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risk reduces dramatically and becomes comparable to other thermal power generating technologies. Although low compared to the exploration and test drilling phases, geothermal projects also have a long-term operational risk related to declining temperature and permeability of the geothermal reservoir, the possibility of a high level of mineralization, and problems with the re-injection process of geothermal fluids; and these risks are considered manageable. 22. Investments needed to address the high, upfront risks for geothermal development are large. The cost of drilling a typical deep test well is currently around US$2-6 million. Despite the uncertainties in making cost estimates, between US$14-39 million may be needed in the first three phases in order to confirm the geothermal resources with no guarantee of success. This has important consequences for a geothermal project’s financial feasibility, as lenders are unlikely to be willing to finance these activities. They are likely to require equity capital from the developers, and not many are willing to put such sums at risk. These are the stages where government risk-sharing measures can be critical for complementing private sector resources, either through a joint public-private partnership or other financial instruments. 23. Based on global experience, there are essentially two approaches that have been used to mitigate the upfront risks of geothermal development. In the first approach, the government assumes the entire responsibility for the initial three phases of project development. This approach is advantageous because the government usually has access to better financing options than the private sector and has the ability to mitigate geological risks by supporting studies of a portfolio of potential sites. After the test-drilling phase, the government can decide whether to develop the field publicly (as is the case in Costa Rica), in cooperation with the private sector (as in Mexico and the Zunil plant in Guatemala), or completely tender out the field for further development by the private sector (such as the San Jacinto field in Nicaragua). 24. In the second approach, risks of the initial phases of geothermal development are shared between the government and the private sector. Within this approach, several risk- sharing mechanisms have been used or proposed: (1) risk mitigation funds, (2) IPPs, (3) separation of steam and power production, and (4) public-private joint ventures. 25. (1) Risk mitigation funds. Geothermal risk mitigation funds have been created for exploratory activities and drillings, as in the case of Iceland and Japan, to mitigate the exploration phase risk by refunding a portion of the drilling costs to developers in the case of failure. Such funds operate as an insurance scheme with a subsidized premium, in comparison to outright grants which would create incentives to take on higher risks. The insurance structure caps the exposure of the fund and provides some income from premiums. As the industry matures, the demand for such funds diminishes as is the case of the National Energy Fund (NEF) established by the Icelandic Government. viiPDF Image | Drilling Down on Geothermal Potential Central America
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