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We describe the largest risks for the project and the proposed mitigation measures below: • A commercially viable resource cannot be identified, or identifying and developing a production well is more expensive than expected (Resource Risk)—The geothermal resource exploration in Saint Vincent is still in the early stages. While a prefeasibility study, a geothermal resistivity study, and surface exploration have been completed, no wells have been drilled. One of the risks for the project is that the project partners will not be able to identify and develop a commercially viable production well, or that the production well cannot be developed quickly and within the expected cost. To a large extent, this risk is mitigated through the participation of Reykjavik Geothermal in the surface exploration. Reykjavik Geothermal is an experienced developer that has been involved with the development of over 3,000 MW of geothermal projects in more than 30 countries. Reykjavik Geothermal’s participation throughout the whole process ensures that the project receives excellent technical advice and that the cost estimates for developing the production well are accurate. Given that Reykjavik Geothermal is best placed to mitigate this risk, they should be asked to assume some of this risk. • Early stage risks discourage investment (Resource Risk)—This risk can be mitigated through the support of the multilateral development banks. The multilateral development banks could help assume some of this risk through providing contingent grants. Under this arrangement, the multilateral development banks could offer to provide funding whose repayment would depend on the success of the drilling. For example, countries will have to repay the entire loan if the drilling is successful, but only a portion if the drilling is not. This reduces the resource risk faced by project developers. • The proposed project developers do not agree on the terms of the concession or other project documents (Market Risk)—The government has negotiated project agreements with Reykjavik Geothermal and Light and Power Holdings and continues to do so. • One of the key risks is that the government and the proposed project developers are unable to reach an agreement. Despite having a preliminary agreement on the maximum rate of return that the project developers can earn,212 there are other aspects over which they may be unable to agree. For example, they may be unable to agree on the financial contributions that each partner must make or the allocation of risks among partners. To a large extent, this risk has been reduced through the initial commitments by the government and the proposed project developers. As mentioned earlier, the partners have reached preliminary agreements that will found the final agreements. Also, Reykjavik Geothermal and Light and Power Holdings are invested in the project; they funded some of the early exploration of geothermal resources on Saint Vincent.213 The multilateral development banks can further reduce this risk by offering to provide concessionary financing and support for the geothermal exploration, which would reduce the risk for the project participants and would help make the project more attractive. • The project developers are not able to raise the financing needed for the project (Financing Risk)—Another major risk for the project is that the project developers are not able to raise the financing needed for the project. The project developers would be unable to raise financing if investors or lenders did not believe that the project was financially viable. Specifically, they may be unwilling to invest if there are large, unmitigated risks, such as resource risks, or if the expected cash flows are highly uncertain or will not allow them to earn the required return on their investment. However, the participation of Light and Power Holdings and the government in the project will help reduce this risk. As mentioned, Light and Power Holdings’ knowledge of the Caribbean energy sector and its financial position will help it make a compelling case to banks. In addition, multilateral development banks can help reduce this risk by offering concessionary financing for the project. Lastly, the proposed payment support mechanism for the PPA would also significantly reduce the project risk. 93PDF Image | Unlocking Geothermal Power Eastern Caribbean Powerhouse
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