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Upfront investment necessary for geothermal projects

Published

August 26, 2015

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Published:

August 26, 2015

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Among developing countries, only Turkey and Kenya exceeded forecasts for geothermal deployment over the last five years, by 280 MW, while elsewhere over 3 GW of power has been left in the ground, Climate Policy Initiative (CPI) published in its report. Geothermal has the potential to play a big role in a low-carbon energy transition but while deployment of wind and solar has taken off in recent years, deployment of geothermal has remained steady but unspectacular for decades, the think tank’s analyst and project manager Valerio Micale wrote. „This despite the fact that it is broadly cost-competitive with fossil fuel alternatives across the world and is the cheapest source of available power in some developing countries with rapidly growing energy demand,“ he added in an article. Research involved high-level dialogues between public and private sector stakeholders to share findings and promote discussion, and three case studies on geothermal projects in Turkey (Gümüşköy), Kenya and Indonesia.

Geothermal development requires significant upfront investment, so access to debt financing is critical to free equity resources for further development of new or existing fields, the report said. In Kenya, in the case of project Olkaria III, development finance institutions refinanced the initial equity investment and freed additional equity resources for the subsequent development phases of the project; debt financing now totals 85% of the investment costs. In Gümüşköy geothermal power plant in Turkey, debt financing of up to 75% of the total project provided by European Bank for Reconstruction and Development (EBRD) through a credit line extended to local bank Yapı Kredi came in when the developer was ready to build the first 6 MW power plant. It then allowed the developer to reinvest in drilling for the second 6 MW plant while applying the lessons it had learnt.

Carbon leakage risks that may be prevalent in some locations, like Eastern Turkey, where the carbon content of non-condensable gases in geothermal fluids are high, should be taken into account and may be also be mitigated through technology choices, CPI said.

CPI estimates that approximately USD 133 billion would be needed for investment in geothermal in developing countries if current plans to build 23 GW of capacity by 2030 are to be met. The scarcity of public finance available for geothermal in these countries is a barrier to achieving these targets but private investment could fill this gap. Many governments in countries with significant resources have liberalized energy and electricity markets and this could result in an investment opportunity of USD 60 billion to USD 77 billion, with average returns on equity of 14% to 16% if the main project related risks are addressed.

 

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