1. Geothermal energy risk management
The current industry and political landscape has opened opportunities for
cleaner energy options, while investors and government regulators endeavor
to provide the essential infrastructure, services and legal framework to
develop and deploy new energy technologies. Before considering some of the
key risks,which have an impact on renewable energy projects and the
general approach to proper assessment, it is useful to identify barriers that
are preventing the uptake of RE projects. Foremost of these are barriers,
which relate to the low level of awareness, understanding and attention,
afforded to the complex array of policy, regulatory, technical financing and
organizational factors affecting RE projects. Geothermal project financing is
not the typical boilerplatescheme with pro forma agreementsutilized in other
resource project development.
Geothermal Developer Profile
Investors areeither large and traditional energy service companies that have
the ability to finance RE investments in technology or projects funded on a
non-recourse finance basis, orsmaller but entrepreneurial geothermal
developers seeking investors for technology R&D and/or project finance.For
these entrepreneurial geothermal development firms, there are different
business models and balance sheet sensitivities to consider.
While financial institutions carefully evaluate developer qualification and
track record, being a major and well-known developer is not required
because financiers recognizesinvestment opportunities having considerable
experience in developing energy projects by providing equity. However, new
geothermal developers are required to demonstrate their competency by
selecting experienced and well-respected consultants, and specifying and
using equipment with proven track record.
Most if not all capital prior to the geothermal project’s proven feasibility is
done through equity and not debt. Financing of exploration and
confirmation drilling usually comes from company equity or risk capital
provided by investors. Generally, investment is sourced from seed capital,
venture capital, or equity financing for a geothermal developer.Due to the
high risk involved with geothermal exploration, banks do not provide
fundingthrough loans until the later stages in the development process.
Risk Identification
During the critical resource identification phase, the developer aims to
obtain as much information as possible about potential resources while
investor costs are low providing the developer with a stronger foundation for
decisions on actual exploration and project development. Information and
knowledge increase resource certainty and reduce risk, which allows better
access to capital. For this reason, the government can help mitigate risks by
establishing a well-documented geothermal database that is readily available
to potential investors.The government must also develop a standard
classification system that addresses the probability of risk based on a
standard set of geothermal resource criteria and attributes.

2. Key indicators of success from geothermal exploration wells are high
temperatures and permeability combined with production of a high-enthalpy
fluid that is not acidic and does not produce scaling over and above that is
normally expected for geothermal fluids.
The highest risks for the implementation of geothermal energy projects are
resource availability risks.Risk management challenge is magnified in the
context of geothermal development due to the extremely high risk of loss
during the identification, exploration, and delineation drilling phases of
project development where the probability of drilling a dry hole is high.
Other identified risks can be further categorized into: operational risks
(failures in planning, etc.), economic risks (increasing operating costs, etc.)
and political risks (licenses, etc.). Risks that cannot be realistically avoided
can increase the cost of capital or raise the required rate of return.
In Europe and North America, the insurance industry has been providing
many of the traditional risk management products for the petroleum
industry to geothermal, such as property damage, business interruption,
machinery breakdown and construction.
Contract Structure
Geothermal project financing is initially dependent on a “bankable” reservoir
report, which is based on the complete and thorough documentation of the
exploration and drilling data as independently evaluated by a disinterested
third-party’s technical analysis and recommendation report. Engineering,
Procurement, and Construction (“EPC”) contracts typically pass all
geothermal plant facility design, development and construction risks from
the developer who acquires a “bankable” turnkey energy project,to the
contractor who ispaid a premium for the assumption of the risks. In an EPC
contract, the contractor agrees to deliver the keys to a commissioned
geothermal energy plant to the developer for an agreed price, on a fixed
schedule with performance guarantees and liquidated damages for the
failure of acceptance tests and timely commissioning.
Project finance is also highly dependent on the Power Purchase Agreement
(“PPA”) executed between the developer and purchasing end user, typically
an electrical utility.The PPA provides for the sale of capacity and energy at
an agreed price, price structure, and specified time period. In addition, the
financial institution will include a careful analysis of the interconnection
studies and transmission agreements.From the risk perspective however, it
is preferable that economics and demand for power drive projects rather
than contract provisions. Also, contracts negotiated with either side being at
a disadvantage, is a cause of concern for lenders.
Conclusion
Needless to say, streamlining the permit process by government regulators
will have an impact on geothermal development, as shorter project periods
would reduce uncertainty for policy and market dynamics when modeling
economic returns.

3. Geothermal projects are characterized by significant upfront capital
investment for exploration, well drilling, and the installation of plant and
equipment. But once the geothermal projects are placed in commercial
operation the fuel source is secure for the tens of years of expected lifetime
with a steady revenue stream.
It is good to note that traditional insurance products are now becoming more
available to the RE industry while new financial risk management
instruments are evolving. Nevertheless, there is a need for customization of
coverage and linked products that provide a total solution for the risks
inherent in geothermal development. While geothermal energy will continue
to face obstacles to gain investment market acceptance and application,
there is room for optimism as the use of this energy source is only
beginning.
Fernando “Ronnie” Penarroyo is the Managing Partner of Puno and Penarroyo
Law Offices (www.punopenalaw.com). He specializes in Energy and
Resources Law, Project Finance and Business Development.