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sector developers, other than those held by the national power company, INDE; in the early years, the upfront resource risks were borne solely by the Government. 33. It is worth noting that the private sector-concession approach that has been used almost exclusively in the oil and gas industry to great effect has no proven track record of success for geothermal power development. While both the oil, gas and geothermal sectors rely on underground drilling, the similarities seem to end there. Unlike oil and gas, geothermal development involves dealing with high temperatures, corrosive fluids, and commonly harder rocks, all of which make drilling more expensive and riskier. In addition, there is a potentially lengthy period prior to revenue generation in contrast to the oil and gas industry for geothermal projects, where successful drillings lead to the production of a valuable market-based commodity almost immediately. A final challenge for geothermal development is that there are numerous alternatives technologies for power generation and a regulated (and sometimes distorted) policy environment that may limit the ultimate price of electricity that can be obtained from geothermal projects. In contrast, the price of crude oil, and to a lesser extent, gas, is largely determined by the supply and demand for the commodity. Other barriers to geothermal development 34. Financing. Geothermal development requires the financing of exploration, production and injection wells, and power plant development. Given the significant risk that a potential geothermal reservoir will not have minimally acceptable well characteristics, it becomes very difficult for project developers to meet their financing needs in the upfront stages (exploration, test drilling) of geothermal development from commercial banks. Instead developers often have to rely on equity investment which requires a higher return on capital than commercial financing, leading to higher financial costs for exploration. Globally, the limited amount of commercial financing that was available for geothermal development has worsened since the 2008 financial crisis as many of the commercial banks that used to support geothermal development withdrew or went bankrupt. Lenders in the past considered that “confirmation” of the resource meant that a project could complete 30-40 percent of the reservoir drilling; under the prevailing financial climate, lenders are requiring that all resource development risk be addressed before financing it. In the case of the Nicaragua IFC loan to Ram Power for the San Jacinto development, it allowed a portion of the resource development costs to be included—once the resource was confirmed. The lack of private financing reinforces the need for public sector support to cover the upfront geological risks and thus reduce the overall costs of geothermal power. Finally, projects in many countries, including the US, are taking 4-8 years to develop, while most investors seek shorter term returns, thereby placing a premium on financing. Reducing commercial risk through instruments such as PPA contracts becomes therefore imperative to assure investors that the output will be sold at an attractive price. 35. The cost of financing could make an economically justified project financially unviable (as mentioned before, most geothermal projects in Central America are economically justified xPDF Image | Drilling Down on Geothermal Potential Central America
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