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

Guarantee or insurance facility
. Such a facility may be set up to provide insurance against a drilled 
well being unusable for electric power generation. In the case of failure to achieve the expected drilling 
result, a compensation amount is paid out of the fund based on the terms of the insurance agreement. 
The agreement may define the geological parameters (temperature, flow rate, fluid chemistry, etc.) 
upon which the success or failure of the drilling activities are to be measured in a quantifiable manner 
and upon which the amount of compensation will be determined. It should be noted that the insurance 
instrument described here will only cover resource risk, not operational drilling, or other risks. Also, 
unlike a guarantee facility that could be required for the on-lending facility described earlier, it is 
directly focused on the most relevant risk exposures, such as test drilling, rather than on broader risks, 
such as general creditworthiness of sub-borrowers.
In order to limit the risk to the guarantee/insurance facility, project applicants would be required to 
provide sufficient data and analytical reports regarding the geothermal prospect in a full project 
proposal to allow for a detailed evaluation of the prospect (IFC 2011).
As an extension of this concept, the same guarantee or insurance scheme may be applied to a 
portfolio of geothermal projects. For example, a portfolio of an agreed number of first exploration wells 
drilled by the national geothermal agency or company would be insured against underperformance 
according to the defined geological parameters. The criterion for triggering the insurance cover 
would be the performance of the whole portfolio against a benchmark, which may be defined as a 
notional portfolio sufficient to service the debt. If the portfolio performs below that level, the guarantee 
or insurance fund would be called upon to top up revenues to the minimum level required for debt 
service. However, the fund would only cover the “first loss” up to a fixed percentage of the portfolio 
value. Beyond that, the national geothermal agency or company would have to cover any additional 
losses. The portfolio approach has the advantage that the guarantee does not need to be called upon 
if dry wells are compensated for by highly productive wells. The other advantage of this approach is 
that the insurance cost/premium per project does not have to be very high. As an increasing number of 
projects and prospects achieve bankability, the geothermal agency or company will decide whether or 
not to continue to purchase the cover (CIF 2011a).
59 
In this description, the authors have adapted certain features of a proposed DOE-supported facility described in recent reports on 
geothermal risk mitigation in the United States (Deloitte 2008). 

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