Financiers Bullish on Geothermal, But Industry Must Address Drilling Risks

Renewable energy financiers are bullish on the geothermal sector, but resource and drilling risks still make them skittish.

Total investment in the clean energy sector reached a record $243 billion in 2010, but only $1.8 billion, or 0.76%, was directed at the geothermal sector, Mark Taylor, head of the finance team at Bloomberg New Energy Finance, told attendees of the Geothermal Energy Finance Forum in New York on Wednesday.

The US geothermal sector will need $29 billion in financing over the next six years, said Arni Magnusson, executive director of international industries for Iceland-based Íslandsbanki, which finances geothermal projects worldwide. US geothermal capacity is about 3GW, or 30% of the world's total, with more than 2.3GW of new capacity expected by 2015, Magnusson said.

John Hancock Financial Services previously had exposure to more than 70% of existing US geothermal capacity through loans, all of which performed well, said Recep Kendircioglu, senior managing director for the firm.

"Based on our good track record, we would like to put more money at work," he said. "We like geothermal. We are looking for long-term, durable assets, which geothermal seems to fit the bill."

The Department of Energy's (DOE's) loan guarantee programme was a "very good opportunity for us to put some meaningful dollars at work", Kendircioglu said. John Hancock applied for and received a $78.8 million loan guarantee as a senior debt lender to Nevada Geothermal Power (NGP) to finance a 41.5MW geothermal plant and has several additional applications with the department.

But resource, drilling and construction risks persist in the geothermal sector and investors are often unwilling to take on all these risks, said Brian Harenza, senior vice-president for San Francisco-based investment bank Hannon Armstrong.

Drilling risk puts off financiers

"Drilling risk is really where the rubber meets the road," he said. "There are a lot of providers of capital who are interested in start-up and operation, but no one wants to finance the drilling risk."

Banks and international agencies are very concerned about the possibility of drilling a well to disappointing results or getting a power plant online only to see the resource degrade, said Subir Sanyal, president and manager of reservoir engineering of consultancy GeothermEx. The company is talking to European reinsurers about the possibility of insuring resource risk for geothermal projects, he said.

John Hancock is able to take on construction risk, but does not want resource risk, Kendircioglu said. "Until you can take away the resource risk, the capital is going to get expensive," he said.

Hannon Armstrong closed debt and equity financing worth $400 million last May for Hudson Ranch, a 50MW geothermal project in California that addressed all three major risks, Harenza said. For example, the project was based in the Salton Sea area, one of the most prolific areas for geothermal in the world, addressing concerns about adequate resources, he said. "It's not as easy as sticking your thumb in the ground and getting steam, but it's pretty damn close," Harenza said.

But what was missing was a one-stop advisory firm for the arrangement and placing of geothermal project financing so Hannon is partnering with Íslandsbanki's newly formed US unit Glacier to form GeoBanc, which aims to fill this gap, Harenza said. "We're getting involved in your project when you've done enough development with equity dollars that it's real," he added.

By. Gloria Gonzalez

Source: Environmental-Finance