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Financing of large geothermal power plants and construction loans is the focus of interest of hundreds of companies developing capital-intensive projects to exploit the internal heat of the Earth in different parts of the world.
GCAM Investment Group is ready to offer long-term construction loans, leasing instruments and advanced project finance (PF) schemes for the development of geothermal power plants and district heating systems. We finance energy facilities in Europe, the USA, Latin America, the Middle East, Northern Africa, South and East Asia.
Contact us for details.
Fundamentals of geothermal energy projects
According to research, 99% of the planet has temperatures above 1000°C, with temperatures over 5000°C prevailing in the interior of the Earth.The heat content of our planet is 1010 exajoules.
This energy is theoretically sufficient to cover the energy needs of mankind for 250,000 years.
Nevertheless, despite the enormous economic potential, geothermal energy still covers no more than 1% of all our needs. In 2020, the world produced about 90 TWh of electricity from geothermal sources (excluding thermal energy), which corresponds to only 0.3 exajoules.
Geothermal energy, unlike solar and wind energy, is constant throughout the day and is not subject to weather fluctuations that require support from other energy sources. It comes from molten rocks miles underground, and heats the water that flows closer to the earth's surface. An important advantage of geothermal power plants is a high capacity factor, often exceeding 90%, which is significantly superior to other renewable energy technologies.
Table: Advantages and disadvantages of geothermal energy projects
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Advantages
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Disadvantages
|
| The high efficiency of geothermal projects is due to the fact that heat is not generated, but simply transferred. | High initial investment in exploration and construction, which usually means at least 5-8 years for the project to pay off. |
| Geothermal energy is considered to be the greenest source of energy available today, with virtually no emissions. | Engineering solutions for geothermal power plants and heating systems must be customized, which also increases the final cost of projects. |
| Geothermal heating and power generation does not depend on the weather, unlike solar and wind energy. | Very high requirements for geothermal natural resources, which can not be met at all construction sites and not even in all geographic regions. |
| Geothermal projects are characterized by high reliability and low maintenance costs, therefore they are suitable for both large industrial solutions and small systems. | A long term for the implementation of an investment project, which is largely determined by the success of exploration and the search for the location. |
The use of geothermal energy is dependent on the type and size of local resources.
In volcanically active areas located in the contact zones of the lithospheric plates, the use of geothermal energy for the production of electricity predominates. In areas with water (steam) temperatures below 150°C, alternative areas for using these waters are housing heating, greenhouses, hydroculture and recreation, including balneotherapy (spa hotels, hydropathic institutions).
The direct use of geothermal resources consists in obtaining heat from geothermal waters, mainly from sea water or fresh water, and sending it to industrial and domestic consumers.
This is the oldest method of harnessing geothermal energy and usually does not require sophisticated heat recovery or energy conversion technologies with high capital costs.
Geothermal energy derived from rocks and groundwater can be divided into two categories, high temperature (high enthalpy geothermal energy) and low temperature (low enthalpy geothermal energy). High-enthalpy geothermal sources make it possible to directly use the earth's heat, the carrier of which is the steam or gas that fills the voids of rocks with high temperatures.
In addition to heating, it can also be used in many other applications, such as home heating, recreational purposes, agricultural production, etc.
Very high enthalpy geothermal sources can be used to generate electricity using hot steam. Currently, this method of using geothermal energy is possible only in some countries, such as Kenya, Japan, Indonesia, the Philippines, Mexico, New Zealand, Italy and a number of others.
Low enthalpy geothermal sources do not allow direct use of the heat of the earth. This requires the construction of costly supporting devices, commonly known as geothermal heat pumps (GHPs), which raise energy to a higher thermodynamic level. The source of heat, for economic reasons, should be located at the site of the pump, so the successful implementation of such projects requires complex and capital-intensive research and exploration.
The high investment attractiveness of rocks and groundwater as an energy source is determined by their stability and higher energy efficiency.
The growing popularity of geothermal heat pump heating systems is driving the rapid development of technology in this area, making pumps more efficient and profitable. The most interesting in this area is the idea of cogeneration, which means the simultaneous production of electricity and heat in one large geothermal system.
This approach is widely used in the EU countries.
Cost of geothermal power plants
Geothermal energy projects today are in the process of intensive development, continuing to change based on new research around the world.Many governments are supporting these investments by setting preferential conditions for financing geothermal energy. Some market experts predict that the number of geothermal power plants in Europe will double in the next 5-6 years.
Environmentally friendly geothermal renewable energy can partially replace conventional fossil energy. This is one of the strategically important ways to replace fossil fuels, in particular, thermal coal and natural gas. However, this is a very expensive and knowledge-intensive industry.
