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FAQ

Supporting geothermal energy is usually carried in the objective to increase and diversify the renewable energy mix of a country via a greater contribution from geothermal energy. However each actor – whether public, national, local or private - willing to carry some of the risks associated with geothermal projects also has specific objectives. These may include national energy policy objectives (security of supply, energy independence, environmental protection, climate policy), local energy action (distribution of renewable heat to a city, social impacts such as reducing heat poverty…) or because it is justified by a business model for private actors.

Derisking schemes have the following effect on geothermal energy project development:

  • Reduction of the cost of capital: the presence of the scheme reduces the risk for investors not to be paid back in case of project failure, which reduces the cost they are requiring for investing. This in turns has an important impact on the total project costs (all things remaining otherwise equal).
  • Increased confidence from the demand side: geothermal projects, because of the difference between capital expenditures and long pay back period often aim to secure demand (for instance through power purchase agreements), derisking schemes also provide more guarantee to consumers when signing a PPP with a geothermal project.

Derisking schemes have the direct effect of reducing the financial risk for project developers. The increase in the number of projects it allows reduces the technical risk through better knowledge of the resource, greater expertise in development, notably drilling (learning by doing) and quicker development. This in turns leads to lower overall project costs, as the technology progresses closer to market maturity.

Geothermal derisking schemes are a cost-efficient mean to support the market uptake uptake of geothermal energy in emerging markets, by allocating financial support that specifically meets the needs of developers.

As a form of support framework for geothermal energy technologies, derisking schemes also provide several benefits to investors into them, according to their priorities. Here, it should be noted that the benefits of the schemes are highly connected to the level of maturity of the market and the type of schemes that can be implemented.

Effects of various derisking schemes on financing entities (public authorities, PPP, private

Early markets Grants -        Increases the maturity of the geothermal sector, by allowing the development of projects that demonstrate the technology and enable the knowledge of the resources.
Intermediate markets Repayable grants -       Attracts investors to market by suppressing parts of the financial risks, enabling the establishment of a geothermal industry, key prerequisite to a mature market.

-       More limited impact on public finances (only failures are “spent money”).

Public risk insurance -       Allows developers to mitigate their financial risks, consolidating the industry and bridging the gap created by the small pool of projects in intermediate markets for the development of private insurance frameworks.

-       Limited impact on public finances (funds may be revolving, and operation based on insurance fees).

Intermediate to mature markets Public/Private insurance -       Reduces the weight of the scheme on public finances;

-       Continues to provide financial derisking to investors

-       Requires a sufficient pool of projects.

Private insurance -       No impact on public finance;

-       The market is sufficiently liquid and mature to provide enough information to justify the private insurance scheme, and the feasibility of such scheme.

  • For a public scheme, a legal basis (an act, an ordinance, a decree) usually exists. The public schemes can be rooted in an Energy Act (Switzerland) or Environment Act (Poland), including CO2-Act (Switzerland) and climate change legislation (The Netherlands).
  • For PPP schemes, it may be that publically held banks or insurance companies are mandated by government or energy agencies to provide low-interest loans or loan-guarantees, sometimes together with commercially operating privately owned entities. In this case, the legal framework comprises both company laws, banking regulations and public laws.
  • For a private scheme, the legal and regulatory framework is set by articles of association and charters of a commercial entity that states that the private company may engage in developing insurance solutions; or there is a business unit that caters to specific needs of the geothermal industry.

  • Various schemes may guarantee against different types and number of risks, according to the conditions in which they are set up, the resource and the type of market they seek to guarantee.
    • risk of not finding the anticipated geothermal resource (short term)
    • risks associated with the potential impairment of the geothermal resource (long term)
    • lack of financing for the next phases
    • technical issues

  • The legal basis of the fund, usually defines the financing.
    • Public: on top of public finance, the operation of the fund may rely on the levy or fee for participation in the scheme.
    • Public/private schemes: funded via seed capital and are fed by premiums and, where applicable, by a small percentage of the turnover of the successful projects.
    • Private schemes: Private RMS are funded by a dedicated percentage of the benefits of the company (company internal cash flows) and premiums set on a case-to-case basis.

  • Application requirements should be clearly defined, these may include technical, economic, legal, safety, environmental and organisational aspects of the project. The information provided should adequately respond to the identification of the risks, to the legal framework of the scheme, to the assessment criteria and to the Health, Safety and Environmental regulations in place.
  • Assessment of applications: The granting authority or the mandated entity to operate the RMS must manage the assessment and decision-making workflows. This requires specific technical, financial and legal expertise in the development of geothermal projects as well as some management and administrative skills to handle the risk transfer process. The granting authority should aim for a lean structure with streamlined procedures, which will foster efficiency and reduce the risk of high cost and delays due to administrative complexity.
  • Contract: When aid or a guarantee is awarded, the granting authority and the applicant enter a contractual relationship ruling the obligations to one another. These may include schedule or work programmes to be held by the developer for the contract to remain valid.

 

Useful links

InvestEU

European Structural and Investment Funds

European Investment Bank

European Bank for Reconstruction and Development

World Bank

 

 

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