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

Government Support case |
The government provides grants (or capital subsidies) covering 50 
percent of the project’s investment costs in Years 1 through 3, and stops the grant support only when 
exploratory drilling reaches a positive result. Given that the initial phases prior to exploratory drilling 
are relatively low-cost surface surveys, the first three years of the project are high on risk but not so 
high on costs. The amount of the total grant contribution is US$ 14 million. Still, the grant support 
substantially increases the return on the private investor’s equity, bringing it above the required return 
of 25 percent.
Under new circumstances, the project passes the positive NPV test (Table 3.3).
T A B L E 3 . 3
Case with Public Support
PARAMETER
VALUE
Total Investment Cost of Project
US$ 196,000,000 
Investment Cost per Megawatt
US$ 3,920,000 / MW
Government Grant Undiscounted Value
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US$ 14,000,000
Required Return on Equity
25%
Interest Rate of the Loan
6%
Equity Share in Capex (from year 2 on)
30%
Tax Rate
20%
Capacity Factor
90%
O&M, including Labor 
US$ 10,192,000 / yr
Levelized Cost of Energy 
US$ 0.05 / kWh
Tariff 
US$ 0.12 / kWh
Return on Equity
27.8%
NPV 
US$ 3,539,420
Source | Authors.
From the government’s perspective, a grant of US$ 14 million or less to leverage a US$ 196 million 
project may be a contribution well worth considering, if this leads to affordable, reliable power supply. 
It should be noted that, in addition to improving the rate of return on equity, government support during 
the crucial first stages of project development may reduce the private investor’s perception of risk and 
thus lower the hurdle rate of return on equity. The reduced cost of capital may in turn bring the required 
tariff down. For example, applying a 20 percent hurdle rate for the return on equity in the Government 
Support Case instead of the rate of 25 percent used in the Base Case renders the tariff of US$ 0.12 per 
kWh unnecessarily high. A tariff of US$ 0.10 per kWh, which results in a 21 percent rate of return on 
equity, may be sufficient for the private investor, whose NPV remains positive.
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The present value of the grant would be lower since the grant is disbursed over a period of three years.

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C h a p t e r 3
The impact of the reduction in the cost of equity leading to a reduction of the tariff by 2 cents per kWh 
can be illustrated by calculating the present value of the reduction in the tariff over the project life. If, 
for example, instead of providing grant support in the early years of the project, the government chose 
to subsidize the tariff for geothermal energy once the plant was in operation, it would be committing 
to a greater expenditure of public money than the value of the grant noted above. Over the plant 
operation period of 25 years (assuming that a flat tariff
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is contractually secured for the same period), 
the difference of 2 cents per kWh translates into an additional public funding commitment of US$ 46.9 
million (present value discounted at the weighted average cost of capital applied to the project).