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Component 1: Financial Instrument (IDB) Rationale for CTF support The early stages of geothermal development present an imbalance in the risk/reward ratio that limits the availability of private risk capital willing to make such initial investments. The uncertainty over the financial viability of projects before drilling, given the high initial resource risk, makes commercial and even MDB financing almost impossible, unless such risk is mitigated. Unless sufficient equity is available to be put at risk –normally only an option for sizeable developers with big balance sheets– donor or public support is needed to mitigate such risk. Geothermal development in Chile has been directed to the private sector through a concession system. While some public funding has been utilized for exploration work in the past, no public funding is currently available for exploration, appraisal or early production drilling. CTF funding is therefore needed to provide such risk mitigation, to allow third party financing and risk-sharing, reduce the risk/reward imbalance for developers, and thus accelerate investment and development of the sector. Proposed Transformation The MiRiG’s proposed transformation is two-fold: 1) To provide and demonstrate geothermal development risk mitigation mechanisms that allow attracting additional investment (both equity and debt) for drilling activities (i.e. when resource and field development risk still hinder –along with other factors such as interconnection and price/market risk- access to adequate financing). This would accelerate the rate at which projects can reach the stage where they can access other sources of financing for further development of the project. 2) To demonstrate the technical and financial viability of this technology to provide cost-effective base-load power in the Chilean context. The scaling in investment in the development of geothermal energy would also generate environmental and economic benefits, including: For the environment: Reduction of GHG emissions at a competitive generation cost relative to other clean energy sources. For the economy: reducing dependence on imported fossil fuels, stable power for the power system, development of private industry with high export potential and high added value, generating new investments, employment and regional development. From the point of view of competitiveness of the economy, geothermal power is in many parts of the world on of the most cost-effective RE technologies. Proposed strategy to achieve transformation To achieve the proposed transformation, IDB, in partnership with GoC and with CTF support, will evaluate, develop and implement geothermal development risk mitigation mechanisms to overcome the high cost/high risk obstacle of the drilling phases of geothermal development. For this, during project preparation the IDB team will explore with project developers and financiers various possible risk mitigation mechanisms to allow them to secure required financing to enable and accelerate project development. Unlike the cases of PV solar and wind, geothermal power projects are extremely heterogeneous, and the best tool for any given project will depend on its size, location, stage of development, the extent to which the resource has been studied, the financial capacity of the project Page |22PDF Image | CLEAN TECHNOLOGY FUND INVESTMENT PLAN FOR CHILE
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