Factors that determine construction cost
The construction of a medium-sized geothermal power plant usually requires an investment of several tens of millions of euros.The cost of such facilities reaches 5.5 million euros per megawatt of installed capacity, but this figure can vary greatly depending on the technology used, geological features, temperature and other factors. Easily accessible heat sources located at a shallow depth underground make it possible to reduce the cost of a geothermal power plant to 2.5 million euros per megawatt of installed capacity and even lower.
The following are some of the factors that affect investment costs:
• Research and exploration work.
• Location selection and development of the site.
• Choice of technology and engineering solution.
• Labor costs and related costs.
• Operating and maintenance costs.
An analysis of the costs of building geothermal power plants shows that equipment costs are linearly related to installed capacity. The cost of the above-ground part of a geothermal facility is on average 1 million euros per 1 MW, although this figure is dependent on the technology chosen.
Table: Structure of investment costs for the construction of geothermal power plants
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Investment stage
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Works included
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% of the cost
|
|
Project preparation
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Project planning
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10
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Purchase / lease of land
|
||
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Civil engineering
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||
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Road construction
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||
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Environmental assessment
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||
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Field exploration
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||
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Field development
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Drilling of wells
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50
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Pipeline construction
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||
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Installation of pumps
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||
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Well field control
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||
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Reinjection system construction
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||
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Facility construction
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Turbine hall
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30
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Administrative buildings
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||
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Cooling tower basins
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||
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Equipment installation
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||
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Electrical infrastructure
|
||
|
Indirect cost
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Engineering services
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10
|
|
Permits and licenses
|
||
|
Operation and maintenance
|
Significant funds are needed initially for the purchase of land, since each megawatt of installed capacity requires an average of 2000 to 3000 square meters of land, not counting the surrounding "safety belt" around the power plant.
All this, together with the huge costs of engineering services, licenses and permits, means that only serious companies with significant financial resources or government support can afford the construction of geothermal power plants.
However, this does not diminish the importance of bank loans, leasing instruments, bond issuance and numerous project finance schemes that allow owners of geothermal projects to cover up to 80-90% of their total cost. Given the large areas of investment-attractive areas, many companies choose a phased strategy for financing geothermal power plants.
It consists in the construction of small or medium-sized facilities of several tens of megawatts, which are developed and built over a period of 6-8 years or more each.
This strategy means that project proponents require long-term sources of borrowed funds.
Operation, maintenance and electricity cost
The operating and maintenance costs of geothermal power plants include personnel costs, purchase of equipment and spare parts, scheduled maintenance, insurance, and others.O&M costs can vary from one plant to another depending on technology, location, size and other factors. In addition to regular work, geothermal facilities need to be temporarily stopped for 3-5 years for repairs.
Meanwhile, the cost of electricity produced by geothermal power plants built after 2020 averages 2.5 euro cents per kilowatt. This makes geothermal energy quite competitive even when compared to more common renewable energy investment alternatives. Relatively low operating costs are an obvious competitive advantage. For example, the operation of an average geothermal power plant generating about 1 GWh of energy will cost the owners about 3-3.5 million euros per year.
Although the cost of geothermal power plants is still significantly higher compared to solar power plants, these investment decisions are generally longer term.
If a typical solar power plant requires a significant amount of equipment to be replaced after 15 to 20 years of operation, geothermal facilities, if properly maintained, can live longer.
Investment costs depend on technology
In terms of specific technologies, dry steam geothermal power plants remain the cheapest, starting at about 1 million euros for every megawatt of installed capacity.This type of power plant is based on the direct use of hot steam coming from the depths of the earth and driving turbines. This principle is at the heart of 1600 MW The Geysers Geothermal Complex in the US, which is considered the largest geothermal field in the world, consisting of 18 power plants.
At the other end of the technological spectrum are binary cycle geothermal power plants, which can cost up to 5-6 million euros per each 1 MW. These are much more complex solutions based on the use of special liquids with a low evaporation temperature. In the first cycle, hot liquid from the earth circulates, and in the second cycle, steam is created from the organic liquid.
This technology greatly increases the efficiency of a geothermal project, reducing the need for water reinjection.
In the middle of this spectrum are the so-called flash steam geothermal power plants, which typically cost between 2 and 4 million euros per megawatt.
These facilities simply inject water into the hot springs and produce steam, which then drives turbines, and is re-injected into the spring.
