Financial instruments as support for the exploitation of geothermal energy

Many European countries have a significant geothermal potential. Some technologies for exploitation of deep geothermal energy are mature. However this potential appears to be not sufficiently exploited. This could be partly explained by a lack of information among decision makers and investors and by the fact that geothermal energy projects are facing non–technical barriers. The GEOFAR project (Geothermal Finance and Awareness in European Regions), carried out within the framework of EU’s “Intelligent Energy Europe” (IEE) programme, aims to analyze these non technical difficulties and barriers which hinder the initial stages of geothermal energy projects. GEOFAR aims particularly to focus on the financial barriers and on deep geothermal energy (for direct use of geothermal resources, heat production, electricity production or cogeneration). The overall objective of GEOFAR is to develop and to propose appropriate and innovative financing and funding schemes. It is therefore necessary to analyse the existing systems: what kind of financial instruments are offered to support deep geothermal energy in Europe and how pertinent they are. The consortium of the project1 focuses this analyse on ten target countries: Spain, Portugal, Germany, France, Greece, Bulgaria, Slovakia and Hungary, Iceland and Italy.

The report “Financial instruments as support for the exploitation of the geothermal energy” is gathering short descriptions of the main and most significant instruments. More detailed information about each instrument can be found on Fact Sheets that are uploaded on the GEOFAR website accessible under www.geofar.eu. Bank facilities dedicated to geothermal energy projects are appearing uncommon. However, governmental incentives, as tax reduction, guaranteed feed-in tariffs and grants, are quite common in the target countries. Actually, there is a broad variety of application and systems varying extremely from one country to another. Guaranteed feed-in tariffs are the only instruments offered in all countries and this instrument appears extremely important in ensuring the economic viability of an electricity project. On the whole, all these instruments are a way to increase the profitability, by offsetting the high up-front costs and pay back period of the project,  so as to attract investors.

The main barrier identified at this step of the project is the difficulty to obtain finance for the early stage of a geothermal project: a geothermal resource has not been proven until the first well is drilled, thus requiring spending money with a high level of risk. The main outcome of this analysis shows that it is extremely difficult to find instruments that provide a funding for projects in early stages. Only projects which have proven their economic viability are financed through financial institutions. Public grants are the only instruments proposed to complement equity capital or to finance exploration phases.

Geological risk insurance mechanisms, that insure the presence and the quality of the resource, is a way to overcome this important barrier, but these are only offered in a few countries (France, Germany and Bulgaria through the GeoFund international mechanisms).

Finally, this report highlights the heterogeneity of financial instruments currently existing in the target countries and above all, the difficult adaptation of these financial instruments to geothermal projects specificities.