Renewable energy is key to decarbonising electricity generation and thereby enabling a reduction in greenhouse gas (GHG) emissions from transport and buildings, as well as diversify our energy sources.

Geothermal power has advantages over many other renewable technologies in that it can provide reliable baseload electricity generation. However, it also has one of the most challenging investment and risk profiles of any renewable technology. The critical issues for geothermal developments include its “up-front” capital outlay of risk equity to cover geoscientific exploration and exploration drilling, the risk of confirming suitable resource and risk over time that the resource may decline.

Therefore there are societal benefits to be obtained from Governments providing support to the development stages of geothermal project in order to obtain a reliable baseload of renewable electricity.

Types of geothermal resource and potential in Europe

There are three different global geothermal resource types – volcanic geothermal systems, hot sedimentary aquifer geothermal systems, and enhanced geothermal systems (also known as hot dry rocks) – and all three unique reservoir systems are evident in Europe.

A study released by Frost and Sullivan (2009) reported that the geothermal energy market in Europe had reached installed capacity of 1,558 MW in 2009 and estimated this would reach close to 4,000 MW in 2016. The European Geothermal Energy Council estimate that there will be 250-400 MW added per year from 2010, taking Europe to between 4,000 and 6,000 MW by 2020. Taking into consideration that other regions such as Africa are estimating 1,200 MW in ten years, Europe’s target is ambitious but essential to meet the accelerated global demand for energy.

Some countries such as Italy (843MW*) and Iceland (575MW*) already have reasonably well established geothermal capacity, with solid prospects for further development. Countries like Germany (7MW*), France (16MW*), Portugal (29MW*) and Turkey (82MW*) are at the early stages of exploring their full geothermal potential. (*Geothermal Power Generation in the World, 2005–2010 Update Report - Ruggero Bertani, Enel Green Power, April 2010).

Although many European countries have geothermal resources, overcoming the barriers to development can be challenging. Even though geothermal energy is an attractive energy alternative and the technical ability to develop it is available, the non-technical obstacles such as finance and legislation need to be overcome.

Incentives

A key legislative instrument for promotion of renewable energy throughout Europe is the Renewable Energy Directive (2009/28/EC). This political driver sets targets for the promotion of the use of energy from renewable sources within the European Union. Member states have taken various steps to stimulate production and consumption of renewable energy sources in their respective countries.

Of these , there are a number of Government incentives that have been implemented to speed up the large scale increase in renewable energy production, often with a particular focus on electricity. These incentives are targeted at the development demonstration and commercialisation of renewable technologies including geothermal, and include:

• Guaranteed Feed-In Tariffs 
• Quotas (green certificates) 
• Grants 
• Tax reductions to support different phases of geothermal development

The most common mechanisms used to promote renewables in EU Member States and also commonly applied worldwide are feed-in tariffs and quota systems (also known as green certificates).

Feed-in tariffs have proven one of the most effective methods, with several countries, including Germany, Estonia and France, because it supports rapid growth of renewable technologies whilst also providing certainty of income. Of the countries with a geothermal feed-in tariff the average value is 98 €/MWh, with support ranging from 20 €/kWh to 173 €/kWh. Green certificates on the other hand provide no price guarantees so that there is no mechanism to protect the generator from becoming uneconomic due to changing electricity or certificate prices. This has resulted in a reluctance on behalf of investors to finance projects with quota systems unless they have a power purchase agreement with a supply company who will guarantee a price for electricity and the green certificates. The value of green certificates in different countries and across different technologiesranges from 45 €/MWh to 160 €/MWh with and average of 95 €/MWh.

However, feed-in tariffs and green certificates alone will not stimulate the geothermal sector. Tariffs only really address the main risks during the operational phase of the project. The success of a project also depends upon identifying a suitable geothermal resource and demonstrating that the size of the resource is sufficient for the life of the project. This stage is both high cost and high risk.

To combat these issues, countries such as Germany and organisations such as the World Bank have developed drilling risk mitigation schemes covering the risk associated with confirming a resource. Commercial organisations have developed geological risk insurance covering well failure and failure to drill into a productive resource. Grants may also be offered as in Germany and the UK to fund exploration drilling leading to the confirmation of a resource.

There are advantages and disadvantages to the incentives and the balance of measures required to support the early stages of a project’s investment cycle – i.e. incentivising more rapid development without rewarding failure. In the current economic environment it is also important to do so in the most cost effective manner.

In 2009 Sinclair Knight Merz and GeoThermal Engineering carried out a study in Spain, where power generation from geothermal resources has been promoted through either a guaranteed feed-in tariffs (73.56 €/MWh for the first 20 years and 69.50 €/MWh thereafter – 2009 values) or a guaranteed premium which is paid on top of the spot market power price. There is currently 20 MWth of geothermal heat production in Spain but no geothermal power generation.

Having considered the level of support provided in other countries a number of different levels of Government support to the Spanish geothermal sector were identified for consideration. For these scenarios, Sinclair Knight Merz and GeoThermal Engineering developed estimates of electricity generation and heat production that might be achieved from geothermal resources in Spain by the year 2020. The current level of support would produce no power generation and about 100 MWth heat production. If feed-in tariffs were moderately increased and an exploration risk mitigation scheme introduced, there would be an estimated 200 MWe power generation and 150 MWth of heat production. As a third option, if feed-in tariffs were substantially increased, an exploration risk scheme introduced with drilling grants for pure heat projects, a Research and Development program including demonstration projects and improvements to the existing regulatory framework, Spain could reach an estimated 1,000 MWe power generation and 700 MWth heat production by 2020. From these scenarios a preferred option was selected and presented to the Spanish Government for inclusion in the National Renewable Energy Plan.

The long-term effectiveness of measures which address these critical issues for geothermal development is still unclear. Some have only been introduced recently and therefore have not had time to prove their effectiveness. Where measures have been in place for longer, other factors such as sharp increases in drilling costs and limited ability of drilling rigs have negated any benefits gained from the measures.

Summary

The incentives and support provided to geothermal power in Europe vary substantially from country to country. Given the critical issues for geothermal developments (high development cost and resource risk) it is likely that geothermal power will be developed most rapidly in those countries with the best matched support mechanism rather than the best geothermal resources. Therefore the key point for un-tapping the potential for geothermal energy in Europe is to have an effectively designed support mechanism.

© Sinclair Knight Merz
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