Investors familiar with renewable energy sector are aware of the clear trend towards lower construction costs for solar power plants and wind farms due to improved technology and economies of scale in the production of modules in large quantities. Geothermal energy projects also tend to become cheaper, but this trend is not as strong as in the case of other more popular renewable energy sources.
The average cost of geothermal power plants in the world remains between 3.2-3.9 million euros per megawatt during 2013-2021.
Low temperature geothermal power requires more investment
The economic feasibility of a geothermal project, its key performance indicators and the payback period of investments depend on the temperature of the fluid and the access of the equipment used to these sources.At the same time, experts note that about 70% of explored geothermal sources are sources of low and very low temperatures, which requires additional funding for innovative technologies and customized engineering solutions to ensure the success of each project.
In international practice, the limit of low-temperature sources is usually assumed to be 30°C, and this area is called very low-enthalpy geothermal energy (VLEG). Such heat sources require the use of sophisticated equipment to recover the heat contained in the ground or groundwater. Since most countries do not have readily available high-temperature geothermal sources, these investments have attracted attention in recent years, especially against the backdrop of a significant increase in the efficiency of geothermal technologies and lower equipment costs.
Today there is a continuous growth of interest in the technology of power generation in the so-called binary geothermal power plants (B-GPPs).
These systems use additional circulation of the working medium with a lower evaporation temperature (organic liquids, mixtures of water and ammonia), which allows efficient use of resources with a temperature of only 75-100°C.
Several such plants are also operating in France, Germany, Austria, and new advanced B-GPP in Alaska can operate efficiently with water temperature of 67°C. Leading countries are conducting research to improve technology and launch even more efficient binary plans.
Several decades ago, the use of such sources seemed impractical, which stopped the investment development of hundreds of low-temperature geothermal sources. Such breakthroughs highlight the importance of additional funding for research and development in the geothermal energy sector, and also indicate the huge untapped potential of this sector that has yet to be unlocked.
Financing geothermal projects from planning to launch
Geothermal investment projects can be technically complex and multifaceted, which depends on the natural conditions in a particular area, the availability of capital, the technologies used, and the final goals of project owners.The successful development of geothermal power plants and related investments requires significant funds at the stages of exploration and evaluation of thermal resources, which leads to the widespread use of long-term debt instruments.
In the vast majority of cases, the construction of large geothermal power plant takes 6-12 years from the planning and exploration stage to launch. However, the construction phase can take 18 months or more depending on the chosen technology, equipment availability and funding.
This industry is highly dependent on the results of exploration work, which requires uninterrupted funding in the very early stages of the project. Since it is difficult to predict the results of a future project at this point, companies usually have to start with internal financial resources rather than relying on borrowed funds. At the initial stage of any geothermal project, participants must ensure access to significant financial resources and develop an optimal insurance model to cover the high geological risks associated with exploration.
The following scheme for the construction of a geothermal power plant worth 90 million euros gives a good idea of the stages and scale of financing an investment project at different phases:
Initial capital costs are the biggest concern for any large geothermal project, especially one located in a so-called new geothermal area. In particular, the planning and permitting phase can cost up to 10% of the total capital costs, while drilling wells can cost up to half of the project budget.
If we add to this the costs of consulting, engineering services and insurance, then by the time the construction site is cleared and the foundation is poured, the project initiators can bear much more than 50% of the total costs of the project.
The question is how to finance all these stages.
Early-stage financing
Financing geothermal power plants in the early stages of project development has much in common with oil and gas projects, since in both cases the outcome is initially unknown.In many cases, funds for planning, exploration and drilling of the first wells are accumulated with the participation of private investors ("angels"), as well as with strong financial support from the government or municipalities interested in the development of renewable energy.
However, these sources of financing are difficult to attract due to high project risks in the early stages.
Therefore, the initiators of geothermal projects should preferably have sufficient capital (usually up to 10 million euros) to start on their own.
Also in the early stages, issuance of securities with their placement on stock exchanges and other balance sheet financing mechanisms for larger companies with a long operating history are widely used. One of the most common sources of funding in the early stages of a geothermal project is an initial public offering (IPO). Companies seeking to go public must demonstrate a technological edge, strong market position, good financial health, and an impeccable operating history.
Investing internal financial resources requires strong positive cash flow, which is not always possible for most companies in the market. Companies with extensive experience in building geothermal power plants can use corporate debt to fund projects in the early stages.
Providers of corporate debt may require company assets as collateral, which reduces the risk of this type of investment and makes debt instruments more accessible. In this case, financing terms and risks are assessed taking into account the financial health of the borrowing company, and not a specific project. Companies with good financial prospects can raise additional capital on attractive terms through the debt markets.
