Moving a Geothermal Project from Concept to Commercial RealityPeter Barnett Sinclair Knight Merz (SKM)

Introduction In moving a geothermal project from concept to commercial operation, we follow a program of sequential stages from initial exploration through to commissioning Objective is the discovery and proving of the required: quantity, and quality of geothermal energy

Is now a more or less standardized industry process

Key stages in geothermal development Pre drilling exploration model To determine whether a project is worth drilling

End of exploration drilling evaluation Feasibility Study Commitment to proceed with development Establish a nominal size and cost of development

Development Combination of delineation and development drilling Continued resource evaluation

Detailed engineering Steam field Power plant

Construction Ongoing production drilling

Commissioning

Key issues in the development process At all steps in this process we need to deal in detail with issues of: Timing Costs (capital) Risks Returns

Staged Geothermal Exploration & DevelopmentTime, years

ActivityProject identification / reconnaissance Geology and geochemistry GO/NO GO Geophysics Prefeasibility study GO/NO GO Permitting / EIS Infrastructure (pads, roads) Exploration drilling, well testing Resource assessment, feasibility study GO/NO GO Preliminary design Commercial negotiations to PPA EIS, permitting Development / production drilling Establish EPC contract FINANCIAL CLOSURE EPC Manufacture EPC Construction COMMISSION

1

2

3

4

5

1000

Nominal timing and capital cost requirements for a 100 MWe Greenfield geothermal project 100 Cumulative Cost, US$ M 10

1

Project timing Timing Greenfield developments Typically 60 months required from first surface exploration 24 months for surface exploration and exploration drilling 30 to 36 months to develop project from time of commitment (feasibility study)

Brownfield developments less time required as fuel supply is not such an issue Field expansions Infield optimisation plant

project timing largely dictated by time for equipment supply and installation Can be only a few months eg topping turbines

Project costs 1 Capital Costs dependant on: Well costs reservoir depth well productivities field enthalpy steam field collection system Type Pressure control system

number of injection wells

Power Plant cycle type plant size inlet pressure

Project costs 2 Initial estimation of project capital costs Well costs assume USD 1,200 to 1,500 per m

Steam field collection system wet steam field assume USD .35 to .40M per MWe

dry steam fields assume USD 0.20 to 0.25 MWe

Power plant dependant on cycle type significant economies can be achieved with: increased unit size increased inlet pressure

overall unit capital cost estimated to vary from US$1,600/kW to US$2,500/kW (McVeigh, 2003) depending on project size and other project-specific criteria

Sanyal (2005) eqn fitted to McVeigh (2003) data

$2,700

T otal P ro ject D evelo p m en t C ost (U S D / kW )

$2,500

Cd = 2500 e -0.003*(P-5) Cd = capital cost in US$ / kW P = plant capacity in MW

$2,300

$2,100

$1,900

$1,700

$1,500 0 20 40 60 80 100 120 140 160

Power Plant Size (MW Capacity)

Key issues for commercialization Although the activities undertaken in the Key Stages in geothermal development are important, there are two essential requirements for project commercialization: 1. Securing project fundingNeed funds in two amounts: exploration drilling (e.g. USD 10 to 15 M) for the power development (e.g. USD 100 to 150M) requires packaging of the project in such a way to make it financeable

2. Commissioning: i.e. the commencement of commercial generation and thus revenue with which to repay loan funds

Sources of Funding . 1 Exploration drilling Government agencies government funds grant funds (e.g. international assistance, foreign aid agencies)

concessionary loan funds WB, IFC, JBIC, ADB

Developers internal reserves commercial loans

Exploration drilling seen to have a high risk profile presents a barrier to exploration drilling and thus the creation of new projects for development

Sources of Funding .2 Development funding Government Concessionary loans

Private Sector Internal reserves Commercial loans

Development projects have a lower risk profile and funding is thus more readily obtainable Funders are seeking projects with greatest potential for: technical and economic success coming on-line within a reasonable time framei.e. having minimal legal, institutional and environmental risks

Role of government vs. private sector Once exploration projects are proven viable and development risks reduced, then private sector is much more likely to participate Its all a question of risk and return on capital Governments take a utility viewpoint with relatively low IRR expectations IPPs view risk as requiring a greater return on capital with IRRs of 15%, or probably higher

Role of government vs. private sector SKM view is that: Government agencies remain best placed to handle exploration drilling and resource proving as government is in the best position to accept the risk

Subsequent field development can then be undertaken by the private sector and/or government

To ensure active involvement of the private sector in geothermal developments, government needd to set the appropriate incentives: a power price which adequately compensates the private sector for: cost of money in the commercial sector development risk

and provides contractual and regulatory certainty

Geothermal Risk Issues As project commercialization progresses, the term RISK arises ever frequently

Geothermal Risk Issues Key geothermal risk issues include: Pre development exploration risk (of failure) environmental risks regulatory new geothermal law (#27 / 2003) regional autonomy law (# 25/ 1999)

Development fuel risk (for start up) construction risk plant performance

Commercial operation long term fuel risk commercial risk currency risk

% Probability 100% 120% 20% 40% 60% 80% 0%

D es k To p

MIN

MAX

MEAN

R ec on n.

