Geothermal presents an opportunity for many countries to diversify their power generation mix in a sustainable way. It is a clean energy source that can reliably produce baseload power on a 24/7 basis. It also provides sizable global and local environmental benefits when developed properly. Geothermal can often be a less costly option than utilizing fossil fuels when its environmental benefits are considered, and it helps stabilize the cost of electricity supply since it is not subject to the volatility of international commodity prices during operations. For many countries where it is indigenous, geothermal can enhance energy security as well. 

Despite over 100 years of development and an estimated global potential of 70 to 80 GW, only about 15 percent of the known reserves are presently exploited and producing electricity. 

While there are many reasons, in various countries, for the slow pace of geothermal development, one widely recognized and unique obstacle that is globally applicable is the high resource risk during the early stages of the multistage geothermal development process. The real or perceived uncertainty regarding the steam resource capacity during the early stages of geothermal field development makes it very difficult to mobilize the required risk capital, especially through the private sector, for the exploration drilling required to confirm the size, temperature, pressure, chemistry, and potential production rate of the resource.

Addressing this challenge is even more relevant given that the majority of sites suitable for development around the world are green fields (i.e., new fields), where the resource risks are often perceived to be especially high. A common theme that is apparent when reviewing global experience is that successful scale-up of geothermal development has benefited from some form of government facilitated support. While such support can come in many forms that can improve the overall profitability of geothermal projects, there are some schemes that specifically incentivize mobilization of risk capital into geothermal exploration drilling. The approaches that have been implemented in various countries to scale-up geothermal development through public support include the following:

• Over 3.5 GW of global installed geothermal capacity has been developed through the public sector, by government or government-backed entities. In some of these cases, the public sector takes on the full resource and other project risks by acting as the total project developer, covering all of the multistage development process, and continuing on to operate the power plant.
• Arrangements for cost-shared drilling between the government and private sector can also leverage public resources to mobilize private funds. This could primarily be undertaken in two ways: (i) government-led exploration and resource confirmation is conducted before the development rights are transferred to the private sector to complete and operate the now reduced-risk project, and (ii) the private sector is responsible for developing all stages of a geothermal project, but the government shares the cost of the high risk exploration stage to shift some of the risks away from the developer. In each case, governments take on some or all of the exploration risks to catalyze private funding for the larger portion of the development. It is estimated that over 3 GW of geothermal capacity has been catalyzed through different types of cost-sharing risk mitigation schemes.
• Geothermal resource risk insurance seeks to pool exploration risks across a portfolio of development projects by insuring the productivity of a well prior to drilling, where some or all of the losses would be covered if certain prespecified goals are not achieved. To date, only a few tens of megawatts of installed capacity have been developed through this mechanism primarily due to the fact that geothermal, being a globally small sector, provides limited opportunities to widely pool risks. Also, the high degree of uncertainty during the exploration stage drilling makes the insurance premiums high and thus often unaffordable for developers.
• Fiscal incentives are not specific risk mitigation mechanisms, but when they are available, they reduce the up-front cost of geothermal exploration. They have the effect of transferring some of the early-stage risks as they reduce the amount of risk capital that needs to be mobilized, thus lowering a developer’s exposure to potential losses should a project not advance further.

Which is the best approach? Download the full report to learn more.