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

A N N E x 2
T h E v A L u E O F I N F O r M A T I O N F r O M E x P L O r A T O r y d r I L L I N g
Introduction
Resource risk is a major factor in the economic evaluation of a potential geothermal power project. 
The possibility that investment could be committed to its construction only to find that there was 
an inadequate resource supply to feed the power plant has to be borne in mind when undertaking 
the analysis of the project’s potential benefits. The decision taker has to balance the probability 
that production drilling will be successful, leading to economic gains from the construction of the 
geothermal plant, against the probability that the drilling will fail. In the latter case costs will have been 
incurred and yet no economic benefit will ensue. If the probability of success is thought to be too low it 
may not be worth taking this risk and starting the investment program. 
However, exploratory drilling or other tests may be able to give a better picture of the probability 
that adequate resource is available. Such a test would have some cost, but much less than that of 
investment committed to full scale production. The problem for the decision maker is to decide when it 
would be worthwhile incurring the costs of the test; when it would not be worth doing so but could still 
be worth proceeding directly to investment in the project; and when it would not be worthwhile to take 
any action. 
The benefits of a viable geothermal plant can be measured by the reduction in the net present value of 
the generation expansion plan (capital expenditure, operational expenditure, and fuel) made possible 
by its inclusion. It is the probability of this cost reduction versus the probability of no cost reduction 
and wasted investment costs of an unsuccessful geothermal project that have to be weighed against 
each other and against the cost of the test. Tools for analyzing such choices have been developed for 
exploration in extractive industries. A basic case is illustrated below to provide an introduction to this 
approach.