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93. In Central America, three broad “development models” have been used for geothermal development: the state-owned model, public-private partnerships (PPP), and private sector concessions, which correspond to the parties bearing upfront geological risks. In Costa Rica, the national power company ICE is the only developer of geothermal resources in the country. La Geo in El Salvador is a good example of a mixed Government/ private sector development strategy. In particular, it is worth highlighting the catalytic role of ENEL in providing technical advice and injecting funds in the company. The approach in El Salvador has been successful, although project risk is still backed indirectly by the Government, and despite corporate disagreements regarding equity participation of ENEL which have led to lengthy arbitration. The Nicaraguan approach consists of providing concession areas to the private sector, which is expected to take on the exploration risk and develop the resource. Honduras is in the same category but only two concessions have been contracted so far. The approach adopted in Guatemala in recent years is similar to the one in Nicaragua in the sense that the Government is trying to develop its geothermal resources by offering concessions tendering them to private sector developers, other than those held by INDE; in early years, the upfront resources risks were borne solely by the Government. 94. It is worth noting that the private sector-concession approach has been used almost exclusively in the oil and gas industry to great effect and has not a proven track record of success for geothermal power development. While both the oil and 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 in general harder rocks, all of which make drilling more expensive and riskier. In addition, for geothermal projects there is a potentially lengthy period prior to revenue generation in contrast to the oil and gas industry, 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 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 Financing 95. The issues on financing include the needs for exploration and the significant capital outlay for production and injection wells and power plant development. Since the risk of not yielding economically viable reservoirs with minimally acceptable well characteristics during exploration is significant, it becomes very difficult for project developers to meet their financing needs at this stage from commercial banks. Instead they oftentimes have to rely on equity investment which requires a higher return than commercial financing, leading to higher financial costs for exploration. The limited availability of commercial financing has worsened after the 2008 financial crisis as many of the commercial banks used to support geothermal development withdrew or went bankrupt. The lack of private financing sources reinforces the need for public sector support to cover the upfront geological risks and thus reduce the overall costs of geothermal power. 39PDF Image | Drilling Down on Geothermal Potential Central America
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