Baseload, Geothermal, Utility Scale

A Rising Model: Public Finance in Early Stage Geothermal Development

Issue 4 and Volume 19.

The physical risks associated with early-stage geothermal development are constant, and barring some major technological advancements, there’s little to suggest that those risks will change substantively in the near-term. Analysts say exploration costs can account for up to 15 percent of the capital cost of a geothermal project, and the rate of success in the early stages can be between 50-60 percent. Despite the importance of preliminary surveys, exploration and test drilling in the project life cycle, public financing has been focused most often on later stages of development. That trend, however, is changing.

Access to certain financial mechanisms, such as commercial debt, which are available to other resource developments, is unavailable to early-stage geothermal development as a result of the high associated risk. Some companies may have access to public equity, and private equity investors could contribute capital with a promise of a high return. The public sector, on the other hand, is becoming a secure place for developers to access funding through, for example, direct funding and loan guarantees. Government development agencies also are a strong option in the current market.

Image: Olkaria Geothermal Power Complex, Kenya. Credit: Power Africa.

There are some promising financing developments for the early stages of the project life cycle because “public resources are starting to amass to answer the necessity of participating in early-stage financing,” Stephen Morel, climate finance specialist, Overseas Private Investment Corporation (OPIC), said.

According to Morel, finance tools from development finance institutions (DFIs), such as OPIC, have evolved to help drive more investment into geothermal, and a lot more public programs are now available as part of those tools. OPIC is the U.S. government’s sole DFI.

Morel said that national resources are changing. For example, governments around the world are demonstrating a stronger will to further geothermal development.

“That has resulted in resource mapping in countries where it didn’t exist before, as well as the availability of fields to private developers,” he said. “There are a lot of success stories now where public entities under government have completed exploratory drilling and can offer opportunity from the wells to private developers.”

In addition, Morel has seen an enhanced role by public entities in providing contingents and concessionary products.

“That has come from the strong will of those public entities,” he said. “A lot of the will from public entities started with in-depth research from, for example, the World Bank and other multilaterals that wanted to map where geothermal resources are.”

Morel also said that he is seeing a resurgence in geothermal drilling insurance.

Image: Stephen Morel. Credit: OPIC.

OPIC Around the World

OPIC, which is a development finance institution that serves the U.S. government’s foreign policy goals, finances and insures U.S. private sector businesses looking to enter challenging economies around the world and develop projects ranging from small agriculture, healthcare, and education to large infrastructure.

Charles Stadtlander, a spokesperson for OPIC, said that the organization has seen “a pretty large uptick in renewable energy in the past five to six years.”

He said that OPIC has about a $20 billion overall development portfolio in financing and insurance, supporting 500 active projects in 100 countries, in impactful sectors like clean water and sanitation, agriculture modernization, financial inclusion, affordable housing, and new energy access, including from renewables.

“In recent years, overall new commitments from OPIC have ranged from $3 billion up to more than $4 billion per year,” he said. “Of that, about one quarter to one third has been in renewable energy, including more than $6 billion in support to renewable energy over the past five years.”

According to Morel, OPIC in the early ’90s was active in the Asia-Pacific – Indonesia and the Philippines – and more recently provided support for the Olkaria III project in Kenya. Olkaria was completed with a combination of public and private financing as well as risk mitigation measures.

“Geothermal is fantastic for OPIC because it really fits in the wheelhouse of all the aspects we’re trying to get to,” he said. “It is one of the more interesting renewables to support these days because it is truly base load, which you don’t find with some of the other renewables that have become more mature and have more financing options,”said Morel.

The ability of geothermal to act as a base-load resource has been important as a long-term energy plan for a lot of the countries that OPIC works with, he added.

Stadtlander noted that OPIC can collaborate with other DFIs from around the world on large infrastructure projects.

“We can work as co-lenders,” he said. “We’re part of a like-minded community that helps drive private developers, private capital, and private equity investors in some of the world’s most challenging economies.”

Promising Options

Morel said that the way the market is adapting is forcing a dichotomy on the private side in that there are now two types of developers: those that can fund a project on balance sheet, but also those developers who have positioned themselves to navigate public resources – the multilateral banks, DFIs and regional bodies.

“Some of the more interesting public financing is coming in the form of concessional loans that have conditions more akin to mezzanine debt,” he said. “Given the conditions on those loans, funds are capable of being deployed at an earlier stage and with concessional rates. That is beneficial to the private developers that are putting a lot of their own equity into a project.”

Also of interest on the public side, he said, are programs that are providing contingent loans, where funds can be deployed, and if a drilling program is successful, it remains as a loan; if it’s unsuccessful, then it becomes a grant.

On the private side, he added, balance-sheet financing remains the most effective way to keep down required rates of return.

“If they’re working with other equity institutions that require a high rate of return, then that makes it a challenge for them,” he said. “On balance sheet financing remains one of the most effective ways to address that.”

Public-Private Partnerships

According to Pierre Audient senior energy economist at World Bank Group’s Energy Sector Management Assistance Program (ESMAP), public-private partnerships (PPP) are a growing option for supporting the risks of early-stage geothermal development.

World Bank in 2013 formed the Global Geothermal Development Plan, which has raised $250 million. ESMAP uses a portion of that funding to finance identification and preparation of projects as well as other forms of technical assistance required to structure geothermal advancements in countries. The funding currently supports programs in seven countries.

PPPs can stimulate private developer funds and reduce the risks taken on by government or a developer if either were to develop a project on their own.

Audient said PPPs can take different forms. Under a tolling agreement, for example, a public entity can develop and operate a steam field, and the steam field is later turned into a power plant that is owned by a private developer. As an alternative, a public entity and a private investor can create a joint venture. Under the joint venture agreement, all aspects of a developed project are co-owned and co-financed by the public entity and private investor.