Financing and construction loans for geothermal power plants
The focal points and main interests of many companies who are interested developing capital-intensive projects to exploit the internal heat of different parts of the globe is geared towards Geothermal power plants financing
According to research, 99% of the planet has temperatures above 1000°C, with temperatures over 5000°C prevailing in the interior of the Earth.
The heat content of our planet is 1010 exajoules.
This energy is theoretically sufficient to cover the energy needs of mankind for 250,000 years.
Nevertheless, despite the enormous economic potential, geothermal energy still covers no more than 1% of all our needs. In 2020, the world produced about 90 TWh of electricity from geothermal sources (excluding thermal energy), which corresponds to only 0.3 exajoules.
Geothermal energy, unlike solar and wind energy, is constant throughout the day and is not subject to weather fluctuations that require support from other energy sources.
An important advantage of geothermal power plants is a high capacity factor, often exceeding 90%, which is significantly superior to other renewable energy technologies.
The growing popularity of geothermal heat pump heating systems is driving the rapid development of technology in this area, making pumps more efficient and profitable.
Geothermal power plants financing cost
Many governments are supporting these investments by setting preferential conditions for financing geothermal energy. Some market experts predict that the number of geothermal power plants in Europe will double in the next 5-6 years.
Geothermal energy projects today are in the process of intensive development, continuing to change based on new research around the world.
The construction of a medium-sized geothermal power plant usually requires an investment of several tens of millions of euros.
The cost of such facilities reaches 5.5 million euros per megawatt of installed capacity, but this figure can vary greatly depending on the technology used, geological features, temperature and other factors. Easily accessible heat sources located at a shallow depth underground make it possible to reduce the cost of a geothermal power plant to 2.5 million euros per megawatt of installed capacity and even lower.
Factors that affect investment costs for Geothermal power plants financing :
Research and exploration work.
Location selection and development of the site.
Choice of technology and engineering solution.
Labor costs and related costs.
Operating and maintenance costs.
An analysis of the costs of building geothermal power plants shows that equipment costs are linearly related to installed capacity. The cost of the above-ground part of a geothermal facility is on average 1 million euros per 1 MW, although this figure is dependent on the technology chosen.
Significant funds are needed initially for the purchase of land, since each megawatt of installed capacity requires an average of 2000 to 3000 square meters of land, not counting the surrounding “safety belt” around the power plant.
All this, together with the huge costs of engineering services, licenses and permits, means that only serious companies with significant financial resources or government support can afford the construction of geothermal power plants.
Meanwhile, the cost of electricity produced by geothermal power plants built after 2020 averages 2.5 euro cents per kilowatt. This makes geothermal energy quite competitive even when compared to more common renewable energy investment alternatives.
Financing geothermal projects from planning to launch
In the vast majority of cases, the construction of large geothermal power plant takes 6-12 years from the planning and exploration stage to launch. However, the construction phase can take 18 months or more depending on the chosen technology, equipment availability and funding.
Geothermal power plants financing can be technically complex and multifaceted, which depends on the natural conditions in a particular area.
The successful development of geothermal power plants and related investments requires significant funds at the stages of exploration and evaluation of thermal resources, which leads to the widespread use of long-term debt instruments.
In the vast majority of cases, the construction of large geothermal power plant takes 6-12 years from the planning and exploration stage to launch. However, the construction phase can take 18 months or more depending on the chosen technology, equipment availability and funding.
This industry is highly dependent on the results of exploration work, which requires uninterrupted funding in the very early stages of the project. Since it is difficult to predict the results of a future project at this point, companies usually have to start with internal financial resources rather than relying on borrowed funds. At the initial stage of any geothermal project, participants must ensure access to significant financial resources and develop an optimal insurance model to cover the high geological risks associated with exploration.
The following scheme for the construction of a geothermal power plant worth 90 million euros gives a good idea of the stages and scale of financing an investment project at different phases:
Initial capital costs are the biggest concern for any large geothermal project, especially one located in a so-called new geothermal area. In particular, the planning and permitting phase can cost up to 10% of the total capital costs, while drilling wells can cost up to half of the project budget.
If we add to this the costs of consulting, engineering services and insurance, then by the time the construction site is cleared and the foundation is poured, the project initiators can bear much more than 50% of the total costs of the project.
Providers of corporate debt may require company assets as collateral, which reduces the risk of this type of investment and makes debt instruments more accessible. In this case, financing terms and risks are assessed taking into account the financial health of the borrowing company, and not a specific project. Companies with good financial prospects can raise additional capital on attractive terms through the debt markets.
This capital can be directed to any existing need, including the development of projects at an early stage (exploration, permitting, engineering).
Mezzanine capital providers offer rather expensive financial resources, which may be required at the stage of drilling geothermal wells. This debt is secured by the project’ assets, allowing the lender to gain control of the land, equipment, and wells in the event of bankruptcy.
Mezzanine financing of geothermal projects usually also requires the initiator’s participation at the level of about 25-30%.
Loans for the construction of geothermal power plants
Given the very high costs of building geothermal power plants, the high cost of purchasing equipment and developing customized engineering solutions, syndicated loans play an important role in the development of geothermal energy.
In favorable conditions, loans for the construction of a geothermal power plant cover up to 80-90% of the total cost of the project.
However, this can be achieved mainly after a successful exploration phase, when the company can confirm the high production potential of a particular project and the key performance indicators look attractive and reliable.
In this case, refinancing is also appropriate, which allows the owners to extend the use of borrowed capital for the required period.
A typical construction loan is issued for a period of 7-8 years, including 2 years of construction and 5-6 years of subsequent debt repayment during the operation of the geothermal facility. Usually this period is enough to return the loan funds, especially given the rising cost of energy and the unstable situation in the hydrocarbon markets. Complex financial schemes using bridge loans are also used.
Financing geothermal projects across the EU
The right combination of financing instruments is critical to the success of geothermal investment projects.
This is proved by the practical experience of European countries, which is mainly based on attracting private capital with effective government support.
As we have said, unlike other renewable energy technologies, “deep” geothermal energy requires a huge initial investment. Only completed wells can prove whether a project will be successful or not. For this reason, the initial costs are in the tens of millions of euros, but there is no guarantee of success. Some European countries are trying to reduce this barrier with innovative tools, such as risk guarantees in the event of project failure, which allow the state to bear some of the costs.
In Europe, geothermal energy is being promoted in many ways and with great variety.
For geothermal projects, these include feed-in tariff costs, risk guarantees, subsidies, long-term loans, tax breaks, municipal investment funds, and even a wage subsidy for builders and employees of geothermal power plants.
Practice shows that where governments and municipalities provide innovative tools, geothermal sector is booming, as in France and Germany. On the other hand, Switzerland has for many years held one of the last places in such areas as financial support for drilling, soft loans and research grants.
If you need geothermal power plants financing / heating systems in the European Union, please contact our team.
CP Finance UK will find the best solution for your investment project.
Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/
