Dr. Tryggvi Thor Herbertsson, Quadran Iceland, Taurus slf. & J. Rúnar Magnússon, EFLA, Head of Geothermal Division & Ingi Ingason, Project Manager, EFLA. Iceland Geothermal Conference 2018 - Breaking the Barriers 24 - 27 April, 2018, Harpa, Reykjavík

1. If Geothermal is so Clever, where are all the Private Investors?
Impacting Operating Costs and Revenues
J. Rúnar Magnússon
EFLA, Head of Geothermal Division
Dr. Tryggvi Thor Herbertsson
Quadran Iceland, Taurus slf
25.5.2018

2. • Due to the nature of geothermal such projects take a long time compared to
most other investment projects.
• A successful project can take about 7 years, or more, from initial exploration
until the power plant is operational and producing.
• The long development time, high capex requirements and uncertainty about
the resource make geothermal investments especially risky.
• On top of that the resource management at the operational stage is highly
complex and is an art in itself.
• However, a well conducted research with gradual utilization of the resource
should not pose more financial risk than many other businesses, i.e., after
the resource is proven.
Investing in Geothermal
Unusually Long Investment Horizon

3. Cost Time
Surface Exploration $300-500k 6-12 months
Exploration Drilling $400k/well 1 month/well
EIA & Social $1-2m 12-18 months
Production Drilling $5-7m/well 2-3 months/well
Injection Drilling $3-5m/well 2-3 months/well
Concept Design $100-300k 2 months
Detail Design $250– 400k/MWe 6-12 months
Tendering & Contracting $100-300k 6-12 months
Power Plant Construction $2m/MWe 18-30 months
Cost and Time for Line Items

4. Typical Schedule for 50 MW Geothermal Project
Typical Schedule for 10 MW Geothermal Project
Year 0 1 2 3 4 5 6 7 8 9 10
Surface Exploration
Subsurface Exploration
Concept Design
EISA
Production Drilling
Detail Design
Tendering
Contracting
Construction
Operation
Year 0 1 2 3 4 5 6 7 8 9 10
Surface Exploration
Subsurface Exploration
Concept Design
EISA
Production Drilling
Detail Design
Tendering
Contracting
Construction
Operation

5. • When the private investor makes a decision to invest the primary
issues he is concerned with are: the risk, the returns and the
payback time (leaving asides things such as complexity of
project, personal interest, etc.).
• The private investor has to compare those issues along different
project before she starts her investment and depending on her
risk profile (her time discount rate) the investment decision is
made.
Risk Assessment
Ex-Post Money Back Multiplier Under Different Time Preferences
Project Phases
Discount
rate Risk
Equity Type
Equivalent
Money Back
Multiplier
Years to
Completion
Preliminary Survey 25% + High Start-up 4.77 7
Exploration 25% + High Start-up 2.49 5
Test Drilling 25% + High Start-up 2.07 4
Production/Injection Drilling 10 - 15% Moderate to High Private Equity 1.44 2
Plant Construction 10 - 15% Moderate to High Private Equity 1.28 2
Production 6 - 10% Low to Moderate Listed Equity 1.08 0

6. Phases of Geothermal Investment
First Stages are Uncertain and Thus Highly Risky
Source: Geothermal Risk Mitigation Strategies Report. Deloitte. 2008

7. • When comparing to other projects it is apparent that geothermal is highly risky in the
beginning due to uncertainties about the resource and it takes a long time.
• Furthermore it is capital intensive and complex.
• Consequently for the private investor it is a risky business to take on a project like this.
• The number of investors willing to engage in a risky project like this is low.
• However, when test drilling phase is over and the resource is better known the risk is
reduced and time until production is substantially shorter than initially.
• At this stage the risk is more characterized like the normal construction risk any project is
faced with, given that the PPA has been secured.
• It is fair to say at this stage one can expect a number of private equity type investors to be
interested in investing as the expected returns compared to project time is reasonable and
the payback time is short.
The Risk Defines the Type of Investor
Expected Returns Vary Over the Life-Cycle of the Project

8. • When the plant is operational the number of investors fall again as the returns are only moderate
and the project becomes more like a yield play, given no further development possible.
• At the operational stage it is likely that institutional investors are the type of investors that are
most likely to invest.
Type of Investors
When the Plant is Operational the Number of Investors Fall

9. • The risk can partly explain the lack of interest among private investors investing in
geothermal projects.
• However, in recent years we have seen big family offices with to-do-good motives and soft
capital become more interested, latest example the Gates Foundation.
• In recent years we have seen development institutions try to tackle the exploration phase
problem with soft money and grants through risk mitigation facilities.
• Notable examples are the GDF for Latin America, the GRMF for East Africa.
• From a public policy standpoint risk mitigation facilities will serve to increase private
investments in geothermal.
• However, soft money only mitigates the “long-time-horizon” risk problem.
• We are still left with the “excessive-capex” risk problem.
How Can the Risk be Mitigated?
Increasing Amounts of Soft-Money in the Game

10. • In the past potential sites for a resource and a plant have been identified and
a matching plant has been designed.
• This might be optimal when the resource is exactly known and nothing goes
wrong, i.e., in a perfect world.
• But this method increases the risk in an uncertain World.
• The risk increases exponentially as the plant gets bigger as uncertainty about
the resource is greater the bigger the anticipated resource is.
• Although it is more expensive ex-post to build in incremental steps, ex-ante it
gives higher returns, due to lower risk, and is thus preferable to the private
investor.
Excessive CAPEX risk
Risk Increases Exponentially With the Size of Project

11. • We know from past experience that diving into a resource expecting
100 MW from the beginning is a risky game as it is never known
beforehand how the resource will react to that level of utilization.
• Therefore it is wise in order to reduce the risk to gradually build.
• By this method it is more likely that private investors will come in
earlier as the risk, and the capex requirements, have been reduced.
Slice Projects
It is too Risky to go Directly for the Big One

12. • In order to increase involvement of private investors in geothermal
power production the basic message here is simple:
• From a public policy perspective: Encourage the use of soft-money at
the exploration stage through either risk mitigation facilities and/or by
giving tax benefits, even negative taxes.
• From an engineering perspective: Don‘t go for the big one. Gradually
build as more information becomes available.
Basic Message
Soft-money and Slicing it Key to Lower the Risk for Investors

13. If Geothermal is so Clever, where are all
the Private Investors?
 Waiting for the Sliced Power Plants