SuPPOrTIvE POLICIES
. The third key element of successful geothermal energy development is the
presence of supportive policies for attracting private investors. This is especially true if the country
decides to move beyond a project-by-project approach to one that creates the right environment for
investments in a scaled-up, nationwide effort to deploy geothermal power.
Governments around the world use a wide range of policy and regulatory instruments to support the
deployment of renewable electricity. Most renewable energy sources receive public support in several
different forms. Countries with strong renewable energy development agendas have introduced either
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feed-in tariffs (FITs) or quota obligations, such as renewable portfolio standards (RPS), as their core
policy.
Geothermal power stands out as a special case among renewable energy sources, and the scope
of application of such policy instruments needs to be carefully considered in the specific context of a
particular country. Attention should be given to approaches that facilitate financing for the test drilling
phase, as this is the key to reducing risk to a level that becomes more attractive for private financing.
Policies that support improved returns during the operating phase, such as FITs and RPS, are
generally less effective at overcoming the exploration risk hurdle, especially in countries lacking a track
record in geothermal development. There are only a few examples of FIT schemes being applied to
geothermal power, with most of the examples found in continental Europe. Africa and Asia have seen
budding interest in using feed-in tariffs for geothermal, but in some cases the efforts have resulted in
policies that set a ceiling price instead of a FIT (for example, Indonesia).
Government support to public-private partnerships (PPPs) involving build-operate-transfer (BOT) or
similar contracts may be a logical policy choice for countries seeking a more limited commitment to
geothermal power development, such as reaching a particular milestone in a country’s power system
expansion plan or even developing an individual project. The BOT model used in the Philippines and
the Mexican
Obra Publica Financiada
(OPF) model demonstrate the effectiveness of the approach.
After proving the commercial viability of its geothermal sector through a series of successful PPP
contracts in which the government takes most of the exploration and resource risk, the country may
consider transitioning to models that allocate more of this risk to the private developer. Two basic
approaches can be considered.
The first approach consists of inviting proposals from private companies to develop new geothermal
sites through concessions or PPPs in which more of the exploration or resource risk is taken by the
private developer. However, the developer or investor in this case will require compensation for the
increased risk through a higher off-take price of electricity or through other means. Many countries
have preferred to directly fund the risky upstream phases due to this trade-off. Indeed, the developing
countries actively engaging the private sector in geothermal development today (e.g., the Philippines)
have previously deployed large volumes of public funding and official development assistance to
finance geothermal resource exploration.
The second approach—a national policy commitment to support geothermal power generation, such
as FIT, while phasing out public support in the upstream phases—has a chance of success if: (a)
geothermal exploration and resource confirmation resulting from prior public support is well advanced
in many areas of the country, so there is substantial scope for immediate “brownfield” rather than
“greenfield” development; (b) the companies expected to respond are financially able to take the
residual exploration risk, including, if necessary, through balance sheet financing rather than seeking
loans; and (c) the off-take tariff or FIT is sufficient to compensate the developer for the incremental cost
relative to lower cost generation alternatives, if any.
Increasing private participation in the sector can also be accomplished by privatization of the national
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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
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geothermal development company and its assets. However, this does not necessarily lead to further
geothermal development by the incoming private sector entities. Such privatization, therefore, needs to
come with explicit commitment of the investor to further geothermal development.
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