Moving a Geothermal Project from Concept to Commercial

Reality

Peter BarnettSinclair Knight Merz (SKM)

Introduction

• In moving a geothermal project from concept to commercial operation, we follow a program of sequential stages from initial exploration through to commissioning

• Objective is the discovery and proving of the required: – quantity, and – quality of geothermal energy

• Is now a more or less standardized industry process

Key stages in geothermal development

• Pre drilling exploration model– To determine whether a project is worth drilling

• End of exploration drilling evaluation– Feasibility Study

• Commitment to proceed with development• Establish a nominal size and cost of development

• Development– Combination of delineation and development drilling

• Continued resource evaluation– Detailed engineering

• Steam field• Power plant

– Construction• Ongoing production drilling

– Commissioning

Key issues in the development process

• At all steps in this process we need to deal in detail with issues of:– Timing – Costs (capital)– Risks– Returns

Staged Geothermal Exploration & Development

1

10

100

1000Activity 1 2 3 4 5Project identification / reconnaissance

Geology and geochemistry

Geophysics

Prefeasibility study

Exploration drilling, well testing

Resource assessment, feasibility study

GO/NO GO

GO/NO GO

Permitting / EIS

Infrastructure (pads, roads)

Commercial negotiations to PPA

EPC Manufacture

Preliminary design

EIS, permitting

Development / production drilling

GO/NO GO

Establish EPC contract

FINANCIAL CLOSURE

EPC Construction

COMMISSION

CumulativeCost, US$ M

Time, years

Nominal timing and capital cost requirements for a 100 MWe “Greenfield” geothermal project

Project timing

• Timing– Greenfield developments

• Typically 60 months required from first surface exploration– 24 months for surface exploration and exploration drilling– 30 to 36 months to develop project from time of commitment

» (feasibility study)

– Brownfield developments • less time required as fuel supply is not such an issue

– Field expansions– Infield optimisation plant

• project timing largely dictated by time for equipment supply and installation

– Can be only a few months» eg topping turbines

Project costs …1

• Capital Costs dependant on:– Well costs

• reservoir depth• well productivities• field enthalpy• steam field collection system

– Type– Pressure control system

• number of injection wells – Power Plant

• cycle type • plant size• inlet pressure

Project costs …2

• Initial estimation of project capital costs – Well costs

• assume USD 1,200 to 1,500 per m– Steam field collection system

• wet steam field– assume USD .35 to .40M per MWe

• dry steam fields– assume USD 0.20 to 0.25 MWe

– Power plant• dependant on cycle type• significant economies can be achieved with:

– increased unit size– increased inlet pressure

• overall unit capital cost estimated to vary from US$1,600/kW to US$2,500/kW (McVeigh, 2003)

– depending on project size and other project-specific criteria

Sanyal (2005) eqn fitted to McVeigh (2003) data

$1,500

$1,700

$1,900

$2,100

$2,300

$2,500

$2,700

0 20 40 60 80 100 120 140 160

Power Plant Size (MW Capacity)

Tota

l Pro

ject

Dev

elop

men

t Cos

t (U

SD/ k

W)

Cd = 2500 e -0.003*(P-5)

• Cd = capital cost in US$ / kW• P = plant capacity in MW

Key issues for commercialization

• Although the activities undertaken in the “Key Stages in geothermal development” are important, there are two essential requirements for project commercialization:1. Securing project funding

Need funds in two amounts:• exploration drilling (e.g. USD 10 to 15 M)• for the power development (e.g. USD 100 to 150M)

– requires packaging of the project in such a way to make it financeable

2. Commissioning:– i.e. the commencement of commercial generation

and thus revenue with which to repay loan funds

Sources of Funding …. 1

• Exploration drilling– Government agencies

• government funds• grant funds

– (e.g. international assistance, foreign aid agencies)• concessionary loan funds

– WB, IFC, JBIC, ADB – Developers

• internal reserves• commercial loans

– Exploration drilling seen to have a high risk profile• presents a barrier to exploration drilling and thus the creation

of new projects for development

Sources of Funding ….2

• Development funding– Government

• Concessionary loans– Private Sector

• Internal reserves• Commercial loans

• Development projects have a lower risk profile and funding is thus more readily obtainable

• Funders are seeking projects with greatest potential for:– technical and economic success– coming on-line within a reasonable time frame

i.e. having minimal legal, institutional and environmental risks

Role of government vs. private sector

• Once exploration projects are proven viable and development risks reduced, then private sector is much more likely to participate

• Its all a question of risk and return on capital– Governments take a utility viewpoint with relatively

low IRR expectations – IPP’s view risk as requiring a greater return on capital

with IRR’s of 15%, or probably higher

Role of government vs. private sector

• SKM view is that:– Government agencies remain best placed to handle

exploration drilling and resource proving• as government is in the best position to accept the risk

– Subsequent field development can then be undertaken by the private sector and/or government

• To ensure active involvement of the private sector in geothermal developments, government needd to set the appropriate incentives:– a power price which adequately compensates the

private sector for: • cost of money in the commercial sector• development risk

– and provides contractual and regulatory certainty

Geothermal Risk Issues

• As project commercialization progresses, the term “RISK” arises ever frequently

Geothermal Risk Issues

• Key geothermal risk issues include:– Pre development

• exploration risk (of failure) • environmental risks • regulatory

– new geothermal law (#27 / 2003)– regional autonomy law (# 25/ 1999)

– Development • fuel risk (for start up)• construction risk• plant performance

– Commercial operation• long term fuel risk• commercial risk• currency risk

Probability of Success vs Exploration Stage

0%

20%

40%

60%

80%

100%

120%

Desk T

op

Recon

n.

