Among renewable resources, few offer the benefits of geothermal –reliable, firm power that provides a stable base for intermittent resources like solar and wind and that is produced from an abundant domestic resource accessed using well-established equipment and methodologies.  Although geothermal exploration, like oil and gas, has long been a hit-and-miss game, where a few bad guesses and dry wells could sink a project, a new generation of geothermal developers is using AI and other cutting-edge technology to optimize the search for geothermal deposits, increasing the likelihood that any given well will be productive and thus reducing the overall capex of a project.

In many ways, financing for geothermal projects follows the same path as solar, wind and other renewables, with site control, permitting, interconnection and offtake the key factors affecting viability.  Traditional lenders and federal tax credit investors, though relatively new to geothermal,  don’t have to look far for appropriate underwriting standards and the more geothermal projects reach commercial operation, the more standardized these capital sources will become.  

There are, however, a few key differences from more well-known renewable energy technologies that a financing party and its counsel should focus on early when underwriting a geothermal generation project:

• Drilling: the core of any geothermal project is its wells drilled below the Earth’s surface (often more than 10,000 feet) to tap deep steam and heat deposits.  Even the slimmest test wells are expensive ventures.  Although new approaches have been successful in improving geothermal drilling outcomes, there is still significant risk to any one tap.  Financing parties should work closely with developer clients to regulate how much is invested in drilling at a site before it must show resource availability.
• Surface/Subsurface Disconnect: while test drilling is the essential first step in geothermal project development, a developer has to align its work on the surface, where interconnection queues are still long and supply chains still uncertain, with its active drilling program.  Moreover, a financing party’s naturally more cautious voice can help to temper the momentum (and excitement) behind early positive subsurface results, which can tilt development timelines and cause large drilling investment to have to wait for the surface to catch up.
• Site Control: the most significant and accessible geothermal resources in the U.S. are located in Western states, where land rights have been fragmented over generations of disparate land uses.  In one project site, it would not be unusual to find subsurface rights bifurcated from surface rights, in different ways over different owners and changing among the main power station site and its many feeder wellhead locations.  On the surface you must also negotiate multiple access and gen-tie easements; underneath you might see mineral rights severed from steam/heat interests, and some or all of them owned by the federal government and leased to others.  From the outset, a developer and its financing partners should focus in on site control, using expert local counsel when needed to interpret and navigate the complex map of land interests.
• Remote Location: Because geothermal development goes where the subsurface action is, projects may often be miles from an interconnection substation in mountainous terrain, along faults or in canyons.  Development timing – and cost – will be significantly affected by the degree of difficulty in tying into the utility.  Advance interconnection planning is critical to keeping the overall project schedule and budget on track.

Geothermal generation has a central role in the clean energy transition.  Coming up to speed on its unique challenges, as well as its promising benefits, is essential to building effective capital stacks for this sector and to getting important projects built.