OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL tone 115 YK 2 4 100 0 Pantone 289 CMYK 93 39 0 73 DEVELOPMENT IN LAC B 255 229 0 RGB 0 35 69 tone 656 Process Cyan Pantone 433 YK 1 0 0 9 CMYK 100 0 0 0 CMYK 82 65 65 79 B 235 241 241 RGB 0 173 228 RGB 2 23 25 Cover photo: Geothermal pipes. Photo courtesy iStock Photo via www.thinkstockphotos.com. OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL D E V E LO P M E N T I N L AC San Jacinto-Tizate Geothermal Plant. Photo courtesy of Polaris Energy Nicaragua S.A. CONTENTS Acronyms and Abbreviations............................................................................................................v Acknowledgments............................................................................................................................vii Executive Summary..........................................................................................................................ix Chapter 1.  Geothermal History and Opportunities in LAC...........................................................1 Mexico and Central America.........................................................................................................1 The Caribbean...............................................................................................................................6 South America...............................................................................................................................8 Conclusions.................................................................................................................................10 Chapter 2.  Attracting and Selecting Qualified Private Developers............................................13 Geothermal Resource Conditions and Risk.................................................................................14 Policy, Legal, and Regulatory Framework...................................................................................15 Institutional and Local Capacity to Oversee and Develop Geothermal Capacity.......................18 Financial Considerations.............................................................................................................19 Conclusions.................................................................................................................................19 Chapter 3.  Geothermal Resource Risks and Options for Mitigation.........................................21 The Key Challenge......................................................................................................................21 Approaches to Geothermal Resource Risk Mitigation.................................................................22 Emerging Approaches in LAC.....................................................................................................29 Conclusions.................................................................................................................................33 Chapter 4.  Mobilizing Financing for Geothermal Development.................................................35 Power and Geothermal Investment Landscape to Date..............................................................35 Looking at the Horizon: Investment Needs in the Geothermal Sector.........................................38 Financing Geothermal Development...........................................................................................40 Funding Sources in the LAC Region............................................................................................40 Chapter 5.  Policy, Legal, & Regulatory Reforms to Improve the Investment Climate..............47 Establishing a National Strategic Policy Framework...................................................................48 Legislative Best Practices............................................................................................................51 Contents i Best Legislative Practices Designed to Facilitate Private/Public Sector Development...............55 Regulatory Best Practices...........................................................................................................57 Conclusions.................................................................................................................................60 Chapter 6.  Environmental and Social Safeguards......................................................................61 Environmental and Social Impacts and Risks in Geothermal Development...............................63 Environmental and Social Risk Assessment and Management...................................................68 Legislative and Regulatory Management of Environmental and Social Impacts and Risks.......72 Environmental and Social Risk Management—Illustrative Cases...............................................74 Conclusions.................................................................................................................................79 Annexes.............................................................................................................................................81 Annex 1: LAC Countries with Geothermal Laws and Regulations...............................................81 Annex 2: World Bank Group Performance Standards.................................................................82 Annex 3: Environmental and Social Risk Mitigation Measures....................................................84 Annex 4: Environmental & Social Impact Assessment Topics for Geothermal projects..............87 Bibliography......................................................................................................................................89 Tables Table 1.1: Mexico and Central America’s Installed Geothermal Capacity and Share of Electricity Production..................................................................................2 Table 1.2: Caribbean’s Installed Geothermal Capacity and Share of Electricity Production.....7 Table 1.3: South America’s Installed Geothermal Capacity and Share of Electricity Production.................................................................................................................9 Table 1.4: Estimated Geothermal Resource Potential in LAC Region.....................................11 Table 2.1: Key Factors for Attracting Qualified Geothermal Developers in LAC.....................20 Table 3.1: Government-Led Development of Geothermal Generation Capacity (2017).........23 Table 3.2: Estimated Geothermal Generation Capacity Resulting from Cost-Sharing Schemes (2017)......................................................................................................24 Table 3.3: Emerging Geothermal Development Approaches in LAC......................................32 Table 4.1: Private Sector Investment in the Power and Geothermal Sectors in LAC, 1993–2017...............................................................................................................37 Table 4.2: Planned Geothermal Developments in the LAC Region.........................................38 Table 4.3: Planned Geothermal Projects in Central America and Mexico Region (Next 10 Years)........................................................................................................39 Table 4.4: Planned Geothermal Projects in Caribbean Region (Next 10 Years)......................39 Table 4.5: Planned Geothermal Projects South America Region (Next 10 Years)...................40 Table 5.1: A Policymaker’s Checklist to Use in Formulating a National Geothermal Strategy ..................................................................................................................50 Table 5.2: Phases of Geothermal Project Development and Regulation.................................59 ii OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Table 