San Francisco Geothermal Innovation & Investment part 2

Alexander Richter 26 Mar 2009

Continued notes from day 1 of the San Francisco Geothermal Innovation & Investment conference.

This is a continuation of the first part of my notes on day 1 of the Geothermal Innovation & Investment conference here in San Francisco.

Project finance for large scale geothermal projects: Having been part of the panel of this session makes it somewhat hard to write about it. But basically the approach of this session was to give an idea about the key issues in geothermal development that make project financing difficult, give an overview on the financing structure, go into issues about actual project financing and then show how the number of wells needed for the plant makes a project that much more expansive.

Part of the panel were Roy Piskadlo, former Managing Director, Head of Commodity Corporate Finance at Merrill Lynch), Ric Abel, Managing Director, Prudential Capital Group‘s Electric Finance group. Myself I was part of the panel in my capacity as consultant to Íslandsbanki (formerly Glitnir Bank) and representing this website and blog. Giving the presentation for the panel, I stressed out debt financing issues involved in geothermal energy financing and the unique mezzanine/ bridge/ resource verification loan that Glitnir has provided for clients in the U.S.

Ric Abel then gave an overview on issues in project financing, based on his more than 20 years experience in financing renewable energy and geothermal power projects. He stressed the following points as key basic requirements for project finance: proven resource, contract-based financing, traditional EPC, PPA offtake, fuel supply contract, trust account with waterfall, full insurance package and restricted payment test.

Roy Piskadlo discussed a sensitivity analysis for a 10 MW single plant, in which he showed how the amount of wells really cuts into the bottomline and total capex of the development cost.

The questions from the audience then went into details on power purchase agreements (PPA) and how the different models might play into the project. A further point made was the point about drilling risk and the hurdle that this risk plays in getting financing for project, as well as the weakness of well field management. The industry really needs some drilling risk insurance and possibly some kind of governmental drilling fund similar to the models in other countries, such as Australia and Germany. The DOE should try find ways to allocate some of the money towards mitigating drilling risk.

Role of major utilities in geothermal growth: This panel saw presentations by the big utilities here in the West, PG&E and Nevada Energy (the merged entities Nevada and Sierra Power).

David Lewis of PG&E gave an insight into his company’s view on the portfolio standards in the state of California, and how unachievable the 20% renewables by 2010 are. So with 20,000 MW installed capacity the company would need to source about 7,000 MW from renewables. This is hard to reach and particularly hard as most of the renewable projects now face the issue of lacking financing.  For geothermal, he sees transmission as a major problem, as most of the project are not where you need the electricity. So forward looking PG&E sees a lot of uncertainties going forward.

For Nevada Energy, Tom Fair, gave the view on his utility on the current market. He talked a lot about solar projects in the state of Nevada. He described the advantages of geothermal. The smaller MW size of plants are actually better for transmission, further points are clearly the footprint, environmental impact, baseloand, competitive cost and the credibility of geothermal in Nevada. As the challenges he saw primarily financing and tax equity, resource uncertainty, permitting and long lead times.

So key take away from the representatives of the utilities here is clearly the concern regarding lack of financing for projects in development.

Global geothermal exploration opportunities: In this session Tim Stephure, an analyst of Emerging Energy Research gave his firm’s view on development in geothermal. Key take away was that the outlook for geothermal continues to be good, despite the current market conditions as the base issues like climate change, volatility in fossil fuel prices etc will continue to drive renewable development. Developed countries will see a continuation of development, while emerging markets will be hit harder by the financial market conditions.

Case Study Kawerau project by Mighty River Power in New Zealand: Karl Spinks, project geologist at the Kawerau project of Mighty River Power (MRP) gave a very good insight into this exiting project. With political will for 90% of renewables by 2025, the company is driving geothermal development. MRP has 3 fields in operation, Kawerau (100 MW since June 2008), Rotokawa (35 MW with 135 MW under construction) and Mokai (112 MW) in which MRP holds a 25% stake. Other projects of the company include Natamariki which is expected to go online with 100 MW in 2012, as well as 5 exploration prospects in the country.

MRP targets 500 MW geothermal generation capacity by 2012. So far 41 geothermal wells have been drilled across 5 reservoirs with a 90% success rate within 6-7 years. The Kawerau project clearly is a big success story for geothermal development, with first exploration drilling in January 2004 and the commissioning of the plant in June 2008, the project was deliveredy 6 weeks early, under budget and with 10% more power as initially expected.

Geothermal development in emerging markets: Rahm Orenstein, Director of Business Development at Ormat Technologies was giving the last presentation of day 1 of the conference. Talking about Ormat and the company he focused then primarily on the experiences of his company in emerging markets. The development challenges Ormat sees in emerging markets are with regards to financing, the small capacity, very high investment cost, life cycle cost of fuel embedded in up-front capex. On the credit risk size, political risk, resource and offtaker risk are an issue. Furthermore there is a competition with fossil fuels, either through subsidies provided, no penalties for greenhouse gas emissions, as well as insufficient incentives for renewables. But – also very important – quite often monopolistic environments in those markets make the life of any developer difficult, e.g. if you only have one company for e.g. transmission or as offtaker in the country. He also talked about the World Bank being involved in supervising Ormat’s operations in Kenya with regards to prevent corruption.

As a key take away from his presentation, he mentioned the need for paying close attention to support local communities and preserve local eco-systems, as well as the need for incentivising renewables in emerging markets. Ormat priority markets are in this order: U.S., Philippines, Latin America, Costa Rica.