Policy, legal and institutional frameworks for geothermal development: a donor perspective Kampala, Uganda September 19, 2011 Maitane Concellon Programme Officer Energy & Climate AFD Nairobi

2 Geothermal development: need to address many technical and non-technical barriers 0 High up-front investment costs associated with high resource risk Poor availability of capital risk insurance for private sector investment Lack of specific laws and regulations governing geothermal resources Lack of geothermal equipment and resources for applied research and development Low awareness and limited information about geothermal energy; available technologies and available ressources Etc, etc, etc

3 Agenda Some thoughts on geothermal policy, legal and institutional frameworks Conclusions

4 Legal and regulatory framework Establish specific laws and regulations for geothermal addressing Authority issuing licenses for exploration and development of geothermal Systems and procedures of licensing (incl. geographical scope and duration) Ownership of geothermal resources Fees and liabilities for extraction of geothermal resources Steam sales Agreements Ensure consistency / sufficient provisions in other related laws and regulations Links mainly with Energy, Environmental management, Mining and Groundwater laws But also with legislation on land ownership, natural resource management, building legislation, licensing, investment, etc. Deal with other bottlenecks limiting investment Transparent procurement rules Customs and tax laws and procedures Reliable PPAs Sovereign guarantees Build capacity to establish a regulatory framework but also for monitoring and enforcement 1.1

5 Institutional framework (s) 1.2 Ressource Exploration Ressource Assessment Drilling / Wellfield Development Power Plant Development Operations National Utility Costa Rica (165 MW), Mexico (958 MW), Italy (842 MW), El Salvador (204 MW), Portugal (28 MW) National Utility Philippines (1,902 MW), New Zealand (650 MW), France (17 MW), Ethiopia (7MW), Turkey (94 MW) Several national and local government entities Iceland (573 MW) Public entitie (s) National utility, IPPs Costa Rica (165 MW), Philippines (1,902 MW), Kenya (167 MW) Public entitie (s) IPPs PPP IPPs Turkey (94 MW), Guatemala (49 MW) Japan (535 MW), US (3,074 MW), Australia (0.1 MW) Gov National utilities / Local gouvernements / IPPs US (3,074 MW), NZ (650 MW), Nicaragua (87 MW) Russia (81 MW) Source: Geothermex (2010), KPMG (2010) Examples (Installed capacity by 2010) Site Inventory Surface exploration Geological surveys Exploration drilling Appraisal drilling Feasibility study Production drilling Steam gathering network Power plant transmission Sales Marketing

6 Institutional framework (s) – Some considerations Success of some case when a single public entity has been in charge from exploration to drilling (ENEL in Italy) but development can be slow because of access to finance and capacity Intervention of public entities in early stages required for mobilization of grants / concessional loans reducing high up-front costs and high risk of resources Private sector investment can push development of the industry by diversifying financing options – but not easy to get private sector investment before resources are assessed (cf. Longonot, Suswa) If private sector mobilized, public intervention to reduce risk is required Optimization of risk sharing between the public sector, donors and private sector is required from exploration to electricity production but complex formula very dependent on country specific factors no unique success story sometimes a learning by doing process or a mix of options 1.3

7 Geothermal policies Key requirement: a national strategy that establishes the geothermal potential, identifies targets and defines a clear implementation and investment plan Various policy tools available for supporting investment in geothermal Reducing up-front costs (grants for research, drilling and demonstration, investment tax incentives) Increasing financial returns (production tax incentives, subsidies for low interest rate loans, reducing cost of licensing) Reducing risks (drilling risk insurance schemes, feed-in-tariffs, renewable portfolio standards, guarantees, provision of data from surface exploration and drilling performed by government agencies) But also closely linked to other policies: national and energy sector policies, pricing of energy/FiT, credit risk/cost of capital, political stability, Constitution of Geothermal Advisory Groups increases confidence and helps to reduce risk perception/premium 1.4

8 Risk-mitigation policies Project and financing confirmed only after completing the exploration, confirmation and permitting stages, i.e., estimated to % of project costs on average High cost of proving geothermal resources before confirming commercial exploitability of a site Surface exploration ~ 1 m $ Exploration drilling, well testing and appraisal drilling (approx. 9 wells) ~ from 3 to 5.5 m $ per well (own vs. hired from overseas rigs) Infrastructure development ~ 5-10 m $ Feasibility studies/ESIA ~ 1 m $ Approx. 35 to 65 million $ investment up-front (add. 35 m $ for purchase of 1 rig in low-case scenario) Early phase exploration and development financing is heavily reliant on government support in order to mitigate risk in initial development stages Policy instruments to be adapted to risk profile of each stage of development Exploration: grants, cost-sharing Wellfield / power plant development: fiscal incentives, loan guarantees/subsidies, risk insurance schemes Operations: tax incentives, feed-in-tariffs 1.5 Cost breakdown of a typical geothermal project Source: Geothermal Energy Association (2010) Risk involved in geothermal development Source: KPMG (2010)

9 Agenda Some thoughts on geothermal policy, legal and institutional frameworks Conclusions

10 The donor perspective 2.1 Not expecting a standardised solution / magic tool-box but a few key requirements for a reliable investment environment Success of geothermal development in particular countries is closely linked to their government’s policies, regulations and incentives – a complex system that requires fine-tuning over time The policy, legal and institutional framework must promote transparency, stability, efficiency and security for investors/donors There is a need for policy continuity over the long-term to ensure economic certainty Regional cooperation, resource mutualisation and knowledge sharing in East Africa can be key in accelerating and reducing the cost of initial stages of development

11 ASANTE SANA THANK YOU MERCI