6.1: Recognized Principles and Guidance on Environmental and Social Impacts and Risks........................................................................................62 Table 6.2: Environmental and Social Impacts and Risks by Development Phases.................67 Table A1.1: Geothermal Laws and Regulations in LAC Countries with Geothermal Potential/Capacity...............................................................................81 Table A3.1: Environmental and Social Risk Mitigation...............................................................84 Figures Figure 3.1: Overview of the Typical Geothermal Development Process...................................21 Figure 3.2: Development Stages in Public Sector as Developer..............................................23 Figure 3.3: Development Stages in Public-Sector led Exploratory Drilling...............................24 Figure 3.4: Development Stages in Cost-Shared Exploratory Drilling.......................................26 Figure 3.5: Evolution of Geothermal Power Generation Capacity in the United States and Japan...............................................................................................................27 Figure 4.1: Private Geothermal Investment by Region, 1993–2017 (US$ million).....................37 Boxes Box 1.1: Chile Geothermal Roundtable Discussions..............................................................9 Box 6.1: Geothermal Gas Emissions.....................................................................................65 Box 6.2: Incorporating Gender in Geothermal Projects........................................................70 Contents iii San Jacinto-Tizate Geothermal Plant. Photo courtesy of Polaris Energy Nicaragua S.A. A C R O N Y M S A N D A B B R E V I AT I O N S ADB Asian Development Bank EBRD European Bank for Reconstruction AfD Agence française de développement and Development (French Agency for Development) EHS environmental, health and safety Ar argon EIA Environmental Impact Assessment BMZ Bundesministerium für wirtschaft- EIB European Investment Bank l iche Zusa m mena rbeit u nd ENAP Empresa Nacional del Petróleo Entwick lung (German Federal (National Petroleum Company) Ministry for Economic Cooperation ENEE Empresa Nacional de Energ í a and Development) Eléctrica (National Electric Energy CABEI Central American Bank for Economic Company) Integration ENEL (NI) Empresa Nicaragüense de Electricidad CAF Corporacion Andina de Fomento– (Nicaraguan Electricity Company) Banco de Desarrollo de América ENEL (IT) Enel Green Power Latina (Andean Development Bank ESAP Environmental and Social Action of Latin America) Plan CAPEX capital expenditure ESIA Environmental and Social Impact CCP Cerro Colorado Power Assessment CDB Caribbean Development Bank ESMAP E n e r g y S e c t o r M a n a g e m e n t CEL Comisión Ejecutiva Hidroeléctrica del Assistance Program Río Lempa (Executive Hydroelectric ESMP E nv i ron menta l a nd Soc ia l Commission for the Lempa River) Management Plan CEPAL Comisión Económica para América ESMS E nv i ron menta l a nd Soc ia l Latina  (United Nations Economic Management System Commission for Latin America and EU-LAIF European Union Latin America the Caribbean) Investment Facility CFE Comisión Federal de Electricidad FI Financial Intermediary (Federal Electricity Commision) FIT feed-in tariff CH4 methane GCF Green Climate Fund CIF Clean Investment Fund GDF Geothermal Development Facility CO2 carbon dioxide GDN Geotérmica del Norte (Geothermal CTF Clean Technology Fund of the North) DFID Depa r t ment for Inter nat iona l GDP gross domestic product Development GEEREF Globa l Energ y Eff iciency and DGDC Dominica Geothermal Development Renewable Energy Fund Company GEF Global Environment Facility A c r o n y m s a n d A b b r e v i at i o n s v GEOLAC Geothermal Congress of Latin LCOE levelized cost of energy America MW megawatts GGDP Global Geothermal Development Plan N2 nitrogen GHG greenhouse gases NH3 ammonia GIZ German Center for International NOx nitrogen oxide Cooperation NDF Nordic Development Fund GoCD Government of the Commonwealth NCGs non-condensable gases of Dominica OHS Occupational Health and Safety GoM Government of Mexico O&M operations and maintenance GoN Government of Nicaragua PMA Pitons Management Area GoSL Government of St. Lucia PPA power purchase agreement GW gigawatt PPIAF P ubl ic-P r ivate I n f ra s t r uc t u re H 2 hydrogen Advisory Facility  H 2S hydrogen sulfide PPP public private partnership Hg Mercury PS Performance Standard ICE Instituto Costarricense de Electricidad PTC production tax credit (Costa Rican Institute of Electricity) RAP Resettlement Action Plan IDA I nter nat iona l Development RPS Renewable Portfolio Standard Association SAGS steam-above-ground system IDB Inter-American Development Bank SEP Stakeholder Engagement Plan IFC International Finance Corporation SIDS Small Island Developing States IFI International Financial Institution SO2 sulfur dioxide INDE Instituto Nacional de Electricidad SREP Scaling Up Renewable Energy (National Electricity Institute) Program IPP independent power producer SSA steam sales agreement ITC investment tax credit TKB Development Bank of Turkey JICA Japan International Cooperation TKSB Türkiye Sınai Kalkınma Bankası Agency (Industrial Development Bank of KenGen Kenya E lec t r ic it y Generat i n g Turkey) Company UN United Nations KfW Kreditanstalt für Wiederauf bau US United States (German Development Bank) UNU-GTP United Nations University Geothermal LAC Latin America and Caribbean region Training Program vi OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC ACKNOWLEDGMENTS T his report is a product of the Energy Program (ESMAP) is also gratefully acknowl- Department for the Latin America and edged. ESMAP—a global knowledge and tech- Caribbean Region (LAC) of the World nical assistance partnership administered by the Bank’s Energy and Extractives Global Practice. World Bank and sponsored by official bilateral It is intended to enhance regional and global donors—assists low-and middle-income coun- knowledge about the geothermal sector to facil- tries, its “clients,” in providing modern energy itate scaling up geothermal development in LAC. services for poverty reduction and environmen- The report was prepared by a core team consisting tally sustainable economic development. ESMAP of Laura Berman, Thrainn Fridriksson, Ximena is governed and funded by a consultative group Rosio Herbas Ramirez, Migara Jayawardena, John comprised of official bilateral donors and multi- Armstrong, Stan Peabody, Juan Turner, and lateral institutions representing Australia, Sergio Aurelio Rivera Zeballos. The authors are Austria, Canada, Denmark, Finland, France, grateful for the guidance provided by Antonio Germany, Iceland, the Netherlands, Norway, Barbalho (World Bank Energy Practice Manager) Sweden, the United Kingdom, and the World and for the valuable contributions made by Paolo Bank Group. Bona, Joeri Frederik de Wit, Surekha Jaddoo, and Madiery Vásquez, as well as for the inputs Please note that the findings, interpretations, and provided by the geothermal developers, policy conclusions expressed in this report are entirely makers, and utilities interviewed. those of the authors and should not be attributed in any manner to the World Bank, its affiliated The financial and technical support provided by organizations, members of its Board of Executive the Energy Sector Management Assistance Directors, or the countries they represent. Acknowledgments vii San Jacinto-Tizate Geothermal Plant. Photo courtesy of Polaris Energy Nicaragua S.A. EXECUTIVE SUMMARY M any countries in the Latin America and regional experiences and best practices that and Caribbean region (LAC) are have proved useful in overcoming these chal- endowed