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awarding of concessions can attract opportunistic operators without solid capital behind them (sometimes referred to as, “concession collectors”) who only seek to negotiate the concession with a bigger organization, but do very little to advance the knowledge regarding the resource. 82. One possible way to advance the process under the concessioning approach is for the Government to take responsibility for, in a well-defined manner, the basic exploration tasks, including if necessary the drilling of exploratory boreholes. This should be followed by an auctioning process in which the base value is set to recuperate a substantial fraction of the sunk costs in the project. 83. Based on global experiences, there are essentially two approaches that have been used to mitigate the upfront risks of geothermal development, and thus lower the overall costs. 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 (such as Mexico and the Zunil plant in Guatemala), or completely tender out the field for further development by the private sector (such as San Jacinto in Nicaragua). 84. 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. 85. The first mechanism is to leverage a geothermal risk mitigation fund, as in Iceland and Japan, which can mitigate the exploratory phase risk by refunding the drilling costs to developers in the case of failure. These types of funds operate as an insurance scheme with a subsidized premium as opposed to outright grants which create incentives to take on high risks. An insurance structure would cap the exposure of the fund and provide some income from premiums. In Iceland, a National Energy Fund (NEF) was created by the government to provide insurance against such risks—once a drilling plan was approved by the NEF, the Fund would reimburse 80 percent of the actual costs of all unsuccessful drillings. The NEF was replenished on a regular basis and, later on, included grant support for geothermal development, mainly for exploratory activities. The Fund played a critical role in mitigating the exploration and drilling risks, thereby leaving project developers with minimal risk. As the Icelandic companies and utilities became more experienced with fewer failures in drillings and dry boreholes, the Fund has become less important for the development of new projects. 86. Experience in developing countries to create a geothermal risk mitigation fund has been more limited. In 2006, the World Bank launched an innovative instrument called geological risk insurance (GRI) under its GeoFund program for the Europe and Central Asia Region (ECA). The GRI scheme is designed to mitigate the geological risks in geothermal development and to facilitate commercial financing to geothermal projects. A similar risk mitigation scheme has been introduced in the GEF-financed African Rift Geothermal Development Program (ARGEO). The GeoFund financed two drillings in Hungary that did not lead to successful outcomes. However, the Geofund also provided important lessons for developing risk mitigation instruments for geothermal development, including: 36PDF Image | Drilling Down on Geothermal Potential Central America
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