A global fund to de-risk exploration drilling: possibility or pipe dream?

Installed power capacity from naturally-occurring geothermal resources represents just 6% of estimated global potential. This untapped capacity reflects in large part the high risk and cost associated with deep exploration drilling. The most promising mechanism proposed to date to reduce risk at this stage and accelerate development is to diversify risk across a large portfolio of projects via a global geothermal drilling fund. Here Bloomberg New Energy Finance in collaboration with development consultants Rinova International present the first quantitative look at the feasibility and potential impact of a Geothermal Exploration Drilling Fund.

● A developer must drill typically two to four deep exploration wells to confirm expected output and determine economic viability of a given resource. At $5–9m each, it costs about $10–36m just to know whether or not a resource merits development. The high cost and risk of answering this question is keeping most geothermal sites undeveloped.

● Interest in breaking this barrier is mounting. Geothermal power is increasingly cited as a means of fuelling economic growth in the developing world – an estimated 113GW of untapped potential is located in 39 developing countries. Recently, several agencies have proposed portfolio funds, but to date no publicly available study has been completed to determine the feasibility and potential impact of such a fund.

● Here we draw upon recent global historical geothermal exploration drilling data to determine whether a $500m rotating debt facility could provide affordable financing to a global portfolio of geothermal projects for the first few deep exploration wells.

● A revolving global Geothermal Exploration Drilling Fund (GDF) may be able to offer debt financing to exploration-phase projects at rates that are commercially viable for the fund and potentially quite attractive to developers.

● We derived these conclusions from analysis of empirical data on historical geothermal drilling success and probabilistic modelling of portfolio size and economics.

● Outcomes are most sensitive to drilling success rate and the fund’s own cost of capital – ie, return required by lenders/contributors.

● A commercial financing approach using a 7% cost of capital would result in a 17% interest rate to developers, while a fund with public sector support and a 3.5% rate of return to public sector contributors could offer loans at a 14% interest rate. While these rates are high, they could be attractive, considering the total lack of access to financing at this time for early-stage drilling.

● The fund’s economics are also attractive from a development perspective, with a 1:25 indirect financial leverage ratio, and 7MW of capacity indirectly resulting per million dollars of funds utilised. Put differently, $500m in the fund would result in approximately $9.6bn of new investment in geothermal projects.

● The fund would directly finance drilling of 473MW across a portfolio of 24 projects and, in the scenario we present here, those confirmed resources would catalyse an additional 1,927MW, bringing the total impact of the fund to 2,400MW.

View the full White Paper here.

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