geothermal energy : tapping into the ring of fire

Green Investments Summit – 16th September 2009 1

Geothermal Energy : Tapping into the Ring of Fire

-Outlook & Potential for Geothermal Energy –

Green Investment Summit, 16th September 2009


1. Outlook on geothermal sector and its potential as the key resource for clean power generation in Indonesia and Philippines

2. Government policies in pushing the developments of geothermal power generation

3. Economics and legal challenges for geothermal investments and development

4. Understanding the geothermal project characteristics – Project profitability, project financing sources

Agenda


Geothermal energy uses hot water or steam as an energy resources to drive turbines

• Geothermal Power uses hot water or steam to turn

turbines and generate electricity, and the risk lies with

the IPP

• Several technologies exist in order to achieve this

depending on the form of the energy (water or steam)

and the types of temperatures.

• Most technologies exist in the sector though have their

own particularities, and new technologies are being

developed to target certain conditions.

What is Geothermal Energy?


Geothermal has been around for a long time and is making a comeback due to a push for “green” backed by subsidies i.e. recent US subsidies

Key geothermal markets globally

Source : Frost & Sullivan

US

Chile

Mexico

Canada

Philippines

ANZ

Indonesia

Turkey


Indonesia and the Philippines are well placed in terms of potential to further grow their geothermal capacities. This will take time though…

Market Size and Potential for Geothermal Energy

Top Geothermal Countries by Capacity & Pipeline

Source : Emerging Energy Research


Indonesia has around 27 GW of geothermal potential overall and it is clearly in its plans through to 2020…. Only 1,179 MW in operation as of 2008.

Market Size and Potential for Geothermal Energy

Indonesian Power Generation Plan, 2008 through to 2018– Java Bali System






Agenda


Government policies for pushing geothermal have been better in certain countries compared to others and this has changed over time

Government Policies for Geothermal

Source : Frost & Sullivan

US

Chile

Mexico

Canada

Philippines

ANZ

Indonesia

Turkey

Strong policy/ must have

Weaker policy






Agenda


Gestation time and nature of project impacts the economics

Snapshot of Geothermal Project Time Frame

Site Location ExplorationField

DevelopmentConstruction Startup Operation

3 Years 2 Years

Level of Risk by Stage

Ideal to Have Support &

Funds at this Stage!!!!


Price of the off-take has the single highest impact on the economics

• Big projects of over 100 MW get ~8+ cents kw/h

• Smaller projects can get 11 cents kw/h

• Location can also make a difference

Economic Impact


Legal impact relating to financing, taxation, etc. need to be scrutinized clearly. Definition that the country has may not be the same definition you have!

• What are the power tariffs, structure, and security? Opaque process and inadequate

PPA provisions exist in the market.

• How is taxation structured?

• Are there duties on imports?

• Opaque tender processes. How are bidders awarded projects?

• Poor resource data or no data compared to other countries.

Legal & Other Impact






Agenda


Geothermal energy risk is similar in many ways to oil & gas exploration but also has fundamental differences

• Geothermal risk profile is not that different compared to oil & gas where you have to find

resources and drill other than:

Most of the risk is taken upfront in a projectIs very site and location specific, therefore comparables are hard

• Once the geothermal plant is up and running, however, virtually risk free, non-polluting energy

can be made available.

• Risk management has to be hands on by the developing party to mitigate changing risk profiles.

What is Geothermal Energy’s Risk Profile?


Key fundamentals in any project financing venture

Key Factors in Project Financing

• Project must be doable and of benefit

• Dependable developers and reliable off-taker

• Competitive power prices that are transparent and locked in

• Project risk must be understood and allocated properly.

• All parties must walk away with something!

Financing Considerations


Before analyzing profitability and financing options must first understand what different parties need to get out of a geothermal project…..

For the Investor…..

• Geothermal project as mentioned previously is all about managing dynamic & changing risks,

experience is therefore absolutely key

• Types of risk along the project must be distinguished and determine what types of investors are

suited in terms of the development stages

• A long term approach needs to be adapted and therefore parties with the right level of long term

appetite need to be sought as well as parties that can support IRR’s as low as ~15% on certain

projects

• Also less potential for big windfall gains – is more a steady asset play when plant is running

Geothermal Project Characteristics?


Before analyzing profitability and financing options must first understand what different parties need to get out of a geothermal project…..

For the State or Utility and Society

• Is a very secure source of supply with a high base load factor

• Security of price is present in the deal structure : lower risk = lower financial returns

• Distributed generation gives a very efficient use of transmission system compared to a large

power plant

• Also less potential for big windfall gains – is more a steady asset play when plant is running

• Renewable resources allowing reduction of subsidized imports in Indonesia and the Philippines

Geothermal Project Characteristics?


Profitability it typically around15-16% IRR in Indonesia but can actually be pushed higher through based on CDM’s and location of the plants

Profitability Example : Indonesia

• 16% IRR typically used in the market though some projects can give less and some more

• Debate always centres around the price that the PLN can provide, however projects can have

good IRR’s in Indonesia that are palatable to investors

• Risk profile of geothermal, especially at early stage should however command a higher IRR than

it currently does though – country risk is also probably overlooked in comparison to project risk

• IRR’s should really be in the higher teens and command an IRR of 20% in Indonesia to our mind

to reflect the risk levels. This level would be OK for an asset based renewable energy projects,

more or less in line with IRR’s found in wind projects in riskier areas.

Profitability of Projects?


What lenders specifically look for in a geothermal project

Specific Things that All Investors look for when Financing a Geothermal Project:

• Projects have to be bankable and this will depend on numerous factors including but not

limited to : key sponsors, their track record, and financial capabilities, cash flow and its

dependability, creditworthiness of the offtaker, credit enhancements etc.

• Project construction period : could there be delays and what contingency is required if so?

• Period of operation of the plant : ability to service the debt?

• Risk Allocation/ Management : who is responsible for the risk, can it be shared, how to mitigate

it, cost of risk?

Financing Considerations


Each and every country, including location within it, has it own set of risks that must be closely identified, and appropriate mitigation strategies put in place

Specific Risks : Indonesia

• Credit worthiness of the buyer – PLN, and contract structures

• Land acquisition

• Clear legislative and fiscal laws applying to geothermal – tax, environmental, etc. – change in

law?

• Local issues where the plant is situated – legal, social, environmental and even monetary

• Political risk, terrorism, currency risk, changes in law, i.e. nationalization, pricing structures

Specific Risk Analysis of Indonesian Projects


Hypothetical analysis of an Indonesian Geothermal Power Project

Typical Financials of a Project: Indonesia

• Project size 100 MW

• Cost per MW $2.3 to $3 mn depending on technology

• Debt to Equity : Classic 75/25

• Interest Rate : ~9%, 10 Year Tenor

• Equity IRR : ~16% based on price of 7.5 to 9 cents kw/h, and 85-90% load rate

Financials of a typical Indonesian Project


Thank You

Chris de LavigneGlobal VP Consulting Frost & Sullivan

[email protected]

+65 9615 8293

This document contains highly confidential information and is the sole property of Frost & Sullivan . No part of it may be circulated, quoted, copied or otherwise reproduced without the written approval of Frost & Sullivan.

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