Geothermal power is currently a niche market. However, growth is expected to accelerate in the next few years aided by new players in the market, the development of new technologies supported by feed-in tariffs and international development agencies in developing countries. The future for geothermal energy is looking good.

Electricity was first produced from geothermal steam in Italy in 1904 at an experimental installation constructed in Larderello. Today, approximately 22 countries generate electricity from geothermal sources. This number is growing. The United States and The Philippines have the largest installed capacity of geothermal power. Six more countries are expected to have installed geothermal power plants by 2015, and another seven will have done so by 2020.

This article looks at some aspects of the resource, the risks associated with a geothermal project and how the “geothermal risk mitigation facility” in East Africa mitigates some of the exploration risk associated this form of power generation.

Capacity Forecasts

Geothermal power is derived from the heat contained in the crust of the earth. Heat is produced in the earth from the decay of radioactive material that exists in the core of the planet. The heat moves to the surface through a process of conduction and convection. Some of the best geothermal fields are found along volcanically-active areas and are often located near boundaries of tectonic plates.

Commercially-viable geothermal power generation technology relies on underground sources of extractible steam. As of 2013, the total geothermal power market in the world accounted for approximately 11,500 megawatts. The market has historically grown at an annual rate of 3%, but growth is increasing with projections of installed geothermal capacity in the world of as much as 24,000 megawatts by 2020.

Although the highest concentration of geothermal energy is associated with the tectonic plate boundaries, some form of geothermal energy can be found in most countries. For example, ground source heat pumps can be used almost anywhere in the world to produce heat from the ground.

Geothermal resources are classified in a number of different ways depending on the type of heat transfer, heat source, reservoir temperature, utilization, physical state and geological settings.

The United States, Japan, Iceland and New Zealand are the leaders in using geothermal resources for electricity generation.

In Asia, Indonesia has enormous geothermal potential and has plans to add up to 3,000 megawatts of new capacity from geothermal resources by 2020. The Sarulla geothermal project with a capacity of 330 megawatts will be the largest geothermal power project in the world. The project is being undertaken by Medco Power Indonesia (a consortium of Medco, Itochu Corporation, Kyushu Electric Power and Ormat International) at a cost of approximately US$1.6 billion. The Philippines, Malaysia and Papua New Guinea are other countries that are likely to add new capacity from geothermal resources by 2020.

In Africa, the East African Rift Valley is the region with the largest geothermal power potential. Kenya leads in the harnessing of geothermal resources for electricity generation through the establishment of a state-owned company, the Geothermal Development Company, which is responsible for exploiting geothermal fields. With one exception, existing geothermal power plants in the country are all owned by the state-owned generation company, KenGen.

Djibouti and Ethiopia are the other countries in Africa that are likely to increase their generation capacity by the addition of new geothermal-based electricity generation. Ethiopia is said to have at least 5,000 megawatts of geothermal power potential. It has signed an agreement with the Icelandic International Development Agency for geothermal surface exploration. In addition, a deal has been signed between Reykjavik Geothermal and the Ethiopian Electric Power Corporation for the development of geothermal power projects in the Caldera of Corbetti. In Djibouti, the Lake Asal region offers the best potential for geothermal energy.

Test drilling of wells is underway in Uganda, Rwanda, Burundi, the Democratic Republic of Congo and Zambia, and these countries may see the development of pilot projects in the short term. Other countries that provide good prospects in Africa include Tanzania, Eritrea, Sudan, Malawi, Mozambique, Madagascar, the Comoros and Mauritius.

In Latin America, Mexico, Nicaragua, El Salvador and Costa Rica are expected to continue to develop geothermal power generation plants. Other countries that offer good prospects are Peru, Chile, Argentina, several Caribbean island states as well as Guatemala, Honduras, Colombia, Ecuador and Bolivia.

The table shows the installed and forecasted capacity of geothermal power plants around the world.

Benefits

There are many benefits from geothermal energy. It can be distinguished from other sources of renewable energy. First, geothermal power is not intermittent. It can be relied upon as a stable source of baseload power regardless of prevailing ambient conditions. This clearly benefits utilities and permits them to plan and schedule power generation to meet electricity demand. Second, geothermal power plants are reliable and operate at high availability factors of over 90% (and in some cases at over 99%), notwithstanding the relatively high investment costs. The absence of fuel costs and the high availability factors help to compensate for some of the heavy initial investment costs.

