Geothermal energy has numerous benefits. It is a clean, renewable and cheap source of base load power, with minute greenhouse gas emissions and a relatively low electricity cost. In seven countries—Costa Rica, El Salvador, Iceland, Kenya, New Zealand, Nicaragua, and the Philippines—geothermal represents more than 10 percent of total electricity generation. As of August 2013, 24 countries had geothermal power plants with a combined power of 11,765 MW.
However, geothermal also requires high up-front cost. Exploration is expensive, and drilling is risky—an unsuccessful drill hole can cost millions of dollars. The World Bank notes that the total cost of drilling in a geothermal field ranges from $15 to $25 million, and revenue isn’t generated for five to eight years. Developed nations rely on the public sector to leverage risk for geothermal, but public financing is simply not enough to fund geothermal projects in developing nations: innovative financing mechanisms are necessary.
This is where the Geothermal Development Facility could have a large impact.
The centerpiece of the GDF is the Risk Mitigation Fund, which is dedicated to reducing risk and accelerating geothermal development in Latin America. Twelve multilateral institutions and development banks contribute to the fund, which consists of contingency grants for deep exploratory drilling. These grants cover up to 40 percent of the first three drills, giving companies several heavily discounted chances to locate a geothermal resource. Additional loans are available for power plant construction after successful drilling.
The GDF is modeled after the Geothermal Risk Mitigation Facility for Eastern Africa (GRMF), which initially supported development in Ethiopia, Kenya, Rwanda, Tanzania, and Uganda. However, the program’s success led to the inclusion of six more nations, including Djibouti—which mentioned investing $35 million in geothermal energy during the Lima climate negotiations.
It is hoped that a similar model of geothermal expansion can take place in Latin America. Currently, at least 90 percent of geothermal potential in the region is untapped. The only serious geothermal producer in the region is Mexico, and several countries—including Bolivia, Chile, Colombia, Ecuador, and Peru—are endowed with serious geothermal potential, but have yet to successfully generate electricity.
The GDF and its predecessor, the GRMF, will play an important role in financing international geothermal projects. The risk for geothermal projects drops exponentially after the resource is successfully identified, so providing funding at this crucial project stage is likely to significantly accelerate geothermal development and bring more attention to this renewable resource.
While geothermal energy cannot singlehandedly replace coal as a base load energy source, large reserves of untapped geothermal energy exist in many regions of the world, including Latin America. Combining base load geothermal with hydro, wind and solar power could be a solid blueprint for a sustainable energy future. If successful, the GDF and Risk Mitigation Fund will generate 350MW of geothermal in Latin America, saving 50 million tons of carbon dioxide emissions.
In the face of Latin America’s rapidly increasing energy needs and the associated emissions, the Geothermal Development Facility presents an exciting opportunity to meet growing energy demand with a cleaner alternative to fossil fuels.
Originally posted on America's Quarterly on 12/23/14