with world-class geothermal lenges. The report is a decision-maker’s guide to resources. There are 25 countries and territories assessing these key barriers and opportunities in LAC with estimated geothermal resource poten- for expansion of geothermal development in LAC. tial, but only eight have installed geothermal It showcases an array of measures from around power capacity. Fifteen percent or less of LAC‘s the world that clients in LAC can customize for estimated geothermal resource potential is application in their own domestic markets. currently exploited to produce power. The Specifically, this report explores: majority of LAC’s geothermal resources remain untapped, not only in the more advanced Central • Key elements that influence the investment America and Mexico region but also in the decisions of geothermal developers in LAC; Caribbean and in South America. If further • Approaches to mitigating resource risk that explored and developed in a sustainable fashion, may be suitable for LAC and experience using these resources could provide a significant share these approaches around the world; of the base-load power needs of the region at a • Mobilizing finance for geothermal development competitive cost, resulting in direct economic and and the different types of investors and environmental benefits to many LAC countries. financing sources available; Various large and small geothermal developers • Key policy, legal, and regulatory considerations are keen to enter or to expand their presence in that are necessary to support geothermal LAC. There is also strong support for geothermal development; and development from governments in the region and • Ways in which environmental and social from the international development partner considerations can be incorporated into community that has been providing both conces- geothermal developments to ensure that these sional financing and technical assistance. investments will be sustainable over time. While there are a number of barriers that slow The intention of this study is to address key the growth of the geothermal sector in LAC, cross-cutting sector and regional issues in LAC there also are significant opportunities to and explore global solutions to these types of address such barriers and to scale up develop- issues. An in-depth, countr y-by-countr y ment. This report gives an overview of the phys- geothermal analysis for LAC was beyond the ical, economic, financial, market, regulatory, scope of the proposed work. The key opportuni- environmental, and social obstacles that have ties and challenges addressed in the report were hampered geothermal development globally and identified through engagement with LAC policy- in LAC. It also provides examples of international makers, utilities, and developers, and the Executive Summary ix potential solutions and approaches outlined draw solar power, given the significant drop in the primarily from global experience. As regional prices of these technologies. In contrast, experiences and approaches are more well-known geothermal sector expansion has occurred at a by LAC policy makers and stakeholders, the coun- much slower pace. The relatively lower risks, rapid tries engaged were most interested to learn from deployment times, and lower investment require- global experiences outside LAC. These approaches ments of both wind and solar have made these could later be adapted by LAC countries to meet technologies increasingly attractive to both private their own country-specific needs, with further sector and public players. Between 2006 and 2015, assistance from the World Bank and from other over 26 gigawatts (GW) of non-hydro renewable development partners supporting geothermal energy were deployed in the region, of which development in the region if needed. geothermal comprised only a small fraction.3 The growth of intermittent renewables on the Electricity and Geothermal Sector Context grid will require that regulators develop solu- The geothermal sector has a key role to play in tions to manage the increased variability and power-sector development, which is essential uncertainty of electricity generation. Currently, to sustaining economic growth, reducing combining these technologies with options like poverty, and increasing shared prosperity in battery storage is more expensive than using LAC.1 The primary energy sector challenge in conventional power generation technologies like LAC is to meet growing demand for electricity geothermal, natural gas, coal, and oil. However, while diversifying the energy generation mix. the rapid fall in the prices of renewable technol- Meeting growing demand will require the addi- ogies such as solar and the continued evolution tion of a significant amount of new generation of storage, which is expected to become much capacity.2 Given the often high and volatile oil more affordable over the next decade, may prices the region has faced, there is considerable constrain future expansion of geothermal. need for greater diversification of the region’s generation matrixes with renewables. The region There is significant estimated geothermal has a sizable opportunity to develop reliable, potential in the tectonically active LAC coun- lower-cost power generation alternatives, such tries located along the Pacific Rim of Central as geothermal, as a means to improve afford- and South America and in the Eastern ability, enhance competitiveness, and promote Caribbean. Geothermal can play an important growth and poverty alleviation. part in diversifying the power generation mix in the LAC region. It is a reliable and clean source Over the past decade, there has been rapid inte- of energy that, unlike many other renewable tech- gration of renewable energy technologies in the nologies, can provide 24/7, base-load power. LAC region. Wind and biomass are two renew- Geothermal power generation technologies are able energy technologies that have expanded the mature and have been used for decades around most quickly. More recently, there has also been the world, including in LAC. In many LAC coun- increased adoption of and interest in the integra- tries, geothermal provides opportunities to reduce tion of both grid-connected and decentralized the cost of electricity by shifting away from heavy 1 LAC’s gross domestic product (GDP) grew at an average rate of about three percent per year between 1970 and 2016. (World Bank 2018a). 2 Electricity demand in LAC also has grown by about three percent per year on average since 1970 and is projected to more than double by 2030 under modest GDP growth assumptions. (World Bank 2018a). 3 International Renewable Energy Agency. 2016. x OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC reliance on petroleum-based fuels for power Geothermal resource conditions, as well as generation. Once developed, geothermal can resource risks, are among the principal factors supply electricity at a steady price, making that influence investment decisions. Developers consumers less vulnerable to oil price volatili- interviewed indicated that their decision to invest ties. As an indigenous resource, geothermal also is driven first by the quality and the estimated can enhance energy security. Furthermore, potential of the geothermal resource in a partic- compared with fossil fuel alternatives, geothermal ular country and field. However, even if the is a clean energy source that can reduce the emis- resource potential is attractive, this often can be sion of greenhouse gases (GHG) and other pollut- overshadowed by the inherent geothermal ants considerably. resource risk. Due to high resource risks, the significant, up-front investment capital require- Despite significant resource potential, the ments in the initial stage of geothermal develop- expansion of geothermal generation capacity in ment has been a