Analysis of Risk Mitigation Strategies for Geothermal Development

Subir K. SanyalGeothermEx, Inc.

Prepared for the World BankPresented at the GGDP Roundtable

The Hague, NetherlandsNovember 20, 2013

Analysis of Risk Mitigation Strategies

Government as Developer Cost-Shared Drilling Resource Risk Insurance Early Stage Fiscal Incentives

Government Acting as Developer:Introduction Key features of the approach

– Government explores and develops the resource

– Private participation is limited

Where it has been applied– Costa Rica – The Philippines– El Salvador – New Zealand– Guatemala – Iceland– Nicaragua – Turkey– Mexico – Ethiopia– Indonesia – Kenya

San Cristobal Volcano, Nicaragua

Government Acting as Developer: Pros & Cons

Pros– Mobilizes large-scale financing from public sources– Backstops resource risks through the strength of government

treasury

Cons– Some governments may not be able to afford the large scale

investment – Some countries may not have necessary in-country skills or capacity– Mobilizing financing may be cumbersome due to bureaucracy– The need to involve multiple government agencies may create

conflicts

Government Acting as Developer:MW Installed

– Costa Rica: 208 MW (3 fields) – El Salvador: 205 MW (4 fields)– Guatemala: 53 MW (2 fields)– Nicaragua: 70 MW (1 fields)– Mexico: 980 MW (4 fields)– Indonesia: 467 MW (6 fields)– Philippines: 1854 MW (7 fields)– New Zealand: 220 MW (2 fields)– Iceland: 664 MW (6 fields)– Turkey: 15 MW (1 field)– Ethiopia: 8 MW (1 field)– Kenya: 180 MW (1 field) Wairakei, New Zealand

Government Acting as Developer:Impact of Scheme Worked very well were committed and

capable to support the geothermal development (e.g., Costa Rica, New Zealand, Iceland, The Philippines)

Moderately successful with significant geothermal resources but less consistent development strategies (e.g., El Salvador, Indonesia, Kenya)

Not so successful in smaller countries that may have more pressing needs for limited government funds (e.g., Ethiopia, Djibouti, Bolivia) Krafla, Iceland

Cost-Shared Drilling:Introduction

Key features of the approach– Government shares some portion of

drilling costs and risks with a private developer; or fully undertakes exploration drilling and testing of first few wells

Where it has been applied– Japan – United States– Australia – Eastern Africa

Well test, Cove Fort, UT

Cost-Shared Drilling: Pros & Cons Pros

– Catalyzes private investment in geothermal development– Increases availability of risk capital for exploration drilling– Reduces overall exposure of financial risk to developer – Requires less public funding than full government development– Backstops some resource risks through the government

Cons– Some projects will not be viable for full scale development despite

public funding– Requires up-front public funding that may not be recoverable

Cost-Shared Drilling: MW Installed– Japan: 535 MW (15 fields) – United States: 137 MW (8 fields)– Australia 1MW (1 field, many wells drilled)– East Africa (RFP recently issued, 11 EOIs, 5

projects invited to sign grant agreement)

Impact on pace – Served as a significant catalyst for all current

geothermal power generation in Japan– Encourage drilling in United States– Catalyzed drilling but no major MW impact

due to technology choice in Australia– East Africa impact TBD

Cost-Shared Drilling: Impact of Scheme

Management of this scheme is simple It provides a significant catalyst for

private-sector geothermal development Costs to the government are significantly

less than for “Government as Developer” Government’s cost-share portion could be

recovered from the developer for successful projects, thus enabling some recovery and re-investment of funds

Soda Lake, US

Resource Risk Insurance: Introduction

Key features of the approach– Insurance to hedge against the risk of

lower than expected well productivity

Where it has been applied– France – Germany – Efforts are underway to implement

this kind of insurance in Turkey, Kenya and the U.S.

Resource Risk Insurance: Pros & Cons Pros

– Risk of drilling failure for developers is reduced– Could mobilize equity capital due to reduced exposure to potential losses– Reduced burden on government; insurance is provided by specialized

entities

Cons– High insurance premiums – Increases required overall upfront investment (due to premium)– Challenging to commercially underwrite substantial uncertainty (losses) in a

relatively small global market– Complex to design, implement and monitor– Limited number of insurers offering coverage

Resource Risk Insurance: MW Installed– Germany, a few fields (for power or

combined heat and power, overall generation capacity for the German projects is <20 MW)

– France (for heat)

Impact on pace – Insurance may have helped

accelerate the pace of geothermal power development in Germany (the high feed-in tariff has played a major role in geothermal development there)

Resource Risk Insurance: Impact of Scheme

Limited availability and difficult to obtain at an acceptable price for exploration well drilling

Although the risk to developers is reduced, overall up-front funding required for exploration is increased (due to premium)

Developers who need it most may not qualify for coverage and/or their premium could be inaccessibly high

Has a high level of operational and management requirements

Well testing

Early Stage Fiscal Incentives:Introduction

Key features of the approach– Exemption from taxes and import

duties related to exploration

Where it has been applied– United States– Mexico– Turkey– The Philippines – Indonesia

Blue Mountain, US

Early Stage Fiscal Incentives: Impact of Scheme

Government reduces fiscal levies (taxed/duties) that lowers overall investment in exploration drilling

Reduces requirement for risk capital to fund early stage of a project

Simple to administer and monitor when utilizing existing fiscal architecture, but not specifically aimed at resource risk mitigation

Impact can vary depending existing taxes and levies Orita well test, US

CONCLUSIONS

Quantitative analysis indicates … From IPP Point-of View:

– early-stage fiscal support will reduce risk more compared with insurance

From Government Point-of-View:– Better leverage of government funds in cost

sharing scheme– Rapid scale-up could be from either public

developer or cost-sharing

Analysis of Risk Mitigation Strategies:Installed geothermal capacity vs. time in Japan

0

250

500

750

1960

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Analysis of Risk Mitigation Strategies:Installed geothermal capacity vs. time in Kenya

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Analysis of Risk Mitigation Strategies:Installed geothermal capacity vs. time in The Philippines

0

250

500

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Analysis of Risk Mitigation Strategies:Installed geothermal capacity vs. time in the United States

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