Financing geothermal energy projects usually requires tailored approaches in terms of support schemes and financial instruments as the geothermal sector is far from being uniform in terms of maturity and technology readiness across geographical, technology lines and uses.
Geothermal energy projects tend to be defined by their capital intensity. In addition, for deep geothermal projects, the geological risk is a element with a significant impact on the overall cost of the project, by greatly increasing the risk. Indeed, the geological risk only diminishes once a significant amount of capital has been spent (i.e. a first well has been drilled, providing information on the parameters of the reservoir), as illustrated in the figure below. In addition, the capital intensity of the cost-structure means that the cost of a geothermal project is directly linked to the level of risk it represents (geological risk, but also financial risk regarding the sale of the produced energy for instance), as the cost of raising fund for a capital investment is usually directly tied to the risk.
Financing geothermal projects therefore requires reducing uncertainty to reduce the financing cost of the project. To do so, public support schemes play a key role, providing a predictible income in the case of operational aid, or lowering the need for or the cost of raising capital in the case of investment aid.
The European Union is an important actor in financing the energy transition. The EU directs a significant share of its budget to projects in Member States through the structural funds. Climate action and renewable energy are indeed designated as “headline targets” under Europe 2020
– they are a core focus in financing allocation.
The EU’s action on financing for renewable energy rests on two main axes:
- The introduction of conditionality in the attribution of EU funds;
- The “financialization” of public support through the European Investment Bank.
The public sector generally plays a significant role in the promotion of geothermal energy, notably providing operational or investment support. The EU is for instance an key resource in several geothermal heating projects. In some Member States, this support also takes the form of risk guarantees for deep geothermal projects, which can contribute to greatly reducing the costs of financing.
Key policies and regulations:
- Support Schemes
- European Investment Bank
- European Structural and Investment Funds
- Non-paper on the Innovation Fund
- EGEC guide on EU funding for geothermal