This capital can be directed to any existing need, including the development of projects at an early stage (exploration, permitting, engineering).
Mezzanine capital providers offer rather expensive financial resources, which may be required at the stage of drilling geothermal wells. This debt is secured by the project' assets, allowing the lender to gain control of the land, equipment, and wells in the event of bankruptcy.
Mezzanine financing of geothermal projects usually also requires the initiator's participation at the level of about 25-30%.
Loans for the construction of geothermal power plants
In favorable conditions, loans for the construction of a geothermal power plant cover up to 80-90% of the total cost of the project.However, this can be achieved mainly after a successful exploration phase, when the company can confirm the high production potential of a particular project and the key performance indicators look attractive and reliable.
In this case, refinancing is also appropriate, which allows the owners to extend the use of borrowed capital for the required period.
A typical construction loan is issued for a period of 7-8 years, including 2 years of construction and 5-6 years of subsequent debt repayment during the operation of the geothermal facility. Usually this period is enough to return the loan funds, especially given the rising cost of energy and the unstable situation in the hydrocarbon markets. Complex financial schemes using bridge loans are also used.
However, the term of the loan can be up to 15 years or even more, depending on the specific project, the market situation, the borrower's company, government involvement and other factors. Some energy companies take long-term construction loans, having previously concluded a PPA agreement and thus guaranteeing the return of loan funds to banks.
Given the very high costs of building geothermal power plants, the high cost of purchasing equipment and developing customized engineering solutions, syndicated loans play an important role in the development of geothermal energy.
In the history of the sector, syndicated geothermal loans of up to 1 billion euros are known.
Government guarantees for geothermal projects
Many governments offer companies complex "guarantee" systems that protect project proponents from failing to meet project targets when a certain drilling depth is reached at a new location.This is a very important mechanism for new geothermal projects. The Netherlands, Germany, France and a number of other countries widely use it in addition to other measures to support the sector.
To drill the first well in a new geothermal area, companies are seeking to secure guarantees. This helps to attract private capital, including loans from commercial banks. The availability of such guarantees largely determines the terms of financing and the cost of capital.
Current situation in the geothermal energy sector
The increase in prices for organic fuel significantly increases the competitiveness of energy technologies based on renewable energy sources, especially geothermal energy.The global geothermal energy market is constantly growing. The world leader in terms of installed geothermal capacity remains the USA, but over the past 5 years high growth rates have also been demonstrated by about a dozen countries, including developing countries.
Importantly, geothermal power generation is now seen as a mature and reliable technology that can compete with other green energy sources. Banks and financial institutions in major geothermal energy producing countries are well aware of this type of project. This gives energy companies access to cheap long-term loans and advanced project finance tools.
Financing geothermal power plants by countries
At the beginning of 2022, the total installed capacity of geothermal power plants in the world was about 15.9 GW, little changed from the previous year.Geothermal power plants around the world generate about 95 GWh of renewable energy annually, covering part of the electricity demand in remote areas and supplying energy to national power grids.
Table: Ranking of countries by installed geothermal energy capacity (2020)
| Country |
Installed capacity, MW
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Country |
Installed capacity, MW
|
| United States |
2587
|
Mexico |
906
|
| Indonesia |
2131
|
Kenya |
824
|
| Philippines |
1928
|
Italy |
797
|
| Turkey |
1613
|
Iceland |
756
|
| New Zealand |
984
|
Japan |
525
|
The world leaders in the production of electricity from geothermal sources, taking into account the installed capacity, are currently the USA, Indonesia, the Philippines, Turkey, Kenya, Mexico and New Zealand.
Each of the above countries has at least 1,000 MW of installed capacity.
The countries with the fastest growth rates of installed geothermal capacity for electricity generation over the period 2015-2020 are: Turkey (+290%), Kenya (+101%), Indonesia (+71%), Costa Rica (+27%) and the United States (+19%). Between 2015 and 2020, total installed capacity has increased by about 30%, indicating the keen interest of businesses and governments to finance this innovative sector.
During the same period, 5 countries began to produce electricity for the first time – Chile, Honduras, Croatia, Hungary and Belgium.
Financing geothermal heating systems around the world
In 2020, the total number of countries reporting direct use of geothermal energy reached 90, with about 30 countries using the earth's energy primarily for heat and electricity generation.The total capacity of geothermal heat pumps this year exceeded 77 GW, and the capacity of geothermal district heating systems was more than 12 GW. These numbers are rising rapidly year on year, reflecting the need for affordable renewable energy for growing economies.
The European Union is one of the leading markets for geothermal housing heating / cooling, and industrial and agricultural use of geothermal energy.
