Barriers to Geothermal Power Development and the Importance of Governmental Policies

Abstract

This paper compares the generation cost structure of geothermal power and thermal power alternatives, and it analyzes quantitatively the barriers of geothermal power development along with the effects of governmental policies. Geothermal power development has two major barriers; large upfront investment costs and substantial resource risks. The large upfront investment costs engender a strong correlation between generation costs and the capital cost of investment. Since the capital cost for Independent Power Producers (IPPs) is high, the generation cost of geothermal power tends to rise if developed by IPPs. Accordingly, IPPs are likely to prefer thermal power since it requires less upfront investment than geothermal energy. Resource risks, the second barrier, stem from uncertainty regarding the conditions of the reservoir. The production of geothermal steam depends greatly on factors like temperature, pressure, permeability, etc. If these factors turn out better than expected, generation costs decline; however, generation costs can rise precipitously if they are worse. This aspect of geothermal energy resembles gambling more than a professional business venture, which is another reason why IPPs are circumspect about entering the geothermal development business. Government can play an important role in mitigating these two barriers to geothermal power development. For example, measures to lower the cost of capital, such as providing low-interest-rate loans or utilizing state-owned enterprises (SOEs), can be effective ways to lower the aforementioned large upfront investment costs. To reduce resource risks, initial explorations undertaken by the government or an attractive purchase price policy can be effective. In reality, governments of countries that have been successful in increasing geothermal power generation are implementing various forms of geothermal promotion policies. The key to success here depends on the incentives that government policies put into place. This paper demonstrates the effect of those incentives through numerical analyses employing a financial model based on reservoir engineering.