leading factor in the slow pace LAC over the past few decades was quite limited of geothermal development throughout LAC and compared to that seen in the Asian and African globally, dissuading investors from entering the regions. There is an estimated 11 GW to 55 GW4 market. of geothermal resources in LAC with the poten- tial to be used for power generation, but the Policy, legal, and regulatory frameworks for region’s current installed geothermal capacity is geothermal investments, as well as the under- only 1.67 GW. LAC has a significant opportunity lying electricity market conditions in LAC, are to exploit this potential, if enabling conditions to also key factors that developers consider. facilitate geothermal investments are developed Developers often desire public support in the form and if solutions that have been demonstrated to of feed-in tariffs (FIT) and other fiscal incentives; work elsewhere are adopted to overcome the key contractual risk mitigation measures, such as challenges that the region faces. Chapter 1 partial risk guarantees or investment stabiliza- provides more details about the history and tion agreements; longer concession periods; and opportunities for geothermal development in LAC. efficient permitting and licensing processes. Electricity market conditions and the cost competitiveness of geothermal power production Attracting Geothermal Developers – Key is also a key factor for many developers. For Investment Considerations example, the small market size in many The key factors that drive geothermal invest- Caribbean nations, such as Dominica and St. Kitts ment decisions in LAC are varied. The World and Nevis, has discouraged geothermal invest- Bank conducted a series of in-depth interviews ment in those countries, in spite of large esti- with private geothermal developers that are mated resources. active in LAC to understand the key factors they assess before investing in geothermal projects. Developers also considered the institutional The most important investment considerations capacity of governments and the limited local they highlighted were related to: i) geothermal technical capacity and services to facilitate resource conditions and risk, ii) the policy, legal, geothermal development. Development decisions and regulatory framework, iii) institutional and became more challenging when LAC govern- local capacity to oversee and develop geothermal ments had low awareness of the advantages and capacity, and iv) financial considerations. benefits of geothermal development for power 4 The wide range of estimates for the region is due to the fact that most of this potential has not been confirmed by drilling. Executive Summary xi generation. Experience suggested that this lack social considerations. Given that LAC stake- of awareness was often accompanied by limited holders are interested in learning from experi- government capacity to select qualified devel- ences outside the region and that many of these opers and to promote and oversee geothermal same challenges affect geothermal developments development. Availability of local drilling equip- around the world, this study primarily focuses ment and technical expertise are also key factors on demonstrated global solutions. Some regional for developers. The limited market for geothermal experience is also highlighted where lessons can drilling services in LAC, where such services are be drawn from these experiences. available in only a few countries, means that expertise and equipment often must be imported Geothermal Resource Risk from other regions, which increases costs and One of the biggest challenges to geothermal mobilization time. development globally—including in LAC—is the high resource risk in the early stages of Financial considerations such as access to risk geothermal development. Until surface level capital and loans, as well as the availability of reconnaissance and exploration drilling are public support, also influenced investment deci- carried out and an industry standard feasibility sions. Some developers, particularly smaller assessment6 is completed, the viability of a given ones, indicated that access to finance is a signif- geothermal project remains uncertain. These icant barrier, especially for the high-risk early risks can be a significant deterrent for investors stages of geothermal development. This was less and make it particularly challenging to raise the of a challenge for more established developers,5 risk capital required to undertake exploration which have larger balance sheets and a more drilling. Resource risk is particularly significant global presence, but these developers are highly in the LAC region, since most of the remaining selective about the geothermal fields that they unexploited resources are located in greenfield invest in. Developers interviewed indicated that development areas where there is little informa- public sector support to help mitigate early stage tion about the size and quality of the geothermal risks (through grants or cost-sharing instru- resources. It is important for LAC countries to ments) would facilitate private investment. address the issue of geothermal resource risks if Chapter 2 describes in detail the key factors that they want to unlock their potential and expand the interviewed private geothermal developers geothermal capacity. consider when investing in LAC. This report presents several global approaches to facilitating geothermal resource risk mitiga- Expanding Geothermal Development in LAC tion that LAC countries could consider adopting. Based on discussions with LAC policymakers, Two principle approaches are explored: (i) govern- utilities, and developers, the cross-cutting chal- ment being the total geothermal project devel- lenges affecting most countries in the region oper, and (ii) cost-shared drilling to mobilize were identified. These included: i) addressing private investment. The cost-shared drilling geothermal resource risks; ii) mobilizing approaches presented have taken two main financing for geothermal development; iii) policy, forms. In the first, the government undertakes legal, and regulatory reforms to improve the the exploration drilling and then offers the field investment climate; and iv) environmental and development to the private sector. Under the 5 Such as Ormat, Energy Development Corporation, or ENEL Green Power (ENEL IT). 6 Such an assessment should confirm proven steam supply of 50 percent to enable the raising of financing. xii OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC second cost-sharing approach, the government is projected to remain fairly stagnant due to less awards the rights for all stages of geothermal competitive market conditions. These include development to the private sector, but also lower electricity prices and greater competition provides financial support to help mitigate risks. with other power generation options. In contrast, In these types of cost-sharing approaches, devel- the Caribbean is ramping up its geothermal opers and investors with more risk appetite (such capacity, with new six fields and a total of 195 as the government or specialized developers) MW planned for development. Given the signif- undertake the upstream stages of development icant untapped geothermal resource potential (drilling stages) to mitigate risks. Later, the throughout all parts of LAC, there is an oppor- private sector, using more conventional financing, tunity to expand geothermal capacity well beyond undertakes the downstream phases (steam power the amount planned, if key obstacles can be over- plant development and operations and mainte- come and more financing secured. nance). These types of cost-sharing and joint-ven- ture approaches are common in the oil and gas Mobilizing the projected funding requirements industries and there is emerging