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

F I g u r E 2 . 8 
Geothermal Project Risk and Cumulative Investment Cost
Source | Authors.
Pre-Surve
y
Exploration
Te
st Drilling
F/S Plannin
g
Drillin
g
Constructio
n
Start-up
Operation 
&
Maintenance
Risk
Cost
High
Moderate
Low
100%
50%
0
Cumulative Cost
Project 
Risk
B a n k a b i l i t y
The bankability of a geothermal development project (defined as the ability to attract financing from 
commercial sources) will increase gradually as long as each successive development phase brings 
more positive results and reduces uncertainty. However, resolving that uncertainty comes at a price. 
The test drilling phase should once again be mentioned as a major hurdle to clear. With each well 
costing a few million dollars, this phase is much more capital intensive than the previous phases, while 
still fraught with uncertainty. This is when the developer has to make significant investments, without 
knowing whether the geothermal resource has enough potential to recover the costs. Obtaining debt 

---

70
G e o t h e r m a l H a n d b o o k : P l a n n i n g a n d F i n a n c i n g P o w e r G e n e r a t i o n 
financing or investment capital in such conditions is not an easy task. Even if financiers are found, they 
will most likely require a high risk premium on the cost of capital or look for ways to either mitigate or 
share the remaining risks. Options for overcoming the financing hurdle resulting from the resource risk 
are discussed in Chapter 3. 
Formal techniques such as the use of a decision tree can be used to balance the probability of 
success against the cost of failure to reach the best expected outcome. A potential project developer 
is essentially faced with three choices: go ahead immediately with production drilling and risk project 
failure; undertake test drilling at a certain cost but possibly reduce the risk of project failure through 
the knowledge gained; or, decide that the prospect is not sufficiently attractive to make it worthwhile 
risking money even for testing. Annex 2 provides an illustration of the decision tree approach for a 
simplified set of data.
Certain interactions between resource risks and market risks should also be considered. In recent 
years, the cost of drilling wells has had periods of sharp increase due to rising prices in commodities 
such as steel. Also, the geothermal sector can experience a shortage of drilling rigs due to competition 
with the oil and gas industry for the same equipment (World Bank/GEF 2008).