kpmg worldgeothermalmarketandoutlook oct2010

7/29/2019 KPMG WorldGeothermalMarketandOutlook Oct2010

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ADVISORY

World GeothermalMarket & Outlook

An insight into KPMGs report on theinternational geothermal energy sector

kpmg.is


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2 | Section or Brochure name

KPMGs report World Geothermal Market & Outlookis a comprehensive analysis of the geothermal energysector. The report analyzes key data on the industryobtained from interviews with leaders within the sectorand an array of other sources. It offers an objective viewof the sectors current state, its future outlook and thekey drivers of new investment. To get a copy of thereport, please contact KPMG Iceland.


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Growth is an imperative for any business sectorto survive. Whether it is achieved throughentering new markets, developing a new mix ofservices and products or by achieving increasedefficiencies, growth is the only option businesseshave in the long run.

We believe that the geothermal energy sector is about toenter a new growth phase following a decade which sawa substantial slowdown in worldwide development. There

are a few reasons to be optimistic; first of all governmentsaround the world have been moving towards a cleaner energyeconomy. The increased emphasis on clean energy hasseen the introduction of various support mechanisms andincentives to increase investment in renewable energy likegeothermal. Second, new technologies are being developedthat will increase the scope of the geothermal sector openingup new opportunities for future development. Finally, highenergy prices and emissions legislation on the horizon willmake geothermal energy a competitive source of clean,sustainable energy in more markets.

The geothermal sector is poised for a phase of consolidationin our estimate. The rationale is clear, there are too manysmall players out there putting all their resources into too few,high risk projects. A phase of consolidation will create largerfirms that can pool the risk of many development projects.Larger companies will also be better equipped to financetheir own development projects in emerging markets whereobtaining external financing can be difficult.

KPMGs interest in writing a comprehensive market reporton the geothermal sector stems from two factors. First,geothermal energy is a clean source of renewable, base-loadelectricity. Second, technological innovation on the horizon is

set to revolutionize the entire sector in the coming years.

We hope that our report will offer a fresh perspective on thegeothermal sector, the sectors key drivers for investmentand the current market outlook.

H. gst JhannessonHead of Advisory


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Main Findings In2010,24countriesaroundthe

world were utilizing geothermalenergy for electricity production. Theworlds total installed capacity in 2010was 10,715 MWe, a 20% increasefrom 2005

TheUSleadsthewayintermsof

installed capacity with 3,074 MWefollowed by the Philippines with1,902 MWe and Indonesia with 1,187MWe.TheUSalsoleadstheworld

in terms of developing projects withover 150 geothermal developmentprojects underway in 13 states

Themostcommonformofgeothermal resource currentlyexploited is traditional hydrogeothermal or volcanic geothermal.Experiments into enhancedgeothermal systems (EGS) andhot dry rock systems (HDR) arecurrentlyunderwayinFrance,theUS,

Australia, Germany, Switzerland andJapan

JapanesefirmsFuji,Mitsubishiand

Toshiba have a 67% market share indirect steam turbines while OrmatTechnologies dominates the marketfor binary systems. The drillingequipment and drilling servicesmarket is dominated by Halliburtonand Schlumberger

87%oftheworldsinstalled

capacity utilizes direct steam or flashtechnology, binary systems accountfor 13%

Geothermalenergyhasalower

levelized cost of electricity than allother renewable energy sourcesexcept for biomass. It also comparesfavorably to advanced coal andadvanced gas power plants

Thelatestphaseofgeothermal

development is being driven bygovernment support mechanismsand the liberalization of electricity

markets around the world. Supportmechanisms include:

Tax credits and grants

Renewable portfolio standards

Feed-in tariffs

Evaluating the cash generation fromthe proved reserves and the potentialof the estimated resources are keyissues for the geothermal investor

sgeir Margeirsson,President and CEO of Magma Energy Iceland

4 | World Geothermal Market & Outlook


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The Nature ofGeothermal EnergyThe need for the world to switch to renewable energy sourceshas been at the heart of an ongoing conversation that is fueledby concerns for the environment, energy security and thesustainability of our current energy consumption. As the worldheads towards a new energy economy, geothermal energy willinevitably play a larger role in the worlds future energy mix.

The last two decades have seen adramatic increase in investment inrenewable energy as governmentsaround the world have introduced

various incentives to make suchinvestments more attractive. Thegeothermal energy sector is in directcompetition with other renewablesources when it comes to fundingresearch and attracting investmentcapital.

Renewable energy sources are usuallylumped together in the same categorybutthiscanbemisleading.Unlikesolar

and wind, geothermal energy is a very

reliable source of clean, base-loadelectricity. Geothermal power plantsoperate at a consistent production leveltwenty four hours a day. Geothermalalso has very different characteristicsas an investment than solar and wind.The upfront investment risk is typicallyhigher.