More than 25% of the EU population lives in regions suitable for geothermal systems, with 34 European countries already using geothermal heating on an industrial scale.
In 2020, there were about 350 operating geothermal heating systems in Europe and about 230 investment projects were at various stages of development. In addition to Iceland and Norway, which are not members of the EU, the leading markets for investments and financing geothermal projects are France, Germany, the Netherlands, Italy, Poland, Switzerland and Denmark.
Financing geothermal projects across the EU
The right combination of financing instruments is critical to the success of geothermal investment projects.This is proved by the practical experience of European countries, which is mainly based on attracting private capital with effective government support.
As we have said, unlike other renewable energy technologies, "deep" geothermal energy requires a huge initial investment. Only completed wells can prove whether a project will be successful or not. For this reason, the initial costs are in the tens of millions of euros, but there is no guarantee of success. Some European countries are trying to reduce this barrier with innovative tools, such as risk guarantees in the event of project failure, which allow the state to bear some of the costs.
In Europe, geothermal energy is being promoted in many ways and with great variety.
For geothermal projects, these include feed-in tariff costs, risk guarantees, subsidies, long-term loans, tax breaks, municipal investment funds, and even a wage subsidy for builders and employees of geothermal power plants.
Practice shows that where governments and municipalities provide innovative tools, geothermal sector is booming, as in France and Germany. On the other hand, Switzerland has for many years held one of the last places in such areas as financial support for drilling, soft loans and research grants.
Iceland
As a recognized European leader in the development of the geothermal sector, Iceland has achieved a lot through good governance and government support for renewable energy.Exploration of geothermal sources can be supported up to 50% by grants, especially in areas where sources of warm water are not yet known. Long-term construction loans are available at an interest rate of around 6% when the project can reduce heating costs.
Germany
Germany offers fast financing and a risk guarantee that can cover up to 70-80% of costs.Private insurers can also insure the risks of hydrothermal exploration. Government subsidies are provided for demonstration projects. Municipalities receive money when they invest in renewable energy, which provides support for geothermal projects at the local level. In addition, for the production of heat and electricity, long-term low-interest loans are issued with interest paid on maturity.
France
France has been promoting geothermal energy since the 1980s and the role of the state in this sector has traditionally been very important.In addition to special tariffs for geothermal energy, the government and regions provide guarantees covering up to 90% of the costs incurred. For feasibility studies, grants can cover up to half the cost.
Finally, mechanisms are proposed to offset the additional cost of geothermal heat over that produced using fossil fuels in order to improve competitiveness.
Spain
Geothermal projects in Spain are promoted through various state and local support mechanisms, including soft loans and special electricity tariffs.Some of these financial instruments are being developed with the participation of the largest banks in the country. Increasing efforts are being made in research and development, as well as domestic production of equipment for geothermal systems.
Italy
Italy makes extensive use of geothermal sources, especially for electricity generation.Government support for the sector in this country is mainly based on quotas. Companies are required to produce a certain proportion of electricity from renewable energy sources. Green certificates can be traded, and geothermal power plants can alternatively benefit from a high price premium.
Netherlands
In the Netherlands, for a long time, several tens of millions of euros have been available to companies for large projects with a goal depth guarantee.The country has developed a public database of geothermal resources, so the first preliminary data can be obtained quickly and at no additional cost. Geothermal energy is also supported by a high price level.
Bulgaria
Bulgaria offers energy companies a variety of financing instruments, including project grants covering up to 60% of the cost of a geothermal power plant, soft loans, income tax cuts, tariff cuts on imported equipment, and even reductions in other taxes by agreement.This policy is rapidly changing and improving, which allows Bulgaria with its mountainous terrain to actively develop geothermal energy projects.
Greece
To promote geothermal energy, Greece offers reimbursement rates, subsidies, soft loans, tax incentives, and subsidies for job creation.Thus, the Greek authorities are focusing not only on the development of the sector, but also on increasing the social value of geothermal projects for local communities.
Hungary
Hungary, another European country rich in geothermal natural resources, has traditionally supported geothermal energy through subsidies, soft loans and guarantees. In addition, the government has for many years set favorable prices for geothermal electricity sold to the grid.Portugal
Portugal promotes geothermal projects with a special system of bonuses, reduced taxes and subsidies in some local tax programs. Considering all the financial instruments involved, the total government support for geothermal projects in Portugal can be as high as 80% of the project cost.If you need financing for the construction or modernization of geothermal power plants / heating systems in the European Union, please contact our team.
GCAM Investment Group will definitely find the best solution for your investment project.
