The World's #1 Renewable Energy Network for News, Information, and Companies.

Drilling for Dollars: Notable Developments in Geothermal Finance

Geothermal capacity additions are on track to top 100 MW in 2012, making this year one of the best for geothermal deployment in the last decade. This could be a tentative sign that conditions have been improving for geothermal finance (traditionally, finance has been one of the principal barriers to the technology's wider adoption). Projects coming online this year have demonstrated some creativity in leveraging financial opportunities. Here are some highlights.

Commercial Lenders may be Revisiting Geothermal Asset Finance

One particularly notable project for geothermal finance was the 49.9-MW John L. Featherstone plant (formerly Hudson Ranch I), which began commercial operation in the Salton Sea, California area in March.  According to Project Finance magazine, Featherstone was the first utility-scale geothermal facility in the United States since the 1980s to secure debt for construction finance from commercial lenders, a class of investor that has typically shied away from geothermal project finance. The debt deal featured a club of banks, and amounted to about $300 million, about 75% of project costs. It is structured as a five-year, mini-perm, which equity holders plan to refinance in the capital markets.

While it is noteworthy that EnergySource, the Featherstone project's developer, was able to secure commercial lenders for its construction, it is even more so that the firm was able to do so to finance exploration drilling. The Icelandic bank Glitnir (now Islandsbanki) issued the Featherstone project a $15-million "resource verification" loan to conduct test-well drilling.  Typically, geothermal projects must finance the exploration stage through equity investments, as the risk of non-discovery has tended to make banks uncomfortable. That Glitnir decided to lend to developer EnergySource likely reflects the confidence the bank had in the resource potential, and in the strength of the development team. Little public information is available on the terms of the loan beyond the disclosure that it was a senior-secured, mezzanine vehicle that was made available to only one other developer (Nevada Geothermal).  No further "resource verification" loans have been made since Glitnir was taken over by the Icelandic government and rebranded as Islandsbanki in 2009.

Debt, Equity, and Project Bonds

The John L. Featherstone project was financed on a debt-to-equity ratio of 75%, with the 25% balance comprised entirely of developer equity from EnergySource's parent companies. The newly operational 23-MW Neal Hot Springs project, developed by U.S. Geothermal, was originally financed with a similar ratio, though its debt came from the United States Federal Financing Bank and was backed by a 1705 Loan Guarantee. The Neal Hot Springs project was one of only five geothermal projects to secure a loan guarantee under the 1705 program.  U.S. Geothermal financed the remaining portion of their project with an equity stake from the Canadian oil and gas company Enbridge. While originally a 20% position, that equity was bumped to 40% after U.S. Geothermal incurred additional drilling costs.

Commercial debt and equity are, however, not the only two sources of financing that geothermal has been using lately. Ormat, through its subsidiary organizations, has been issuing bonds collateralized by project assets to attract capital to its development portfolio. Bonds issued for the portfolio of projects which received a partial guarantee under the 1705 are 80% backed (principal and interest) by the federal government. In this respect Ormat could prove a bellwether for other renewable energy technologies seeking alternative financing arrangements — especially solar which is currently exploring methods for securitizing their cash flows through asset-backed instruments, project bonds, and other vehicles.

In Summary

From commercial debt, to federal incentives, to project bonds, the geothermal development community has demonstrated some creativity in leveraging alternative financing options. However, as federal incentives expire, and as macroeconomic shifts in the debt markets play out over the next several years, developers will need to continue their search for progressive financing strategies if they want to expand on this year's uptick in capacity deployment. And with as much as 872 MW of confirmed geothermal projects in the early stages of development and looking for capital, there are gains to be had if developers can find novel ways of opening the taps.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Lead image: Geothermal wells via Shutterstock

RELATED ARTICLES

Pope Francis

The Common Goals of the Pope and Clean Energy

Paul Stinson, EDF Pope Francis turned a keen eye toward the environment and the problem of climate change with his encyclical,“Laudato Si” (“Praised Be”). As a clean energy advocate, I’m heartened that Pope Francis recognizes the need t...
money pile

Deeper Capital Markets for Renewable Energy

Tomas Gardfors and Ann Vesely, Norton Rose Fulbright Following the global financial crisis, a more diversified funding market is developing in Europe. Institutional investors are helping to fill the funding gap left by the contraction in bank lending in the wake of the crisis...
Clean planet

Renewable Energy Responsible for First Ever Carbon Emissions Stabilization

Vince Font, Contributing Editor Carbon emissions in 2014 remained at the previous year’s levels of 32.3 billion metric tons — a milestone that points to the impact worldwide renewable energy investment is having in the face of a 1.5 percent annual increas...
Geothermal area

Scotland Establishes Fund to Explore Five Geothermal Project Sites

Renewable Energy World Editors The Scottish government awarded £234,000 to conduct feasibility studies at five geothermal heating project sites. The exploration will take place in in Fife, West Lothian, North Lanarkshire and Aberdeenshire. The studies wi...
Travis Lowder is an Energy Analyst with the National Renewable Energy Laboratory's Project Finance Team. His research encompasses the U.S. renewable energy project finance market and financial policy, PV project risk management, PV asset and cash ...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 3
1505REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

SAP for Utilities

The SAP for Utilities conference is the most comprehensive SAP for Utili...

GRC Fieldtrip - McGinness Hills Geothermal Plant

The 13.4 MW Salt Wells Geothermal Plant is owned by Enel North America a...

GRC Fieldtrip - Steamboat Geothermal Plant Complex

Ormat’s Steamboat Geothermal Power Plant Complex located...

COMPANY BLOGS

Net Zero Energy Efficient Buildings and Geothermal Heat Pumps

As the U.S. market for green building design and construction evolves, ...

Geothermal Earth Day Visual: Shaping Environmental Solutions

Earth day 2015 is an important point in history for the environment. Mem...

Environmentally friendly solutions for projects

geoAMPS joins the celebration of the worldwide observance of Earth Day o...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS