21 August 2015
Well-directed public finance has the potential unlock tens of billions of private sector geothermal investment in developing countries, argues Valerio Micale
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. This is 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.
Among developing countries, only Turkey and Kenya exceeded forecasts for geothermal deployment over the past five years. Elsewhere, over 3GW of power has been left in the ground, mainly in Indonesia and the Philippines but also in new markets such as Chile and Ethiopia.
At the Climate Policy Initiative, we estimate that approximately $133 billion would be needed for investment in geothermal in developing countries if current plans to build 23GW 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 liberalised energy and electricity markets, and this could result in an investment opportunity of $60-77 billion, with average returns on equity of 14-16% if the main project-related risks are addressed.
Our analysis suggests that governments and development finance institutions would need to provide the rest of the $133 billion in the form of financing and risk mitigation tools needed to attract private investment in these countries.
This requires a 7-10 fold increase in current allocations of public money to the sector for future development.
In addition, significant efforts at the global level to increase public finance commitments for the early stages of geothermal project development mean they now account for 11% of current commitments. But in order to meet demand, this finance needs to be raised to up to 17% of public finance distributed, and should be targeted particularly at the test drilling phase.
We estimate that approximately $133 billion would be needed for investment in geothermal in developing countries if current plans to build 23GW of capacity by 2030 are to be met.
Some public finance could also be refocused on the management of resource risk during the later stages of project operations.
In our most recent report, we draw lessons from a year of analysis of geothermal projects and markets in developing countries to identify how public finance from governments and development finance institutions can be used to best drive private investment. Key factors include:
- Supportive regulatory frameworks for geothermal – the basic condition for growth together with well-designed feed-in-tariffs aligned with the project's lifetime or loan terms available in the local debt market.
- Differentiated public support during the exploration phase, supporting early public exploration and tendering of proven fields in markets with challenging investment environments, while incentivising early-stage exploration in more mature private markets.
- Favourable loan conditions and measures to unlock its provision.
These measures could increase energy access and put those developing countries with geothermal resources on a path to green growth. Our case studies of geothermal projects suggest this can be done without increasing the levelised cost of electricity generated, and thus power tariffs for consumers.
When national and international public measures lower financing costs and address specific political, currency and exploration risks relevant for the private sector, private development models can deliver power at similar or lower cost than public development models. This allows governments to increase energy supply and access while committing only 15-35% of what they would invest were they to develop the whole project through local public utilities, freeing resources for further investment. This is something that should be at the forefront of the minds of national energy policymakers and the development banks that support them.
Valerio Micale is an analyst and project manager in Climate Policy Initiative's Europe office.