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Some guidance on Concessional Financing Facilities
general Principles Emerging from Past Experience
Participation of international agencies can substantially reduce the cost
of capital available to
projects. Some of the capital may even come in the form of grants. This opens the door to a variety of
opportunities for setting up financial facilities (funds) customized to address specific needs.
Since resource exploration risk is a major barrier to geothermal energy development, in recent years
considerable efforts and resources have gone into attempts to set up funds using concessional
financing to mitigate this risk for investors.
Two significant programs supporting the development of such funds have been undertaken under the
auspices of the World Bank. In both cases, GEF has been the main source of concessional capital.
The experience from designing and operating geothermal funds in Europe and Central Asia, as well as
more recent experience in Africa has helped the international community
learn some valuable lessons
and develop a better understanding of the available options (Box 3.14).
B O x 3 . 1 4
Two Donor Supported Geothermal Development Programs
Donor supported geothermal development facilities established in the past under the auspices of the World Bank
with GEF support have included the GeoFund in ECA and ARGeo in Africa.
The ECA GeoFund was initiated in the early 2000s but took a few years to become operational. The overall ECA
GeoFund Program capitalization from the GEF as approved by the World Bank in 2006 was US$ 25 million. The
first phase of the GeoFund included two subprojects: (a) a grant of US$ 810,000 to the International Geothermal
Association for Regional Technical Assistance (TA) activities and (b) a Geological Risk Insurance (GRI) Grant of
US$ 3.72 million to MOL, the Hungarian integrated oil and gas company group. In the second phase, US$ 1.5
million was allocated for TA in Armenia, and US$ 10 million was allocated to the IFC
for geothermal development
projects involving the private sector in Turkey. The remaining US$ 9.5 million was returned to GEF, as no
additional subprojects were envisaged and because the GEF administrative budget was exhausted (World Bank
2010b). The current follow-up project by the IFC in Turkey builds on the GeoFund experience, utilizing the valid
concept of GRI developed under the GeoFund to attract private investment.
African Rift Geothermal Development (ARGeo) Program was initiated in 2003 and had many common features
with the ECA GeoFund. Its capital consisted of US$ 11 million for risk mitigation and US$ 6.75 million for TA
components. Six countries—Ethiopia, Eritrea, Djibouti, Kenya, Uganda, and Tanzania—were eligible to receive
support
from the program, implemented by UNEP and the World Bank. According to the original plan, the project
was to start in 2005 and operate for 10 years. However, the project’s risk mitigation facility was never made
effective, and the UNEP-executed TA component was only approved in late 2009.
Source | Mwangi 2010 and Authors.
Key lessons and guiding principles underlying the design of a successful global / regional / MDB
facility to support geothermal development have emerged from this experience. They can be
summarized as follows:
C h a p t e r 3
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•
To be successful, a donor-supported geothermal development facility needs to be well
staffed and professionally managed. The expertise available within the facility should allow
for proactive identification and development of a suitable investment project portfolio, its
investment risk assessment,
financial packaging, and the implementation of relevant
tendering procedures for bidding the projects out to the market.
•
The facility needs to be adequately funded, including the critical mass of concessional capital
sufficient to attract cofinancing from the market at large—including private sector debt
and equity—in amounts sufficient for full-scale geothermal project preparation and
implementation.
•
Concessional financing should be directed at phases in the geothermal development cycle
when such financing has the most impact in reducing risk for investors and thus increasing
the bankability of a geothermal project. In the development phases of a typical mid-size
geothermal power generation project, the early phases of project preparation, including test
drilling phase, will usually be the most suitable phases for
a targeted application of
concessional funds.
•
Success during the test drilling phase is the key to bridging the crucial gap between
the early start-up phases that are unlikely to attract debt financing and the more
mature phases of the project, when the financiers begin to see the project as
increasingly bankable. During the start-up phases, relatively little capital is required,
but the risk is unacceptably high for most investors. During mature phases, the project is
seen as increasingly bankable without further concessional finance.
•
The geographic scope of the project portfolio should cover an area(s) containing well
established and highly productive/promising geothermal reservoirs,
principally those suitable
for electricity generation. To reduce the concentration of risk, the area(s) should also be
sufficiently wide to allow for a diverse portfolio of geothermal project locations.
•
Notwithstanding the benefits expected from risk diversification, each individual project
proposal presented to the facility has to meet investment risk evaluation criteria on its own
merits, including geothermal resource risk assessment, creditworthiness assessment of the
developer or other project sponsors, and assessment of regulatory and other relevant risks.
•
To align the incentives of the developer and its sponsors with those of the facility, minimum
requirements for equity contribution from the developer or sponsor need to be set in advance.
•
In the case of a guarantee or insurance facility, the compensation should be limited to
losses directly due to the risk that the facility intends to address (e.g., resource risk) within
the criteria specified in advance and in amounts that will generally not be the full amount of
the developer’s losses. The guarantee fee (insurance premium) should
be set to recover the
costs to the facility occurring over the long term on a portfolio-wide basis.