experience in to finance geothermal development will be chal- LAC applying similar approaches to spur lenging. Since the 1990s, the LAC geothermal geothermal development. sector has attracted less than US$1 billion of private investment. There is a significant gap Other types of support to incentivize develop- between the amount of funding required to ment have been used in different countries, undertake the planned geothermal investments with more varied results. These include and the amount of private geothermal investment geothermal resource risk insurance, early stage that has been attracted to LAC over the past three fiscal incentives, and other measures. Several decades. Furthermore, the amount of geothermal key lessons from an analysis of the different development planned over the next decade is approaches are that: (i) public support is central small compared to the region’s total estimated to geothermal development, especially for geothermal potential, which, if exploited, would reducing risks; (ii) well-targeted public support require significantly more investment. This study can leverage pr ivate pa r t icipat ion; and highlights some of the funding sources available (iii) approaches to scaling up geothermal should in the LAC region, in particular those that have be customized to country-specific circumstances. been used in the past or that are being used Chapter 3 provides more details about geothermal currently to finance geothermal development. resource risks and global and regional measures Mobilizing the funding required to scale up to address these hurdles. geothermal development in LAC will require the combined efforts of both the public and private Mobilizing Financing for Geothermal sector and support from the international devel- Development opment community. Chapter 4 explains the esti- Over the next decade, it is estimated that LAC mated investment needed to scale up geothermal will require an estimated US$2.4 billion to capacity in LAC and the different financing US$3.1  billion to finance the development of sources available to the region. about 776 megawatts (MW) of geothermal power generation capacity. Central America is Policy, Legal, and Regulatory Reforms to planning to develop over 50 percent of this Enhance the Investment Climate geothermal capacity in eleven fields, in both To expand geothermal development in LAC, greenfield and brownfield developments. establishment of a national strategic policy and However, with only two fields expected to be deployment of legislative and regulatory tools built, geothermal development in South America to overcome barriers are essential. Only about Executive Summary xiii half of LAC countries with estimated geothermal manage its responsibilities. Other governmental resource potential (or installed capacity) have a actions consistent with building national insti- geothermal-specific law in force; even fewer have tutional capacity include: ensuring that these passed geothermal regulations. However, the lack institutions have sufficient capacity to handle the of geothermal-specific laws or regulations does permitting and monitoring functions; ensuring not mean that a country’s geothermal resources adequate awareness and inter-institutional coor- are ungoverned, unregulated, or undeveloped. dination; providing sufficient domestic training; Geothermal resources are governed instead under and having access to external expert advisory energy, mining, mineral, or other types of legis- services where needed. lation. However, the relationship between the different laws and regulations that impact One of the most important areas in which insti- geothermal development can be extremely tutional capacity may need to be strengthened complex and can cause uncertainty that can is the screening and evaluation of potential dissuade potential investors. Countries that have companies applying for geothermal conces- streamlined and facilitated geothermal develop- sions. Such screening and evaluation would help ment have put into place a legal regime that ensure that only qualified developers with the reconciles divergent and often competing laws. technical and financial capacity to develop the country’s geothermal resources are awarded Successful development of geothermal resources exploration and production licenses. Screening requires a predictable and stable policy frame- and evaluation would help diminish the risk of work and legal regime. At the same time, these the awarding of concessions to speculators who need to be flexible to incorporate potential future have no intention of advancing field development. modifications needed to facilitate investment and Stipulations in geothermal laws, regulations, and to reflect technological changes. The policy concession agreements can help by including framework and legal regime are the primary tools shorter terms for concession periods, minimum needed by policymakers to shape and promote a developer qualifications, and physical and finan- country’s geothermal development and consist cial investment requirements to maintain the of: i) the national geothermal energy strategy; concession. Chapter 5 provides an overview of ii) the laws that define, promote, or preserve existing geothermal laws and regulations in LAC resource exploration and utilization; and iii) the and legislative good practices based on global regulations that encourage, license, and ensure and regional experience. the safety and sustainability of geothermal devel- opment. The framework determines how Environmental and Social Considerations to geothermal development will maximize its poten- Facilitate Geothermal Development tial benefits for the country. Policy, law, and regu- Environmental and social considerations are lations also determine the national investment other key factors that impact the ability of climate and the likelihood of success or failure geothermal developers to raise financing. While for a country’s geothermal development. geothermal is an environmentally friendly renew- able energy technology, there are still various To effectively govern the sector, it is also imper- considerations that must be considered during ative to ensure that adequate institutional and the investment and operational stages to ensure local capacity exists to execute these laws and that developments are undertaken in a safe and regulations. To facilitate institutional capacity, sustainable manner. Important considerations a government focused on developing geothermal are: ensuring adequate measures are adopted for capacity could appoint a lead agency and ensure the treatment of drilling fluids; proper effluent that the agency has the legislative mandate to and waste disposal; the following of industry xiv OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC standard drilling practices and occupational different countries and identifies measures and safety measures; good practices for land acqui- interventions that can be applied in the LAC region. sition; and addressing how constructionrelated matters are resolved. Most international finan- Various development partners are involved in ciers now require that projects meet international the geothermal sphere in the LAC region, standards such as Equator Principles,7 making assisting with both reforms and investments. safeguard compliance an integral part of a proj- Through grants and loans, the World Bank Group ect’s bankability. Insufficient safeguard practices stands out as the largest multilateral develop- on even one project could set back the entire ment bank financier of geothermal energy proj- sector development in a given country, as it raises ects worldwide, with a long track-record of global concerns among project-affected communities experience. Both within the region and globally, and citizens at large. Therefore, it is