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The Next Challenge for Geothermal: Turning the Corner Towards Private Investment

Early this year, the U.S. geothermal industry caught a rare win with the passage of a PTC provision that allows projects to qualify for the tax credit as long as they are "under construction" by the end of the year. Many had been hopeful that the provision would help kickstart geothermal development in the U.S. Today, however the industry is still waiting for a clear definition of what "under construction" means, which is making it difficult for investors to feel confident enough to pull the trigger on new projects.

While the U.S. industry waits for projects to start moving at home, many are moving their interests to emerging market development and clean energy exports, especially in booming geothermal markets like East Africa and Southeast Asia, according to Karl Gawell, executive director of the Geothermal Energy Association. "Most people in the energy business know that you don’t work in isolation. You may be based here in America, but you are also selling equipment and operations on the worldwide market."

Recent geothermal development announcements in emerging markets like Rwanda, Indonesia, and Kenya have sparked worldwide interest, said Gawell. “Over 70 countries in the world right now are preparing to move geothermal projects forward. We're looking at potentially marketing $100 billion in projects."

To help get these projects started, the World Bank recently announced a $500 million investment fund to aid in the exploration and drilling phases of project in emerging markets – one of the most costly and at-risk phases of geothermal development. When looking at the value chain of geothermal development, about 10 percent of the costs goes into test drilling, whereas with wind, for example, resource validation is only about 1 percent of the project cost, according to Pierre Audinet, clean energy program leader of ESMAP at the World Bank.

Each project must drill about three or four test wells, which can cost anywhere between $3-6 million each, and they have a high rate of failure. According to Audinet, if drilling takes place in an area with little to no existing development and knowledge of its geology, there is usually a 50-60 percent failure rate. However, if the project is in an area where drilling has occurred nearby with a good deal of information about its geology, the failure rate drops to about 30 or 40 percent – which is still a hefty number. Under the World Bank plan, part of the costs of failed wells will be reimbursed, which should help to reduce some risk and attract more investment. 

“[Exploration and drilling] are generally funded either through the developers own equity and/or with public support, which is why we see such sluggish development of geothermal energy worldwide,” said Audient, “not because the resource is not there, but because it is hard to validate. It takes money, and it takes a big risk appetite, which is why we are acting in this area.” 

Though many in the industry expect that this fund will move projects along, the question still remains: How will these projects raise the capital to actually build plants and start producing energy? 

According to Audinet, once projects complete the exploration and drilling phase and have found successful resources, the World Bank hopes to connect investors and developers to the “guaranteed” opportunity of baseload renewable power. Once the exploration barrier, and major financial risk, is out of the way, it will simply be a matchmaking game.

“The World Bank doesn’t want to run commercial operations, they want to use seed capital for funding issues that will bring in private capital,” said Gawell. “This is the next challenge for geothermal – whether it can turn that corner.”

Stay tuned for our update on the global geothermal financial market from the Geothermal Energy Association’s Finance Forum on April 11th, 2013, which includes speakers from the World Bank, Ex-Im Bank, the Ambassador of Kenya, Ambassador Odembo, and more. 

Lead image: Curved road sign via Shutterstock

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