Interview: Padraig Oliver, CPI Analyst on Gümüsköy geothermal project
ThinkGeoEnergy interviews Padraig Oliver, Analyst at Climate Policy Initiative (CPI) on the role of public finance and private exploration in the geothermal project of Gümüsköy, Turkey
Geothermal energy is regularly praised for being a renewable base-load power source and for its low cost. This is all well know yet this particular energy source faces significant drawbacks when it comes to early stage exploration and more importantly, financing. These two factors are what are preventing many countries, both industrialised and developing of exploiting or expanding their geothermal potential.
A good example of this is Turkey, where the geothermal industry has seen good growth in the past few years and seeing how these projects have come into operation is of great interest for companies and governments alike. How does the private sector to take on the high risks associated traditionally ingrained in early-stage development (i.e. exploration and development) have been recently covered by CPI in a new finance report on the Gümüsköy geothermal project.
The report, “Public Finance and Private Exploration in Geothermal: Gümüsköy Case Study, Turkey”, was released yesterday and we had the pleasure of interviewing Padraig Oliver, Analyst at CPI and one of the authors.
Can you tell us about CPI and its interest in geothermal energy?
CPI works to improve energy policies around with world with a particular focus on finance. Our interest in geothermal stems from its ability to provide low-cost, low-carbon, flexible base-load power to displace fossil fuel capacity on the system and allow further integration of variable renewable sources such as wind and solar.
What was the motivation for this report and what was the goal?
In this project, the Climate Investment Funds (CIF) asked us to analyse the best way for public finance to help accelerate the deployment of geothermal projects in developing countries. We do this through conducting case studies of projects to see what role public finance and policy support played in attracting private investment and how it can be used to replicate and scale up investment. This report is the first of three case studies we will conduct.
In the researched case, the developer depended on private sector funding for its project. Do you think this was an advantage or disadvantage for the project?
The risk appetite of the project developer was certainly key. The project developer BM Holding had the resources and risk appetite to spend approximately 24% of total investment costs in equity financing in the exploration and development phases before reaching financial close when it benefitted from public debt originally sourced from EBRD but channeled through a local private bank.
Other countries look at taking away the early stage risk by government-driven exploration activities, e.g. in Kenya. How do you think the Turkish model could be applied elsewhere?
Well firstly, it is important to clarify that this particular project is not representative of the ‘Turkish model’ as most of the projects in Turkey have been developed on fields proven by government-driven exploration activities. Gumuskoy is an interesting case as it shows that the private sector can do exploration provided the right enabling environment is in place for it to act. The Turkish government wants to see more private investment and competition in its electricity market generally. For the geothermal sector specifically, it has set a feed-in tariff that makes it easier to finance projects. And for exploration itself, this project was able to draw on existing mining and drilling skills and capacities in the country and refit it for geothermal. Whether similar conditions in other countries also enable the private sector to do more exploration is something we will look into in our subsequent geothermal studies.
How important do you see the Turkish feed-in-tariff for the financing of the project in this particular case and for other projects in Turkey?
The feed-in tariff was essential to the project financing. The tenor of the loan was aligned with the feed-in tariff programme of 10 years so, for the lender, the FiT provided certainty around the cash flows over that period. For the developers, it provided certainty that they could achieve a margin over the market rates and compensate themselves for the risks they took on earlier in the exploration and development phases of the project. We estimate that over a ten-year period that revenues will be 28% higher than they would be at current market rates. That allows the project to achieve payback of all investment costs within eight years.
While mostly financed locally, the EBRD loan has been a crucial element in the financing for the project. What role could banks like EBRD and other development banks play in the wider context for geothermal development in Turkey and elsewhere?
The role of the EBRD in this project was important. By channeling long-term, low-cost debt through local bank Yapikredi it ensured the loan was economically attractive for Yapikredi and encouraged the Turkish bank to lend to a geothermal project for the first time. Through its participation Yapikredi was able to develop the technical, environmental and social due diligence skills in-house for clean energy project finance. Participation in EBRD’s Medium Size Sustainable Energy Finance Facility (Mid SEFF) is setting them and other banks up for further clean energy lending. This project demonstrates how development banks can have a multiplier effect rather than providing direct lending themselves and might ultimately allow them to redirect resources to target funding gaps for earlier phases of geothermal development.
In the report you also look at risk allocation. BM Holding has been a large enough entity to carry the exploration risk. How do you see smaller developer shoulder that risk in this context in Turkey or elsewhere?
It may be that not all developers may have the same risk appetite as BM Holding but there are some emerging trends that could support further private exploration. Firstly, a services market for exploration and drilling is beginning to emerge in Turkey that means that smaller developers can easily contract out these risks. Secondly, new public funding models are being explored to provide early-stage capital for exploration in Turkey that would assist smaller developers. In this report we did not analyse in detail what the form that public funding might best take, focusing instead on the lessons from the case study, but we hope to touch on this in future research following the other two case studies. It is also worth noting that the potential rewards of such an investment. In interviews, BM Holding told us the experience gained in this project halved the time and costs involved in proving the resource for subsequent projects, significantly reducing risks.
In general, how do you see the geothermal market evolve in Turkey in the coming years? Any thoughts also on geothermal development in other regions?
The government is already well on its way to meeting its 1GW deployment target in 2023 which might explain why geothermal’s share of Turkish government drilling activity fell from 25% in 2006 to 7% in 2013. However, geothermal could supply much more power than the current government targets envisage. Given the drop off in drilling and the government’s goal of increasing private sector participation and competition in the energy sector, it would seem that the stage is set for greater privately-funded exploration in geothermal in coming years. This could help the sector to reach its full potential. However, the nature of the geothermal resource in western Turkey means greenhouse gas emissions will need to be carefully managed if it is to be a low-carbon solution.
As for the regional development, much of the completed and planned projects are located in the western region where the government carried out most of the exploration activities. If the market is to reaches its potential, we will see more developments, particularly in central and eastern Turkey.
What other themes regarding geothermal development would CPI be interested in looking at following this great report?
Following this report, we are working on two more case studies, based in Indonesia and Kenya respectively. At the end of our research program we will collate the lessons from these different models into a comparative analysis of the risks, costs and benefits of different project models and in particular, how country-specific factors play a role in them with a view to identifying how public finance should be best deployed to scale up geothermal in developing countries.
About the Climate Policy Initiative (CPI)
Climate Policy Initiative (CPI) works to improve the most important energy and land use policies around the world, with a particular focus on finance. It supports decision makers through in-depth analysis on what works and what does not, working in places that provide the most potential for policy impact, including Brazil, China, Europe, India, Indonesia, and the United States.
Its work helps nations grow while addressing increasingly scarce resources and climate risk. This is a complex challenge in which policy plays a crucial role.
To read the full report, please follow the link