I’ve received a copy of a new regulation framework for geothermal energy in Europe. Handed to me by a colleague last week, whose associate led the drafting of the document.
Geothermal is still an infant industry. In many countries, governments lack even a basic mechanism for granting licenses on geothermal projects. There just isn't any legal-work around giving a company rights to hot groundwater.
The new framework attempts to address this and several other issues for European governments. Giving them suggestions on how to administer and foster geothermal projects within their borders.
Much of the document is straight-forward. The licensing process should be transparent and streamlined. Contract timelines should be set based on realistic estimates of the amount of work needed to assess a geothermal resource. Data from test wells should be centrally collected and used to hone future licensing and exploration.
But there are a few more interesting and unexpected suggestions made by the framework.
The document specifically recommends that geothermal licensing fees should come in lower than for hydrocarbon and mining licenses. In recognition of "the lower return on investment from geothermal energy systems... and the beneficial characteristics of geothermal energy as a low carbon, sustainable energy resource."
And the authors discourage government from imposing royalties on geothermal production, given that in most systems the bulk of produced water is re-injected. Meaning no loss of the resource.
The authors also recognize the importance of capital costs in geothermal operations. Large-diameter geothermal wells are costly. So is building a power plant.
To mitigate these costs, the document recommends governments should "front load" green credits for geothermal projects. That is, calculate the power production over the entire life of the project and award commensurate credits in a lump sum at the beginning of operations, rather than doling them out over decades. This up-front payment has a huge positive impact on net present value.
(Interestingly, the mining industry labors under much the same "capital-loading" problem. Building a mine is a huge sunk cost. And yet there's little talk of up-front lumping of, say, tax write-offs for depletion and depreciation. It's not easy not being green.)
Perhaps the most daring suggestion is the creation of a "Geothermal Insurance Guarantee and Risk Fund". The document proposes that government create a pool of cash to be used reimbursing exploration costs on higher-risk projects, such as deep reservoirs with little available data. If a test well comes back uneconomic, the driller could apply for an "insurance payout". Encouraging exploration companies to investigate new resources.
These are all of course draft suggestions. It will be up to individual governments to adopt none, some or all of the measures. Recent geothermal regulations in America show that financial incentives do speed development. The U.S. government now offers state-sponsored refinancing of project debt for operating projects, giving producers low interest rates on capital borrowed for plant construction. Several American projects are pushing ahead because of this break.
There's a lot of geothermal heat around the world. Nations that design competitive financial regimes are going to see a lot of it exploited over the coming years.
Here's to the birth of an industry,
Disclosure: No positions