Knowledge Series 024/16Comparative Analysis of Approaches to Geothermal Resource Risk MitigationA Global SurveyPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedComparative Analysis of Approaches to Geothermal Resource Risk Mitigation iTABLE OF CONTENTSACKNOWLEDGMENTS IIIEXECUTIVE SUMMARY IV1. INTRODUCTION 12. GEOTHERMAL RESOURCE RISK MITIGATION APPROACHES 33. GOVERNMENT AS TOTAL GEOTHERMAL PROJECT DEVELOPER 54. COST-SHARED DRILLING TO MOBILIZE PRIVATE INVESTMENT 7Cost-Shared Exploration Drilling 7Government-Led Exploration Drilling to Facilitate Development by the Private Sector 10Other Approaches to Facilitating Private Participation 12Privatization of Government-Developed Geothermal Assets 125. GEOTHERMAL RESOURCE RISK INSURANCE 156. EARLY-STAGE FISCAL INCENTIVES 177. OTHER FACTORS INFLUENCING THE ACCEPTANCE AND MITIGATION OF GEOTHERMAL RISK 198. IMPACT OF RISK MITIGATION STRATEGIES ON GEOTHERMAL EXPANSION: ILLUSTRATIVE CASES 21Australia 21Chile 21Japan 21Kenya 21Nicaragua 22Philippines 22Turkey 23United States 239. CONCLUSIONS 27ANNEX | SUMMARY FRAMEWORK FOR COMPARING GEOTHERMAL RISK MITIGATION SCHEMES 29REFERENCES 34ACRONYMS AND ABBREVIATIONS 35Comparative Analysis of Approaches to Geothermal Resource Risk MitigationiiComparative Analysis of Approaches to Geothermal Resource Risk Mitigation iiiACKNOWLEDGMENTSThis report was prepared by the Energy and Extractives Global Practice at the World Bank to share global experience in geothermal resource risk mitigation with client countries in order to assist them with selecting an approach that best suits their spe-cific circumstances. It is part of a larger analytical exercise reviewing the Opportunities and Challenges of Scaling-Up Geothermal in Latin America and the Caribbean Region. Funding for the research and evaluation in the report was provided by the World Banks Energy Sector Management Assistance Program (ESMAP) and as part of the Global Geothermal Development Plan (GGDP). Drafts of this report and its findings have been presented and feedback received during past GGDP Roundtable Discussions held in The Hague, Netherlands, and Copenhagen, Denmark; and the regional geothermal congresses GeoLAC 2014 (San Jose, Costa Rica), and GeoLAC 2015 (Managua, Nicaragua). In addition, specialized workshops around the findings of the report were carried out with multiple stakeholders in Santiago, Chile; Mexico City, Mexico; and Managua, Nicaragua. While there has been numerous formal and informal reviews that have provided input towards improving the report, the findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, its affiliated organizations, to members of its Board of Executive Directors or the countries they represent.The authors of the Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation: A Global Survey are: Subir K. Sanyal (coopsanyalgmail) is the former President of GeothermEx Ann Robertson-Tait (Ann1slb) is the Business Development Manager and a Senior Geologist at GeothermEx Migara S. Jayawardena (mjayawardenaworldbank) is a Senior Energy Specialist in the Energy and Extractives Global Practice at the World Bank Gerry Huttrer (ghuttrercolorado) is a geologist consultant for the Energy and Extractives Global Practice at the World Bank Laura Berman (lbermanworldbankgroup) is an Energy Specialist in the Energy and Extractives Global Practice at the World BankComparative Analysis of Approaches to Geothermal Resource Risk MitigationivEXECUTIVE SUMMARYGeothermal presents an opportunity for many countries to diversify their power gen-eration 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 environ-mental 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 devel-opment, 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 port-folio of development projects by insuring the productivity of a well prior to drilling, Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation vwhere 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 developers exposure to potential losses should a project not advance further. Which is the best approach? To make this determination, it is important to carefully consider the specific circumstances in a given country and its national geothermal development goals. The evidence indicates that some of the risk mitigation schemes described above have made significant contributions to the scale-up of geothermal. However, other important considerations in any given country could include the strategic objectives of the geothermal and power sector, scale and timeframe for development, available domestic technical capacity, ability to administer and oversee the schemes, financial impact and affordability of the approach, and other stakeholder considerations. The annex to this report provides a framework through which different approaches to geothermal resource risk mitigation can be screened in order to determine their suitability. While resource risk mitigation schemes can be critical for kick-starting and scaling-up geothermal development programs, they are not substitutes for addressing various