essential the World Bank Group has developed knowledge that geothermal developments in the LAC region products to inform policymakers and other stake- follow good safeguard practices and for author- holders about ways to develop and finance ities to both facilitate progress and ensure compli- geothermal resources; has provided technical ance. Chapter 6 describes the environmental and assistance and advisory services for policy- social risk mitigation tools commonly used for makers, utilities, and developers to help advance geothermal projects and offers examples of their geothermal investment (including regionally in application around the world. Chile, Nicaragua, Dominica, St. Lucia, Mexico, and El Salvador); and is financing different stages of geothermal development in many countries so The Way Forward that these nations may take advantage of the Governments and developers in LAC have made benefits from this clean renewable energy progress in advancing the region’s geothermal resource. The extensive experience and convening resource development, but there is still much power of the World Bank Group also has placed work to be done and many challenges to over- it in a strategic position for donor coordination come. Attracting qualified developers, mitigating and outreach at the global and regional level, resource risk, mobilizing finance, developing a including through the Global Geothermal sound policy and regulatory framework, and miti- Development Plan Roundtables and the gating environmental and social risks are key chal- Geothermal Congress of Latin America (GEOLAC) lenges that hinder the region from reaching its full events. In collaboration with other development potential. Global experience from developed and partners and stakeholders, the World Bank Group developing countries can inform LAC’s efforts to is committed to supporting LAC countries with develop its geothermal resources, and these further investment, technical assistance, and approaches can be customized to fit the specific analysis to facilitate the scale up of geothermal circumstances of countries in the region. This power capacity so that countries in the region report evaluates how the above geothermal chal- can benefit from the affordable, reliable, and lenges have been addressed successfully in clean energy it can produce. 7 “Equator Principles“ is a risk management framework adopted by financial institutions, for determining, assessing, and managing environmental and social risk in project finance. http://equator-principles.com. Executive Summary xv Saint Lucia Soufriere Geothermal Field. Gerry Huttrer, Geothermal energy expert, Geothermal Management Company, Inc. Photo courtesy of  CHAPTER 1: GEOTHERMAL HISTORY AND OPPORTUNITIES IN LAC I n LAC, there is significant estimated the Andean and Caribbean sub-regions. geothermal potential in countries located Opportunity exists to expand the utilization of along the tectonically active Pacific Rim of geothermal in LAC as an integral part of achieving Central and South America and in the Eastern a more diversified generation mix. Caribbean. Broad estimates indicate that LAC’s geothermal potential for power generation could The development of geothermal in the LAC range from 11 GW to 55 GW.8 The wide range of region can be discussed in the context of three estimates is primarily because much of the geographically distinct sub-regions: Mexico and geothermal potential in LAC is yet to be explored Central America, the Caribbean, and South and validated by drilling.9 Information for Mexico America. The distinct sub-regional market differ- and Central America may have a greater degree ences have played—and will continue to play— of accuracy, since considerable drilling has taken an important role in the development of the place and several power plants are in operation geothermal sector. The sections below provide there. Given the nascent state of sector develop- an overview of the history of geothermal devel- ment in the Caribbean and South America, broad opment in the LAC countries in each sub-region estimates for these areas are more speculative. that have successfully installed power genera- tion capacity. There are also several countries, Only a small amount of this vast potential is particularly in the Caribbean and in the Andean being exploited for power generation. Current region, that have undertaken initial surface level installed geothermal capacity in the LAC region studies and some drilling that has not yet resulted is only 1,669 MW, which represents less than one in installed capacity. These countries are not percent of the electricity matrix of the overall covered in as much detail in this chapter. region.10 Most installed geothermal capacity in LAC is concentrated in Central America and Mexico (1,602  MW). Small developments are Mexico and Central America present in Chile (48 MW) and in the Caribbean Mexico and Central American countries have (Guadeloupe, 15 MW). There is evidence that led geothermal development in the LAC region. there is considerable untapped geothermal poten- Since the first commercial geothermal plant was tial in Mexico and Central America, as well as installed in Mexico in the early 1970s, over 1,600 8 These are World Bank estimates, based on expert review of currently available studies that estimate geothermal potential of countries in the region. 9 Geothermal power generation capacity can be estimated at a high degree of probability only after sufficient drilling has been completed. 10 Tissot 2012. Chapter 1: Geothermal History and Opportunities in LAC 1 Mexico and Central America’s Installed Geothermal Capacity and Share of Electricity Production TABLE 1.1   Geothermal installed capacity Geothermal share of total Country (MW) electricity generation (percent) Mexico 957 2.3 Costa Rica 207 12.5 El Salvador 204 26 Guatemala 49 2.5 Honduras 35 3 (estimated) Nicaragua 150 15 Source: World Bank. a World Bank calculations, based on data released by each country and on regional electricity market statistics for 2016 issued by CEPAL 2016. MW of geothermal capacity has been installed the government through its state-owned utility, throughout the Mexico and Central American Comisión Federal de Electricidad (CFE). Electric sub-region. While the majority of this capacity power generation, transmission, and distribution has been developed by Mexico (60 percent) coun- activities were exclusive government-driven activ- tries such as Nicaragua, El Salvador, and Costa ities until recent legislative changes.15 In 2014, the Rica also have established geothermal energy as government of Mexico (GoM) introduced legisla- a critical piece of their electricity supply (Table tion aimed at deregulating the electricity sector, 2.1). In fact, geothermal energy now accounts for which opened the door for the private sector to approximately 7.5 percent of Central America’s acquire geothermal concessions and to sell elec- total electricity generation,11 with several studies tricity in the national market. Among other indicating that there is an opportunity for the changes, geothermal developers and power percentage to be vastly increased.12 The estimated producers are now able to participate in electricity geothermal potential in the Mexico and Central auctions, establish bilateral contracts with private America sub-region is likely to range between and public-sector entities, and sell electricity to 5,600 MW and 6,900 MW,13 of which less than the wholesale market.16 In 2015, Grupo Dragón, 30 percent has been exploited thus far for power a privately-owned domestic geothermal developer, production. launched the first privately developed geothermal power plant in the country (25 MW). While to Mexico date this plant is still the only privately-owned Mexico is among the world’s largest geothermal geothermal facility in Mexico, the GoM has producers, with nearly 1,000 MW of installed approved 22 exploration permits17 to various capacity.14 Historically, the electricity sector in developers, including CFE, Grupo Dragón, Grupo the country has been managed and developed by ENAL, Mexxus RG, and Storengie.18 11 Dolezal et al. 2013; ESMAP 2013b. 12 ESMAP 2012. 