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How Can Emerging Markets Capitalize On Geothermal Energy’s Potential?

While solar and wind are the dominant segments in the transition to renewables, a number of emerging markets are looking to geothermal sources as a way to meet future energy needs. Geothermal energy – which is generated when pipes drilled into the earth’s surface supply steam to power electricity turbines – lags behind other forms of renewables in terms of installed capacity; however, it is an effective solution for many countries.

Geothermal on the rise in Kenya

One of the countries leveraging its significant geothermal potential is Kenya. Located on the Great Rift Valley – where tectonic plates meet and bring magma closer to the earth’s surface – Kenya derives almost half of its electricity from geothermal sources, according to Fitch Solutions, with its contribution set to expand to nearly three-fifths by 2030.

As part of plans to boost geothermal capacity, in July the state-owned Kenya Electricity Generating Company, also known as KenGen, announced its intention to invest $2bn over the next five years on new plants and modernisation. These efforts are expected to double installed geothermal capacity to around 1600 MW.

The company aims to bring the 83.8-MW Olkaria I Unit 6 plant, which is currently under construction, on-line later this year, while the Geothermal Development Company, another state-owned body, has plans to complete the construction of three geothermal plants in Menengai with a combined capacity of 105 MW in 2023.

The benefits of Kenya’s geothermal expansion extend beyond generating electricity; the country has begun to export its expertise to some of its East African neighbours.

Related: Analysts See Oil Trading Closer To $70 Through Year-End In February KenGen won a $6.6m contract to drill geothermal wells in Djibouti, and in late May the company began drilling works as part of a $69.7m deal in Ethiopia. KenGen has also said it is in talks to undertake projects in both Rwanda and the Democratic Republic of the Congo, as the region increasingly looks to tap its geothermal resources.

South-east Asia’s main players

While the US is the world’s leading producer of geothermal energy, a number of other emerging markets play key roles on the international scene, with Indonesia and the Philippines alone accounting for around 25% of the world’s geothermal energy production.

With installed capacity of around 2100 MW, Indonesia is the world’s second-largest producer, and is on track to overtake the US by the end of the decade: the country’s geothermal development roadmap foresees a rapid of expansion of geothermal capacity to 8000 MW by 2030.

To achieve this, the government implemented a series of incentives to encourage development. These include a November 2020 law that streamlined the approval process for geothermal projects and removed a production fee for using geothermal resources; a number of fiscal incentives – such as tax allowances or exemptions – have also been introduced.

Related: Shell Reports $5.5 Billion Net Profit And Hikes Dividends

Meanwhile, in the Philippines around three-quarters of energy is produced from fossil fuels, compared to 12% from geothermal sources. However, the segment is expected to remain the largest renewable energy source through to 2030, and the country has plans to double capacity by 2040, up from just under 2000 MW at present.

Challenges and opportunities

Despite encouraging recent developments, geothermal energy has yet to realise its full global potential.

Worldwide geothermal electricity generation stood at 92 TWh in 2019, according to the International Energy Agency (IEA), far below comparable statistics for hydropower (4333 TWh), onshore and offshore wind (1390 TWh), and solar (720 TWh).

Furthermore, the IEA says that worldwide geothermal capacity is not on track to meet the UN’s Sustainable Development Goal targets of 162 TWh and 282 TWh by 2025 and 2030, respectively.

While natural and technological factors have undoubtedly contributed to this, there have been some other key issues hindering the widespread rollout of geothermal projects.

Chief among these is the cost of the initial investment. For example, in Kenya it is estimated that a single well can cost up to $6m to drill. While geothermal energy is generally considered to be a more reliable form of baseload power than solar, wind or hydropower – sources that rely on more variable elements such as sunshine, wind or water flow – the cost of bringing geothermal projects on-line can be prohibitive.

In late 2018 it was announced that Malaysia’s first geothermal project, a 37-MW plant in the state of Sabah, had been abandoned amid concerns over the cost of drilling.

In many cases, as in Malaysia, other forms of renewable energy have been favoured as part of their renewable energy transitions.

In Mexico – which, with 950 MW of installed power, is one of the top-10 geothermal energy-producing countries in the world – investment has stalled in recent years, with successive administrations prioritising other energy sources.

Although improvements in technology are bringing down the cost of drilling, and there has been an increase in support for developers in countries like Indonesia, some in the industry have called for additional incentives to encourage development.

“Geothermal holds enormous potential for countries like Indonesia and the Philippines, where there is the possibility for advanced technology to produce endless power from a heat source deep inside of the earth,” K K Ralhan, group chairman of Singapore-headquartered company Kaltimex Group, told OBG.

“To realise this potential, governments need to step up reforms and provide sufficient incentives, whether this be in terms of feed-in tariffs or tax breaks, to ensure that this is economically viable for entrepreneurs.”

By Oxford Business Group

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