G eo p hy si c s

Ex pl o D rlg

D el n D rlg

Probability of Success vs Exploration Stage

PhaseIn tia lP ro dn D Fi na n rlg ci al C lo su re Pr od n D In je cn C rlg D on st ru rlg ct io n

Fe as ib ilit y

Probability of Proving a Viable Project90% 80%MEAN

70%MAX

60%% Probabilty MIN

50% 40% 30% 20% 10% 0%. nn To ic rlg ec o ys D D D el n rlg p s

es k

R

G eo

Ex

D

pl o

ph

Exploration risk Once exploration drilling has been completed and a resource proven, subsequent development risk is much reduced This is support for the view that Government should remain in the business of exploration drilling and resource proving, to reduce project risk Risk reduction supports are becoming increasingly available to Governments: CDM and carbon trading ARGEO type mechanisms regional revolving funds for exploration drilling drilling failure insurance mechanisms

an overall continuing maturity of the geothermal industry with improved understanding of geothermal systems and models etc

African Rift Geothermal Development Facility Risk Guarantee Fund Rationale ofSequencingResource owners responsibility Investors responsibility

Role of the RGFRisk Guarantee Fund Geothermal Resource Assessment Network Resource assessment Resource assessment Resource assessment

Transition Transaction AdvisorFeasibility Study/ Tender Feasibility Study/ Tender

Drilling

Geothermal Power Plant Development Geothermal Power Plant Development Geothermal Power Plant Development

Geothermal Power Plant Development Funding Scheme

Drilling

Drilling

Feasibility Study/ Tender

Time Axis

Fuel Risks Start Up Fuel Risk Reserves assessment required in advance of development funding historically has been based on volumetric stored heat computations now based on numerical modelling simulations based largely on model matching to reservoir natural state

Long Term Fuel supply Risks Largely an O&M issue, managed through: staged plant expansions detailed reservoir modelling based on: closely matching actual field performance with time detailed geochemistry

active reservoir monitoring and management programs

Commercial Risks Key issue is the ability of the project to generate sufficient income to: repay project loans meet O&M costs meet companies profit requirements (for private sector companies and becoming an increasing requirement for corporatized or partially privatized government companies)

Dependant on: selling price of power as locked into PPA

loan interest rate and IRR long term contractual certainty

Example project cash flows # 1150,000,000

Interest Expenses (US$)130,000,000

Loan Principal Repayment (US$)

110,000,000

Net Cash Flow Interest Income (US$)

LOAN INTEREST RATE = 3.5%

90,000,000

Cash Balance(US$)

Cash Flows USD

70,000,000

50,000,000

30,000,000

10,000,000

-10,000,000

-30,000,000

-50,000,000

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

Project Year

Example project cash flows # 2150,000,000

Interest Expenses (US$)130,000,000

Loan Principal Repayment (US$)

110,000,000

Net Cash Flow Interest Income (US$)

LOAN INTEREST RATE = 7.0%

90,000,000

Cash Balance(US$)

Cash Flows USD

70,000,000

50,000,000

30,000,000

10,000,000

-10,000,000

-30,000,000

-50,000,000

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

Project Year

Conclusions 1 A staged geothermal development process is essential during project commercialization - for risk reduction Securing project funding is the single most important step in the commercialization / development process Exploration drilling Development

Government should remain in the exploration and resource proving phase able to handle the higher front end project risk can avail of risk reduction mechanisms not available to IPPs

IPPs and / or Government undertake development privatization model argues that IPPs will be more efficient but, still under vigorous debate (worldwide)

Conclusions 2The key risk issues are not technical but are: Regulatory uncertainties remain in: geothermal law implementation of regional autonomy law

Commercial ability of project to generate sufficient income to meet all obligations selling price of power cost of money and attached risk premium

long term contractual certainty

These issues merit continued strong interest and advocacy by the Indonesian geothermal industry