Geoph

ysics

Explo

Drlg

Deln D

rlg

Feasib

ility

Intial

Prod

n Drlg

Financ

ial C

losure

Prodn D

rlg

Injec

n Drlg

Constr

uctio

n

Phase

% P

roba

bilit

y

MEAN

MAX

MIN

Probability of Proving a Viable Project

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Desk T

op

Recon

n.

Geoph

ysics

Explo

Drlg

Deln D

rlg

% P

roba

bilty

MEAN

MAX

MIN

Exploration risk• Once exploration drilling has been completed and a

resource proven, subsequent development risk is much reduced

• This is support for the view that Government should remain in the business of exploration drilling and resource proving, to reduce project risk

• Risk reduction supports are becoming increasingly available to Governments:– CDM and carbon trading– ARGEO type mechanisms

• regional revolving funds for exploration drilling • drilling failure insurance mechanisms

• an overall continuing maturity of the geothermal industry with improved understanding of geothermal systems and models etc

Rationale of Risk Guarantee Fund

Role of the RGF

African Rift Geothermal Development Facility Sequencing

Resource assessment Drilling

FeasibilityStudy/

Tender

Geothermal Power Plant Development

Resource assessment Drilling

FeasibilityStudy/

Tender

Geothermal Power Plant Development

Resource owner’s responsibility Investor’s responsibility

Resource assessment Drilling

FeasibilityStudy/Tender

Geothermal Power Plant Development

Resource assessment Drilling

FeasibilityStudy/Tender

Geothermal Power Plant Development

Resource assessment Drilling

FeasibilityStudy/Tender

Geothermal Power Plant Development

Geotherm

al R

esourceA

ssessment

Netw

ork

Risk

Guarantee

Fund

TransactionA

dvisor

Geotherm

al Pow

er PlantD

evelopment

FundingSchem

e

Transition

T i m e A x i sT i m e A x i s

Fuel Risks

• Start Up Fuel Risk – Reserves assessment

• required in advance of development funding• historically has been based on volumetric stored heat

computations• now based on numerical modelling simulations based largely

on model matching to reservoir natural state

• Long Term Fuel supply Risks– Largely an O&M issue, managed through:

• staged plant expansions• detailed reservoir modelling based on:

– closely matching actual field performance with time– detailed geochemistry

• active reservoir monitoring and management programs

Commercial Risks

• Key issue is the ability of the project to generate sufficient income to:– repay project loans– meet O&M costs – meet companies profit requirements

• (for private sector companies and becoming an increasing requirement for corporatized or partially privatized government companies)

• Dependant on:– selling price of power

• as locked into PPA– loan interest rate and IRR– long term contractual certainty

Example project cash flows # 1

-50,000,000

-30,000,000

-10,000,000

10,000,000

30,000,000

50,000,000

70,000,000

90,000,000

110,000,000

130,000,000

150,000,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Project Year

Cas

h Fl

ows

USD

Interest Expenses (US$)

Loan Principal Repayment (US$)

Net Cash Flow

Interest Income (US$)

Cash Balance(US$)

LOAN INTEREST RATE = 3.5%

Example project cash flows # 2

-50,000,000

-30,000,000

-10,000,000

10,000,000

30,000,000

50,000,000

70,000,000

90,000,000

110,000,000

130,000,000

150,000,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Project Year

Cas

h Fl

ows

USD

Interest Expenses (US$)

Loan Principal Repayment (US$)

Net Cash Flow

Interest Income (US$)

Cash Balance(US$)

LOAN INTEREST RATE = 7.0%

Conclusions … 1

• A staged geothermal development process is essential during project commercialization - for risk reduction

• Securing project funding is the single most important step in the commercialization / development process– Exploration drilling – Development

• Government should remain in the exploration and resource proving phase– able to handle the higher front end project risk – can avail of risk reduction mechanisms not available to IPP’s

• IPP’s and / or Government undertake development– privatization model argues that IPP’s will be more efficient– but, still under vigorous debate (worldwide)

Conclusions … 2

The key risk issues are not technical but are:• Regulatory

– uncertainties remain in: • geothermal law• implementation of regional autonomy law

• Commercial– ability of project to generate sufficient income to meet

all obligations• selling price of power

– cost of money and attached risk premium• long term contractual certainty

• These issues merit continued strong interest and advocacy by the Indonesian geothermal industry