KPMGs report compares geothermal

energy to other sources of energy, bothconventional and renewable, to provideour readers with a clear perspective onthe nature of geothermal energy. Wespecifically look into:

Technicalaspectsofvariousenergy

sources

Financialaspects

Governmentsupportmechanisms

used to encourage investment in thesector

Thestagesofgeothermal

development

An insight into KPMGs report on the international geothermal energy sector | 5


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GeothermalTechnologyGeothermal energy utilization has traditionallybeen very site specific, concentrated involcanically active regions of the world. Recenttechnological developments like enhancedgeothermal systems (EGS) could however widenthe scope of the sector and make geothermalenergy one of the major sources of energy in the21st century.

Drilling down to depths of up to 4 km to retrieve hot fluidsand steam for power production is a complex endeavor. Theprocess of locating geothermal resources and utilizing themfor power production requires state of the art technology.

Developing a basic understanding of the technology involvedin a sector is necessary for any interested investor asinnovation and technology are key determinants of futuregrowth. As with any evolving technology, some innovationscurrently being developed and tested within the geothermalsector will lead to major changes while others might neverfulfill their promise.

KPMGs report provides the financial reader with a reviewof the current technologies currently utilized in geothermaldevelopment projects as well as emerging technologies onthe horizon that could impact the sector in the near future.Our report looks into:

Explorationanddrillingtechnology

Powergenerationtechnology

Steamfieldtechnologyandresourceutilization

Heatingtechnology

Directuseapplicationforgeothermalenergy

83

37

95

64

31

21

Biomass Wind Geo-thermal

Hydro SolarTH

SolarPV

Capacity factor forrenewable technologies

Capacity factor in percentages

Source:U.S.EnergyInformationAgency



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The geothermal industry is arelatively small industry with very

limited resources in terms of skilledmanpower

Runlfur Maack,CEO overseas operations, Mannvit


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With the constant entrance of new and smallplayers, there is a need for fewer, biggercompanies to consolidate the geothermal market

Jos Antonio Rodrguez,VP operations and COO Latin America

Polaris Energy Nicaragua S.A.


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Main PlayersGeothermal development is a very complicated process requiring

a broad range of skills and specialized services. It is also a relativelysmall sector with knowledge and experience concentrated in asmall number of companies around the world.

The first phase of geothermaldevelopment around the world wasdominated by large public utilities andindependent power producers (IPPs).Many of the utilities in the geothermalsector started off as governmentowned entities and some still are.

The liberalization of electricity marketsalong with increased governmentsupport mechanisms and an increasedemphasis on clean energy, has seennew players emerge on the scene tocompete with established geothermaldevelopers.

KPMGs report categorizes thecompanies most active in thegeothermal sector into:

Pure-Playdevelopers

UtilitiesandIPPs

Technicalconsultants

Drillingcompanies

Equipmentsuppliers

EPCcontractors

Financialinstitutions

In our report, we profile fifteen of the

most active geothermal developerson the international stage in terms ofcurrent installed capacity and those thathave the largest project pipeline. Thecompany profiles provide an overviewof the companies, their activities inthe geothermal sector, any currentoperating geothermal power plants andtheir project pipeline.

We also look into which technicalconsultants, drilling companies,equipment suppliers, EPC contractorsand financial institutions have beenthe most active internationally in thegeothermal sector in recent years.

An insight into KPMGs report on the international geothermal energy sector | 9


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Geothermal CountriesElectricity production from geothermal power plants usingtraditional hydro-geothermal technology has been concentrated

near the boundaries of tectonic plates and other geologicalhotspots where geothermal resources are located near the surface.Advancements in the utilization of low- to mid-temperatureresources have widened the scope of the sector as more andmore countries have started to develop geothermal energy.

There are currently 24 countries aroundthe world that produce electricalpower from geothermal power plants.Electricity production from geothermalpower totalled 67,000 GWh/year in2009.

KPMGs report profiles the 24 countriesthat are currently utilizing geothermalenergy for electrical power production

as well as 16 other countries thatare currently developing geothermalresources for the first time. Our countryprofiles contain:

Detailedinformationaboutthegeothermal resources in eachcountry and the potential for futuredevelopment

Mapsthatshowthelocationof

geothermal resources, any operating

geothermal power plants andongoing development sites

Energymarketandelectricitymarket

overview for each country andthe current share of geothermal inelectricity production

Informationonthemainplayersthat

are active in the local geothermalsector

Thecurrentstateofgeothermal

power production and details of

any operating plants, developingprojects and plants currently underconstruction

USA3,074 MWe

Iceland576 MWe

Mexico958 MWe

Germany7 MWe

El Salvador204 MWe

Austria1.5 MWe

Guatemala49 MWe

France17 MWe

Nicaragua87 MWe

Italy843 MWe

Costa Rica166 MWe

Portugal29 MWe

Turkey94 MWe



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No matter where you are, geothermaldevelopment should be carried out with

strategic local partnerssgeir Margeirsson,President and CEO of Magma Energy Iceland

Russia82 MWe

China24 MWe

Japan536 MWe

Thailand0.3 MWe

Philippines1,902 MWe

Papua NewGuinea56 MWe

Indonesia1,187 MWeEthiopia7 MWe

Australia0.1 MWe

New Zealand650 MWe

Kenya167 MWe

Sources: Proceedings from World Geothermal Congress, 2010; KPMG analysis


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Geothermal ProjectFinancialsThe emphasis on clean renewable energy has led governmentsaround the world to introduce support mechanisms and incentivesto increase investment in clean energy technology. Such measuresare helpful in attracting new investors to the sector but at the endof the day, if geothermal development is not a profitable business,it will not develop further.