13 Based on geothermal expert review of estimates of geothermal resource potential for electricity generation in these countries generated by different authors, and judgement of “most likely value.” 14 Richter 2018a. 15 Government of Mexico (gobierno de México), “Geothermal Energy Law ” (Ley de Energia Geotermica) (2014.) 16 Flores-Espino et al. 2017. 17 Flores-Espino et al. 2017. 18 CFE, which has priority over geothermal exploration rights and permits, has 13 exploration permits. 2 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC However, little new geothermal capacity has is dominated by natural gas (approximately 50 been installed in Mexico in recent years, with percent of generation). most of the capacity installed in the middle of the 20th century. For example, CFE won a conces- Costa Rica sion for 14 geothermal fields in January 2017 but Historically, the electricity sector in Costa Rica has faced challenges in raising the financing to has been run by public utilities. Since the regu- develop them. Thirteen of the fields concessioned latory reforms of the 1990s, private power to CFE are greenfields (undeveloped), the most producers have been able to participate in the challenging type of geothermal field for which to power generation sub-sector in a limited way secure financing. The World Bank and the GoM (capped at 30 percent of the country’s total gener- plan to work together to address some of these ation). 20 Through Instituto Costarricense de challenges to expanding the country’s geothermal Electricidad (ICE), the government of Costa Rica power production. The technical assistance has developed the entire 207 MW of the coun- planned will focus on five key areas: (i) an assess- try’s installed geothermal capacity. While the ment of the regulatory framework; (ii) a screening majority of the country’s geothermal capacity of geothermal fields; (iii) a review of geothermal was developed in the 1990s, ICE has continued development approaches; (iv) a review of to plan and build additional power geothermal financing options; and (v) the design of a proposed power plants. ICE recently finalized the construc- financing structure for field development. tion of a 35 MW power plant in Las Pailas, and plans to bring online an additional 165 MW in The GoM is committed to supporting renew- geothermal capacity over the next seven years able energy and geothermal sector development. (an additional 55 MW unit at Las Pailas power This commitment has included setting renew- plant by 2019, and two 55 MW units at the able energy targets (35 percent of the energy mix Borinquen geothermal field by 2024). by 2024), passing geothermal-specific legislation (2014 Geothermal Energy Act), and establishing Costa Rica generates over 90 percent of its elec- resource risk mitigation facilities to boost the tricity through renewable energy sources. With sector. If public support to the sector remains demand for electricity expected to continue to constant in the upcoming years, plans call for increase on a year-by-year basis, the government geothermal capacity in the country to expand by plans to bring online over 3,400 MW in addi- as much as 900 MW by 2029.19 Given the complex- tional generation capacity by 2035.21 While wind ities of geothermal development, this will be chal- and hydro are the two largest sources of elec- lenging, since meeting this target would require tricity, geothermal provides around 12 percent doubling the amount of geothermal capacity to 13 percent of the country’s electricity supply, installed in Mexico since the 1980s. Nonetheless, as seen in Table 3.1. The estimated geothermal the country has an estimated geothermal resource resource potential is likely to be around 900 MW potential between 2,000 MW and 2,500 MW. to 1,000 MW. Thus, there is significant scope for Mexico to scale up its geothermal capacity as a means to Costa Rica is seeking to expand its geothermal diversity its electricity matrix and displace a capacity, as part of coping with increasing portion of Mexico’s fossil fuel generation, which hydrological variability and the risk of drought, 19 Flores-Espino et al. 2017. 20 Monge et al. 2016. 21 IDB 2014a. Chapter 1: Geothermal History and Opportunities in LAC 3 which could become more severe due to climate fully controls the company, continues to have a change. Costa Rica is heavily dependent on hydro- key role in geothermal development. The govern- power to meet its electricity demand. While hydro- ment has also played a role by enacting geother- power is an environmentally friendly technology mal-specific legislation and setting ambitious that provides low-cost electricity, it makes the geothermal capacity targets (40 percent of energy country highly vulnerable to drought and climate mix by 2019),25 and through development of 80 change. Exploiting more of the country’s domestic MW in the San Vicente and Chinameca fields. geothermal resources can mitigate the need to install more fossil fuel-based generation to meet Renewable energy comprises nearly 55 percent26 base-load power demand. Given the country’s of the country’s 1,700 MW of installed electricity goals to meet its energy needs using renewable capacity. Geothermal energy is one of the main resources and to enhance energy security, the sources of electricity in the country, producing expansion of geothermal capacity is an opportu- about 25 percent of the country’s electricity nity to help achieve these development objectives. supply. The estimated geothermal resource is around 500 MW to 700 MW. Exploiting this esti- El Salvador mated potential will be essential to meeting the As was the case in many Latin American coun- country’s ambitious geothermal capacity targets. tries, El Salvador’s electricity sector was signifi- cantly reformed during the 1990s. The legal The World Bank is currently providing technical changes permitted the participation of the private assistance to support the Government of El sector throughout the generation and distribution Salvador in developing a portion of the country’s sub-sectors. There are over 13 power generators untapped geothermal potential. In particular, it is currently operating in the country, including Duke helping the Government of El Salvador execute due Energy, which bought several thermal plants from diligence and a gap analysis on the proposed the state utility company, Comisión Ejecutiva Chinameca and San Vicente geothermal projects. Hidroeléctrica del Río Lempa (CEL), in 1999.22 The analysis will encompass technical, economic and financial, and safeguard aspects that are Historically, geothermal development was led commonly assessed by the geothermal industry at by CEL, which brought over 200 MW of capacity the project feasibility stage. The technical assistance online.23 However, with the introduction of power will also provide an action plan to address identi- sector reforms in the mid-1990s, CEL was broken fied gaps, including recommendations and guidance up into several companies, including a geothermal to help the state geothermal company, LaGeo, bring developer initially called GESAL, then renamed existing assessments in line with industry standards LaGeo. In 2002, ENEL(IT), a large geothermal to facilitate financing for further development of the developer from Italy, acquired a minority stake Chinameca and San Vicente fields. in LaGeo and was integrated as a strategic partner, helping to develop an additional 44 MW Guatemala in geothermal capacity between 2002 and 2007.24 Deregulated since the 1990s, the Guatemalan Following ENEL(IT)’s recent disinvestment in electricity sector is comprised of both public LaGeo, the government of El Salvador, which now and private actors that work throughout the 22 United States Department of State 2011; CNE 2016. 