Third, geothermal projects do not require too much land or space. This allows for economies of scale. Fourth, since geothermal power is practically free from dependency on fossil fuels, it provides a natural hedge against energy price fluctuations while contributing to a country’s security of supply requirements at the same time.

Fifth, the environmental benefits are immense as geothermal energy can help reduce emissions of CO2 and air pollutants to negligible levels per unit of electricity generated. Sixth, geothermal power generation usually uses conventional steam-cycle generation technologies. The operational and maintenance risks associated with such plants are well known and have been financed.

Four Technologies

The technology available for the exploitation of geothermal resources typically requires the drilling of production wells that deliver subsurface liquids to the surface that are normally injected back into the original formation through reinjection wells after the liquids have been used to generate power.

There are four types of power plants typically associated with geothermal energy: binary, flash (single and double), back pressure and dry steam.

Flash plants — whether single or double — are the technology used to generate electricity from steam with temperatures above 200°C. This is a conventional steam cycle. In a single flash steam plant, hot water or steam from the wellhead enters a separator where steam is separated from liquid and expanded through a turbine.

A double flash steam cycle, while more efficient as a source of generation and in terms of using the geothermal resource, differs from a single flash cycle plant in that fluids are passed through successive separators at different pressures. Steam enters a dual-entry turbine in which steam at different pressures flows to different parts of the turbine. Double flash steam plants cost more than single flash plants.

A binary plant uses a secondary working fluid with a low boiling point and a high vapor pressure at low temperatures. The geothermal liquid heats the secondary fluid through heat exchangers where the secondary fluid is heated and vaporizes. The vapor drives a turbine. Binary plants are usually deployed in geothermal fields that are dominated by liquid with temperatures up to 200°C. Binary units can be produced in sizes of between 0.1 to five megawatts and can be deployed in isolated or remote areas.

Back-pressure units are steam turbines that exhaust the steam from the geothermal resource directly into the atmosphere. While they remain simple to install and they are cheap and easy to run, they are less efficient than other technologies. The lack of a reinjection and potential effect on the environment (depending on the chemical composition of the fluids and steam being exhausted) make them less attractive units to deploy.

Dry steam technology is normally used when a geothermal reservoir produces pure hot steam. The technology is similar to conventional steam or flash technology, but without a separator to separate fluids from steam as that is not necessary. These units can be large and are capable of operating efficiently.

Risks

Several risk factors will influence the appetite for undertaking a geothermal project.

Most risks associated with a geothermal power plant are no different than those faced by any power generation project: construction risk including delay, offtaker risk, market risk, operational risk and regulatory risk including potential changes in subsidies or other government policies.

However, there are two additional inter-related risks that apply to geothermal power projects: resource risk and financing risk, especially where there is a long lead time between the initial investment and the commencement of payments under the power purchase agreement. The two risks go hand in hand.

The exploration risk associated with a geothermal project is not very different from that associated with an oil and gas project. The exact depth of a well or the exact steam output from a geothermal well cannot be accurately predicted until production wells are drilled. The simple economics of a geothermal project depends on the productivity of the geothermal field and on the success of being able to tap into the resource. The amount of electricity that can be produced from the geothermal field is dependent on the number of wells that are drilled and the production capacity of each well. There have been several notable failures of geothermal projects in the US and central America where the resource proved disappointing or far more money had to be spent on wells than expected.

Not surprisingly, lenders do not like to finance power projects where the feedstock risk is unknown nor do they like to provide debt for projects where the nature and extent of the resource is unknown. So how can the resource risk be mitigated? Funds are needed to finance the exploratory stage of a geothermal project.

It helps to have a dedicated agency or state-owned company take the lead in geothermal field exploration and the assessment of the quality of the resource. In any case, if a government is serious about developing this resource, then it has to take the first step in exploring and exploiting the resource. There are some notable examples of where this has been done successfully.

