Exploration and Drilling Financing Options
Financing options for the exploration and drilling stage of geothermal power projects include balance-sheet financing, exchange-traded corporate equity financing, mezzanine-debt financing, and private equity financing. These financing options reflect the high risk of resource identification, resource evaluation, and test well drilling. Financing in these phases presents the greatest challenge because of the uncertain opportunity for economic returns and the lack of familiarity with geothermal power technology in the renewable energy financing market.
Companies with a long track record of geothermal project development have used balance-sheet financing to fund the exploration and drilling stage of geothermal power project development. Balance-sheet financing can include using internal funds, corporate-level debt, or both.
Companies that are considering investing internal funds typically require strong positive cash flows from other operations in order to make funds available. Alternatively, companies can seek corporate-level debt to fund development. Providers of corporate-level debt have recourse to a company's other assets; therefore, investments are evaluated by considering the financial stability and strength of the company as a whole, rather than the characteristics of any specific project. Companies with low levels of existing debt are in a strong position to raise additional capital at attractive prices through the debt markets. Once the corporation receives the debt, it is able to apply the funds to any existing needs, including early-stage geothermal power project development.
Exchange-Traded Corporate Equity Financing
One of the most common forms of exploration and drilling stage financing for geothermal power projects is exchange-traded corporate equity financing. A considerable number of North American geothermal power projects have been financed by public companies with expertise in geothermal power that filed for their initial public offering; however, the U.S. stock exchanges have been less receptive to listing geothermal power development companies than some international stock exchanges have been. Canadian stock exchanges are known to have more investors who are comfortable with resource development risks common to the oil, gas, and mining companies listed on their exchanges.
Companies seeking to list on public exchanges may have three important competitive advantages that can help them to raise equity at the corporate level:
- Technology expertise and experience that improves the likelihood of success for any individual project
- Project portfolios that reduce the risk of an individual project by spreading the risk across an entire investment portfolio; the broader portfolio may include diverse investments beyond geothermal projects and/or multiple geothermal projects in various stages of development
- Expectations of success in the project portfolio, which may be justified by projects located in proven fields or by receiving favorable resource reports by well-respected engineering firms.
After production wells are drilled, mezzanine-debt financing may be available for a geothermal power project. Mezzanine debt is financing that also includes an equity component, which allows the provider to benefit from a portion of the equity upside of the project.
Mezzanine-debt financing is secured by liens on a geothermal power project's assets, allowing the investor to take possession of the project should the developer default on the debt. The lender does not, however, have recourse to the company's other assets, as is the case with balance sheet financing. While the cost is relatively high for debt, it is lower than for traditional equity. Mezzanine-debt financing is usually put in place about 12 to 18 months before construction financing is obtained and is typically repaid with proceeds from a senior loan used for construction of the geothermal power project.
Because mezzanine-debt financing is relatively high risk and requires a deep knowledge of geothermal power project development, investors typically require an equity component ranging from 10% to 30% of a project as part of their financial return.
Private Equity Financing
Private equity consists of ownership or investment into firms that are not listed on public exchanges. Private equity investment is typically highly illiquid due to strict regulation, but can be used to support new technologies, such as geothermal power projects.
Some companies have successfully raised private equity during the exploration and drilling stage of a geothermal power project by offering a portfolio of projects that include geothermal and other renewable energy projects. Given the similarity in development risks to oil and gas exploration and production, private equity entities with experience in this arena may be more comfortable than others in taking on the risks of geothermal power projects.
Examples of companies and investors that are using these early-stage financing options, including the financial and non-financial requirements for each option, are provided in the Guidebook to Geothermal Power