Geothermal energy is a clean, renewable energy source than can provide baseload electricity, heating and cooling or cogeneration according to the resources available and the local needs. Geothermal energy is characterised by a minimal local footprint, and is easy to integrate in densely populated area, as illustrated by the success of geothermal district heating in many urban areas of Europe. Moreover, geothermal energy can also supply heating and cooling for industrial or agrifood processes, contributing to create local value and jobs within geothermal communities.
On the long term, geothermal projects are also very competitive with other energy sources, in particular geothermal heating and cooling projects. However, they require significant capital expenditures (having small operating costs). This means that financing a geothermal energy project may be expensive for investors (whether public or private) that may be challenged to access capital. Moreover, this cost of financing a geothermal project may be compounded by the geothermal risk inherent to large geothermal energy projects.
The geological risk includes:
• The short-term risk of not finding an economically sustainable geothermal resource after drilling
• The long-term risk of the geothermal resource naturally depleting rendering its exploitation economically unprofitable.
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:
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
|- Increases the maturity of the geothermal sector, by allowing the development of projects that demonstrate the technology and enable the knowledge of the resources.
|- 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
|- Reduces the weight of the scheme on public finances;
- Continues to provide financial derisking to investors
- Requires a sufficient pool of projects.
|- 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.
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