In 1976, the government of The Philippines established a subsidiary of the national oil company, Philippine National Oil Company. This subsidiary, PNOC Energy Development Corporation, became responsible for exploration and development of the Tongonan and Palinpinon geothermal fields. Since its inception, it has explored and developed various geothermal resources in the country and was eventually privatized in 2007 and now operates under the name EDC.

There is a similar story from Mexico. Geothermal exploration was the remit of the national power utility, CFE, under which Mexico has become the world’s fourth largest power producer from geothermal resources.

In Indonesia, Pertamina Geothermal Energy was established in 2006, and it is responsible for all aspects of geothermal. It is currently implementing the government’s program to increase capacity by 1,050 megawatts by 2015.

When Kenya did its first geothermal independent power project at Olkaria III in 2000, the geothermal field risk was borne by the independent power producer, OrPower 4 Limited. While the Olkaria III IPP project has proven to be a success for the country and has increased in size from 8 megawatts in 2000 to 110 megawatts today, the latest geothermal IPP being undertaken in Kenya (Olkaria VI) shows that Kenya, too, has now established a state-owned company to champion geothermal exploration.

The Geothermal Development Company was established in 2008 for the purpose of exploring and developing geothermal resources. GDC undertakes the initial exploration, drilling, risk assessment and promotion of direct utilization of geothermal energy. In undertaking these activities, GDC absorbs the early development risks and opens up the possibility of the public and private sector participating in the development phases of a geothermal project. The Olkaria VI project anticipates that GDC will sell the geothermal resource to KenGen that will resupply the geothermal resource to the independent power producer.

The funding for these activities will not come from commercial banks. Multilateral funding is a major source of funding for initial geothermal development in many emerging markets. Banks such as the European Investment Bank and the World Bank are significant sources of debt that is needed to develop geothermal resources. In addition, the German government through KfW and the Japan International Cooperation Agency are also playing a leading role in funding the development of geothermal resources. These are important initiatives towards mitigating the up-front cost of geothermal development and of assessment of the optimal location of wells. Like an oil and gas exploration process, there are several steps that have to take place before the construction phase of a geothermal power project commences. These steps include preliminary surveys, exploration, test drilling, steam field appraisal, project review and planning and field development and production.

These upfront costs can be significant. Development of geothermal projects in emerging markets is hampered to an extent by the lack of available funding for these activities. However, East African countries now benefit from a facility that can provide grants to cover some of the costs.

Geothermal Risk Mitigation Facility

The African Union, the German government and the EU-Africa Infrastructure Trust Fund, via KfW Entwicklungsbank, established a geothermal risk mitigation facility in April 2012 to fund the development of geothermal resources in east Africa. The program is intended to assist with the financing of surface studies and drilling projects. Currently €50 million is available for funding.

The fund was initially open to geothermal development in Ethiopia, Kenya, Uganda, Tanzania and Rwanda, but is now being extended to Burundi, the Comoros, Democratic Republic of Congo, Eritrea, Zambia and Djibouti, too.

The geothermal risk mitigation facility is available for surface studies to find the optimal location of wells in known geothermal fields. This can include geophysical surveys as well as supporting infrastructure that is needed to conduct the surface study. The fund is also available for drilling once the optimal location of wells has been established. The cost of drilling wells that are within certain specified measurements can be supported by the fund as can the cost of infrastructure required for exploration drilling. In addition, the fund can support a feasibility study where it forms part of a drilling program.

Grants are provided through a competitive two-stage application process. The first stage is a pre-qualification process that invites applicants to submit expressions of interest within a certain period of time. Expressions of interest that score over a certain threshold are short-listed and those applicants are invited to participate in a mandatory pre-bid workshop and to submit an application.

The purpose of the pre-bid workshop is to explain the application process as well as the evaluation and procurement processes.

The second stage, which is the application process, requires applicants to submit their applications within a certain period of time. Applications that score above a certain threshold can then enter into contract negotiations with the African Union Commission.

Where a negotiation is successful, grant agreements will be concluded between the African Union Commission and the applicants. The grant agreements establish requirements for monitoring and reporting on the surface studies that are being undertaken and on details regarding the reservoir drilling and testing.

The second application round commenced in October 2013. It normally takes a year from the application to the grant. The third application round is expected in October 2014.