Geothermal handbook: PlanninG and Financing power Generation t e c h n I c a L r e p o r t 2 / 2

FINANCE
A Case for Public Support 
A country may decide to develop its geothermal resources for a range of reasons: geothermal may 
represent the least cost generation expansion, or the government may place significant value on the 
environmental and other benefits associated with domestic renewable energy. Arguments for public 
support for renewable energy based on the associated environmental and other benefits, which are 
used by many governments globally to justify public financial support for renewable energy, apply 
equally to geothermal. As discussed in previous sections, additional justification for public support 
specifically for geothermal power generation is primarily centered on the challenges of financing the 
early-stage resource exploration, and the difficulty of financing such projects by the private sector 
alone, given the resource risk, high upfront costs, and long lead times.
The extent of difficulty in raising private capital for a geothermal power project depends on the 
project implementation structure. When all phases of a geothermal power project are implemented by 
the same developer, building a geothermal power plant is vertically integrated with a steam mining 
operation upstream. Such a project offers an unusual risk-reward profile, quite different from both 
conventional thermal power and from other renewable energies. Unlike conventional thermal power 
generators, which buy fuel from suppliers operating in a well established and highly liquid fuel market, 
geothermal power generators typically have to supply their own geothermal “fuel” for themselves, with 
all the costs and risks that this entails. 
Even after a series of successful geothermal drillings, the expected revenue from selling electricity is 
still uncertain and relatively distant in the future, while major capital outlays continue to be required. 

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This is because further wells are needed to confirm the resource size and output and to gather 
sufficient geothermal flow to run a power plant. Then the plant must be constructed and commissioned 
before the first revenue finally comes. This contrasts with an oil and gas extraction operation, for 
example, which the private sector is more ready to finance, as the revenues typically come fairly soon 
and the expected profit margins can be much higher.
Clearly, it is mostly the upstream phases of resource exploration and development that make a 
vertically integrated geothermal power project difficult to finance, but financing these upstream phases 
separately may be even more problematic. For example, the development of geothermal steam 
fields as a self-standing operation may be considered creditworthy only if the off-take of the steam 
by a reliable buyer is secured. However, the choice of buyers of steam will usually be very limited, 
weakening the steam seller’s prospects for guaranteed off-take and its overall bargaining position vis-
à-vis the buyer.
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Once the steam field is substantially developed, the remaining electricity generation part of a 
geothermal project is more likely to attract private investors. However, there is a possibility that public 
financing will still be required, especially in the case of a project that is large compared to the existing 
power sector, such as the Olkaria IV project in Kenya (Box 3.9). Similar to other capital-intensive 
projects (such as large hydropower), this case shows that the risk of a geothermal power generation 
project may easily exceed the “risk budget” of any single private investor, making public financing 
solutions more appropriate, even when the risks of the steam extraction phase are resolved.