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Posted: May 24, 2013
A global drilling fund could solve geothermal's catch-22
(Nanowerk News) The Catch-22 problem that is holding back world investment in geothermal power could be addressed via the establishment of a “global geothermal exploration drilling fund”, with either private investors and banks or government entities and development banks as the capital providers.
A new White Paper (pdf), published today by research firm Bloomberg New Energy Finance and analysis provider Rinova International, examines how a possible $500m fund could help geothermal developers. At present, the industry faces the problem that that even though the sector as a whole can offer attractive returns, it is very difficult to raise the capital to drill individual wells because of the high risk of failure.
The drilling fund discussed in the White Paper would offer debt financing to exploration-phase projects at rates that might appear high compared to conventional infrastructure loans but would nevertheless be attractive enough to make geothermal projects viable.
Mark Taylor, lead geothermal analyst at Bloomberg New Energy Finance and co-author of the report, said: “Geothermal is one of the most attractive renewable power sources for countries to develop. It is zero-carbon, the technology is well proven over decades, and it can offer baseload, non-intermittent electricity at a cost close to that of fossil-fuel sources.
“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 research found that a commercial financing basis approach 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.
The fund’s economics are also attractive from a development perspective, with a 1:25 indirect financial leverage ratio, and 9MW of capacity resulting per million dollars of funds utilised. Put differently, $500m in the fund would result in approximately $9.6bn of new investment in geothermal projects.
The fund would directly finance drilling of 473MW across a portfolio of 24 projects and, in the scenario the White Paper presents, those confirmed resources would catalyse an additional 1,927MW, taking the total impact of the fund coming to 2,400MW.
Jessica Thompson, president of Rinova International, said: “It is $5–9m to develop each well, and so it costs about $10–36m just to know whether or not a particular resource merits development, since any developer would need to drill between two and four wells per site. The high cost and risk of answering this question is keeping most geothermal sites undeveloped.”
Bloomberg New Energy Finance data suggest that just 6% of the world’s estimated 196GW of geothermal potential has so far been realised. Much of the capacity that has been built is in developed economies, such as the US, Italy and Iceland, and the large majority of the capacity that could be built is in developing countries such as Indonesia, the East African Rift Valley and Central and South America.
Geothermal power as discussed in the White Paper exploits naturally occurring pockets of steam or hot water close to the Earth’s surface (eg, volcanic areas) to generate electricity. Wells are drilled to extract steam or hot water from underground reservoirs. Steam can be used to drive a turbine. Hot water can be sent to a heat exchanger system where a working fluid is evaporated and the resultant gas is used to drive a turbine.
Source: Bloomberg New Energy Finance
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