Raising capital and the challenges of the industry today
Blue Mountain Faulkner-1, geothermal power plant, Nevada (source: Nevada Geothermal Power)
Alexander Richter
20 Oct 2011
A recent article describes the key challenges of financing for geothermal development: creditworthiness of smaller firms, securing debt with recourse on a single project and higher transaction costs at the project level.
An article published this week on Renewable Energy World, by Jane Salmon of Navigant Consulting looks at the key challenges faced by the geothermla energy industry ro rise necessary capital for development.
In the current uncertain economic environment project financing for the industry remains rather challenging.
One of the key issues, clearly is the low risk-tolerance of investors, that particularly seems to hit geothermal, that has to overcome exploration risk.
The article mentions three key challenges for raising capital:
- Concerns about creditworthiness of smaller firms
- Challenges securing debt with recourse on a single project
- Higher transaction costs at the project level.
Going into detail the fragmentation of the industry, continues to be a big concern as smaller players seem to have more difficulties raising the necessary financing for their projects. Players such as U.S. Geothermal, Nevada Geothermal Power and others have solved this by getting partners on board for individual projects. Other firms have created larger portfolios of projects and in cases even diversified into other renewable energy fields, such as Magma Energy (now Alterra Power) has done by buying a hydro/ wind/ solar company called Plutonic Power.
Securing debt is an ongoing challenge for the industry. First of all no debt product is available to-date to help finance the drilling campaign of a geothermal power project, so companies need to have a strong cash position to shoulder the investment in the drilling of production wells to prove their resources.
The article also mentions the size of companies allowing for allowing securing debt through corporate assets rather than assets of a single project. Examples mentioned here are Gradient Resources and Ram Power.
Transaction costs for project finance continue to be quite high, and despite the DOE loan guarantee having helped a small number of projects, this tool won´t be available for projects whose progress has not come that far.
A very thoughtful and concise article that quite well describes the current state of financing challenges for the industry.
Source: “Can the geothermal industry overcome challenges to raising capital?”, Jane Pater Salmon, Navigant Consulting in Renewable Energy World
