponding improvements in CO2 and social good.  Our money will flow where countries find the right balance of issues.  Several countries have taken steps forward and acted as if they have completed their role in the journey but none have done things that makes geothermal compelling for action NOW.  The policy setting argument that ‘we don’t pick winners’ is simply not true.  Without beating a dead horse auction structures that treat solar and geothermal as the same MWh are inherently picking winners by avoiding the complex issue.  We all need to do the hard work that results in the lowest total cost of power delivered in a sustainable and reliable way to allow economies to operate and grow.

How will the COVID-19 impact GDF’s success in the region?

We have proactively reached out to applicants and grantees letting them know that we are here for the long-term, and indeed, we will continue supporting the projects providing possible extensions where needed.  We will also continue our activity and provide distributions on requests already submitted, so we move on and staying strong behind the geothermal developer community that GDF supports. We hope that this issue is only short-term and temporary, and we also believe and hope that the long-term commitment provided by KfW and the EU will show support and staying power to encourage governments to support geothermal as well as developers to stay in the game. We wish everyone good health and safety and due care though this new situation and hope it really does not become the “new normal”.

We’ve covered a lot, anything else you think we should talk about now?

There is certainly a lot more we can talk about. Let’s do another interview.  I’d be happy to dig deeper into other topics.   We can talk about why direct use is a great opportunity but also cannot be treated as a magic bullet.  We can talk about why imported LNG+CCGT’s or solar + batteries is NOT really a better solution than geothermal in geothermally active regions/countries.  We can talk about how embarrassing Jerry Jones is to do the NFL draft from a mega yacht in the middle of a global pandemic.   You pick it, and thanks as always for your time, interest and effort on behalf of an industry we all, or almost all, believe in but also needs drastic and radical improvement.  Let’s make lemonade out of lemons and do the next one as a panel discussion on zoom or something like that?

Note: The interview was lead by Alexander Richter (ThinkGeoEnergy) with Chris McCormick, Chief Investment Officer for the GDF program.