Geothermal development projectsare characterized by high upfrontinvestment and long lead times, that isto say the development of a geothermalresource from the initial explorationphase to the operational stage can takeseveralyears.Understandingtheinitial

capital outlay required and the main

cost drivers, the sources of revenue andthe operating costs over the lifetime ofa project are essential to any investorinterested in the geothermal sector.

KPMGs report presents a thoroughanalysis of:

Capitalinvestmentandthecostof

developing geothermal projects

Geothermalpowerplantrevenues

Operationsandmaintenancecostsof

geothermal power plants

Projectfinancinggeothermal

development

Power plant

Drilling

Steam gathering

Confirmation

Exploration

Transmission

Permitting

5523

7

55 4

1

Cost breakdown of typicalgeothermal development

The financial support of local and regional entities is veryimportant for the financing stage of geothermal plants

Kerry McDonald, CEO Power West Indies

Source: Geothermal Energy Association, 2005



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Investment timeline forgeothermal development

The dry period in geothermal development in theU.S., in the 1990s, was down to a lack of incentives

and very low gas pricesYehudit Dita Bronicki, CEO Ormat Technologies

GeothermalFinancingThe financing options available for any development project willreflect the risk structure of the project and the markets knowledgeof the sector. The less the market knows about a specific sector,the harder it will be to attract financing.

Geothermal development hashistorically been a very small sector inmost countries, dominated by publiclyowned utilities. As a result investors donot have the same level of knowledgeabout geothermal energy as they dowith conventional sources of energy.

The privatization of public utilitiesand the emergence of pure-playgeothermal developers in the last

two decades has lead to a dramaticincrease in publicly listed geothermaldevelopers competing in the equitymarkets. Early phase geothermaldevelopment is highly dependent onequity financing.

In the current economic climatefinancing geothermal developmenthas become more challenging. Thefinancing options that were availablefor geothermal development beforethe economic crisis of 2008 are moredifficult to find today, especially debtfinancing.

KPMGs report offers investors andgeothermal developers an insight

into the various sources of financingcurrently available for developmentprojects. Our report highlights:

Equityfinancing

Debtfinancing

Governmentsupportmechanisms

Financingthedifferentstagesof

geothermal development

Risksinvolvedingeothermal

development

Riskmitigationschemes

Cumulative Investment

Investment

100

68

34

1 2 3 4 5years

%11

4

Source: KPMG analysis


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Market OutlookKPMGs report indicates that the geothermal power sector is at acritical point in its evolution. For the last two decades, development

has slowed down around the world but things seem to be turningaround once again and the industry is bracing itself for a newgrowth period.

Spurred on by a global awareness ofthe need to move from fossil fuels,governments around the world areintroducing the measures neededto increase investment. Thosemeasures have attracted a new type ofgeothermal development company tothe sector. Pure-play developers have

emerged that are focused on resourcedevelopment rather than power plantoperation.

Technological advances promise towiden the scope of the geothermalsector, opening up new opportunities inmarkets across the globe.

KPMGs report provides analysis ofthe geothermal market from different

perspectives. We take an objective lookat the current situation of the sector andtry to asses where it is heading. Ourreport looks into:

Thehistoricalevolutionofgeothermal

development with a regionalbreakdown in the last 50 years

Anassessmentofthecurrentgeothermal project pipeline andestimated increase in installedcapacity

Whichmarketsareexpectedtosee

the most growth in the near future

Theevolutionofgeneration

technology and future development

Financingoptionscurrentlyavailable

for geothermal projects

1975

738 1,636

CAGR = 7.9%

3,256

5,0966,367

8,5159,299

10,715

1980 1985 20001990 20051995 2010

MWe

Compound Annual Growth Rate

Evolution of global installed capacity

Source: KPMG analysis



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The information contained herein is of a general nature and is not intended to address the circumstances of any particularindividual or entity. Although we ende avor to provide accurate and timely information, there can be no g uarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on suchinformation without appropriate professional advice after a thorough examination of the particular situation.

2010 KPMG hf., an Icelandic limited liability partnership and a member firm of the KPM G network of independent memberfirms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

KPMG and the K PMG logo are registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity.

To get a copy of the WorldGeothermal Market & Outlookreport, please contact us

Benedikt MagnssonCorporate FinanceTel: +354 545 6236E-mail: [email protected]

Gunnar TryggvasonCorporate FinanceTel: +354 545 6237E-mail: [email protected]

Download an electronic versionof this brochure on www.kpmg.is

kpmg worldgeothermalmarketandoutlook oct2010

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