other challenges and risks faced by those investing in geothermal in a specific country. These fac-tors that can undermine the investment climate, depending on the circumstances of a given country, could include inadequate policies to support the development of the sector, the high up-front costs to develop the steam field and the power plant, the availability of transmission access to geothermal sites, a lack of basic infrastructure required to provide easy access to these areas, limited availability of technical expertise, and the overall country risk perceived by investors. The implementation of any resource risk mitigation scheme should be in coor-dination with addressing these other important investment considerations, should they exist, as any or all of them can impact the success of the geothermal development programs. The report concludes with a number of illustrative cases of countries that have imple-mented various resource risk mitigation schemes and other types of support to promote geothermal development. They include examples in select countries with significant geo-thermal development such as Japan, Kenya, Nicaragua, the Philippines, Turkey, and the United States; and also several nations that have had significant public sector support for geothermal development but have had little or no geothermal power production to date such as Australia, Chile, and Argentina. While the success rate in mobilizing risk capital towards geothermal exploration and scaling-up geothermal capacity has varied from country to country, the experience provides rich lessons about the applicability of various risk mitigation schemes. The global experience highlighted in this report is helping policy makers make informed decisions regarding the most suitable approaches for geothermal development, in par-ticular for geothermal resource risk mitigation. The World Bank is helping a number of countries apply the findings documented in the report to address geothermal resource risks, including in Chile, Nicaragua, Dominica, Saint Lucia, Armenia, Kenya, Ethiopia, Tanzania, Djibouti, Turkey, and Indonesiaparative Analysis of Approaches to Geothermal Resource Risk MitigationviComparative Analysis of Approaches to Geothermal Resource Risk Mitigation 11. INTRODUCTIONRenewable energy is being expanded globally as an integral part of a diverse power generation mix. Geothermal power is a clean source of energy that can provide reli-able base-load1power in countries and regions where the resource is available. As an indigenous renewable source of energy, geothermal confers important environmental benefits, and can also serve as a natural hedge against price volatility in tradable fossil-fuel commodities, thus stabilizing generation costs. Located in areas that are seismically active and/or with volcanic activity (i.e., countries in the “ring of fire” that surrounds the Pacific basin), the worldwide geothermal power generation potential is estimated (see, for example, Bertani 2009) to be on the order of 70 to 80 gigawatts (GW) based on currently commercial technologies.2However, only about 12 GW of this total potential is being exploited today, and many substantial geothermal pros-pects are still waiting to be developed. Geothermal power development faces a combination of challenges that can include inadequate policies to support the development of the sector, the high up-front cost of developing the steam field and the power plant, the availability of transmission access from load centers to geothermal sites, a lack of basic infrastructure to access these areas, and, in some countries, limited availability of technical expertise. Depending on the circumstances in a given country or region, some or all of these issues need to be addressed to enhance the investment climate and promote geothermal development. However, it is widely recognized that the high resource risk at the early stage of a geother-mal project represents a unique and critical barrier that can effectively stall geothermal development at its inception, thus preventing major investment in geothermal power. Geothermal is developed through a staged approach beginning with surface-based exploration, followed by discovery and exploration drilling to confirm the availability of the resource, a process that can typically take two to three years. Before operations can commence, another three to five years is required for additional drilling to build out the well field and construct the power plant. Once operational, geothermal is a reliable and environmentally preferred fuel supply for long-term power generation at a relatively steady cost. However, the combination of (i) the need for significant up-front capital investment long before revenue is earned from electricity sales and (ii) the high level of resource risk up to and during the early drilling stage can slow the pace of geothermal development and sometimes prevent projects from proceeding. Figure 1 presents a conceptual view of the various stages in geothermal power develop-ment and the associated