How to Mitigate the Risks of Geothermal Energy

Insurance coverage, tax incentives and drilling costs shared between private businesses and governments are some of the proposals put forward for exploiting geothermal potential in Central America.

Wednesday, August 17, 2016

A global study by the World Bank analyzes the reasons why it has not been possible to take full advantage of geothermal energy in Latin America, highlighting countries such as Costa Rica, Nicaragua, Argentina and Chile, whose potential to generate energy through this renewable source has still not been fully exploited, mainly because of the high risks involved in geothermal projects in their early stages.

From the Executive Summary of the World Bank study: "Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation"

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 multi-stage 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 multi-stage 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 in order 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, Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation v where some or all of the losses would be covered if certain pre-specified 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.

See complete World Bank study: "Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation"

More on this topic

Central America Not Leveraging Geothermal Energy

September 2017

According to the International Renewable Energy Agency, the geothermal power generation potential of the region is 20 times higher than the current installed capacity.

The main reason behind the low utilization of geothermal energy is the high cost incurred in the initial stages of exploration and evaluation of available resources. However, once that stage is over, it becomes a more economical source of electricity than others, such as fossil fuels, according to studies by the International Renewable Energy Agency (IRENA).

Costa Rica: $500 million for Geothermal Plant

December 2015

With a loan from the IDB it is hoped that the state power geothermal projects Pailas Borinquen I and II will be completed and improvements made to the transfer line from Guanacaste and its connection to Central America.

The plan by the Instituto Costarricense de Electricidad (ICE) is to invest the proceeds of the loan between 2017 and 2025, starting with projects under development in Guanacaste, Borinquen Pailas I and II.

Geothermal Energy in Central America

January 2013

The region’s geothermal power generation plants exploit only 4% of its estimated potential of 13,000 MW.

Located in a region of considerable volcanic activity, Central America has excellent features for the generation of energy using heat from the earth, however it only generates 506 MW and remains dependent on expensive imported fossil fuels.

Geothermal Energy in Nicaragua

March 2012

The volcanic mountain range of los Maribios could potentially generate more than 1,500 megawatts for the country.

Studies by the Ministry of Energy and Mines (MEM) estimate that the volcanoes of the Los Maribios range, along the Pacific area, could give the country a generation potential of more than the 1,500 megawatts in 12 areas or geothermal fields, a capability that could liberate Nicaragua from dependence on oil as a source of electricity.