23 Bertani 2015. 24 ENEL(IT) has recently sold its minority stake in LaGeo for US$280 million. Bloomberg News 2014. 25 Richter 2016. 26 CEPAL 2016. 4 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC generation, transmission, and distribution de Energía Eléctrica (ENEE). ENEE is respon- sub-sectors. The public sector continues to have sible for all transmission and distribution in the presence in the electricity sector through the country. ENEE also generated about 15 percent Instituto Nacional de Electricidad (INDE, the of the total electricity produced in 2016.32 In country’s public utility company), which recent years, the electricity sector in Honduras currently generates around 14 percent of the was significantly reformed and strengthened country’s electricity supply.27 through the creation of an Electric Power Regulatory Commission (Comisión Reguladora The government has been a critical promoter of de Energía Eléctrica) and by enabling further geothermal development in the country through private participation in the generation, transmis- INDE. Since the early 1970s, INDE has conducted sion, and distribution sub-sectors. several studies that helped identify five high potential geothermal fields in the country.28 The The geothermal sector has gained significant 2013–2027 energy policy framework set a target traction in the last year with the installation of of 80 percent of the country’s energy generation the country’s first geothermal plant at Platanares. coming from renewable sources by 2027.29 With The station, with a capacity of 35 MW, has been 4,200 MW in installed capacity, Guatemala gener- developed and will be operated by Ormat through ates the majority of its electricity through thermal a 15-year, build-own-operate contract with the local and hydroelectric sources, with only about six energy company ELCOSA.33 The project has been percent 30 of its electricity supply provided by financed, in part, through a US$135 million loan geothermal, solar, and wind plants. from the Overseas Private Investment Corporation. Nevertheless, geothermal still only comprises Guatemala has 49 MW in installed geothermal around 1.5 percent of the country’s total installed capacity, which produces only about 2.5 percent capacity of approximately 2,400 MW. Honduras of the country’s total electricity supply. The has an estimated of 100 MW to 150 MW of likely country has two plants currently in operation. geothermal energy potential. While the geothermal These were built and are operated by local subsid- potential in Honduras may be low compared to iaries of Ormat, a large international developer and other Central American countries, the country is equipment manufacturer in the geothermal sector.31 actively seeking to diversify its electricity genera- Guatemala’s estimated geothermal resource poten- tion matrix by developing more geothermal. tial is around 900 MW to 1,000 MW. Similar to other countries in the sub-region, Guatemala is Nicaragua looking to further expand its geothermal capacity Although renewable energy accounts for about to help meet its renewable energy targets. half of Nicaragua’s power generation, the country still uses a significant amount of fuel Honduras oil and diesel to meet the country’s electricity The power sector in Honduras has been domi- demand. With demand for electricity expected nated by state-owned utility Empresa Nacional to continue to increase in the coming years, the 27 Ortega and Briz 2017. 28 Manzo 2005. 29 Ministry of Energy and Mines (Ministerio de Energia y Minas) 2013. 30 CEPAL 2016. 31 Bertani, Geothermal Power Generation in the World, 2010–2014 Update Report. 32 Climatescope, “Honduras” (New York: Bloomberg New Energy Finance, 2017). 33 Ormat Technologies, Inc., 2016. Chapter 1: Geothermal History and Opportunities in LAC 5 government of Nicaragua (GoN) plans to add over Inter-American Development Bank (IDB), is seeking 1,000 MW in renewable energy capacity by 2027.34 to confirm geothermal resources in two other areas This would allow the country both to diversify (Mombacho and Consiguina), by conducting surface its energy matrix and to reduce its reliance on studies and undertaking initial exploration drilling. imported oil, especially in a future context of Cerro Colorado Power (a subsidiary of Polaris) and potentially increasing oil prices. The generation the GoN (through the ENEL(NI)) have been working and distribution sub-sectors in Nicaragua are to develop the Casita San Cristobal geothermal field open to private-sector participation and the trans- with World Bank financial support, using a mission segment is owned and operated by the public-private partnership (PPP) arrangement. state-owned company ENATREL. While no new geothermal power plants have been commissioned or built since San Jacinto, the Nicaragua has over 150 MW of installed country has Central America’s largest estimated geothermal capacity, representing about 15 geothermal potential, exceeding 1,000 MW. percent of the country’s energy supply. Since the 1970s, the GoN has played a key role in the Mexico and Central America is the most sector by enacting geothermal-specific legislation advanced sub-region in LAC in terms of installed (Law 443),35 providing government funding for geothermal capacity and experience. Geothermal geothermal exploration (surface studies, explora- is present in most of the sub-region’s electricity tion drilling, and preparation of a national markets, with the exception of Panama, and is a geothermal master plan), and setting ambitious critical generation technology that is actively renewable energy plans (currently 73 percent of supported by many Central American govern- the energy mix by 2030). The development of the ments and utilities. The existing resource risk geothermal sector has become a cornerstone of mitigation measures, high electricity prices in this the government’s focus on reducing both the coun- sub-region, and the region’s focus on further inte- try’s electricity tariffs and the country’s depen- grating renewable energy technologies will dence on imported fuels for electricity generation. continue to propel the growth of the geothermal energy sector in Mexico and Central America. Nicaragua’s geothermal development was initially public sector-led but has since transitioned to a mixed public-private, cost-sharing development The Caribbean approach. The first geothermal capacity was The Caribbean sub-region has had little installed in the Momotombo field back in the 1980s, geothermal development, with only one plant and the field has a total installed capacity of 77.5 currently in operation. The limited size of the MW, although much lower net capacity. The Caribbean markets, limited geothermal technical geothermal facility continues to be owned by the expertise in the region, the high up-front costs in Empresa Nicaragüense de Electricity (ENEL(NI)). relation to borrowing capacity, and the risks of In 2012, the geothermal developer Polaris completed developing geothermal energy—since almost all the construction of a 72 MW power plant with fields in the sub-region are still greenfields—have financial support from the International Financial all constrained the sector’s growth. Nevertheless, Corporation (IFC), as well as other financial insti- a combination of other factors in the Caribbean, tutions . The GoN, together with the Japan including high electricity prices, significant esti- International Cooperation Agency (JICA) and the mated geothermal resources, and strong 34 CIF 2015. 35 Bloomberg New Energy Finance 2017a. 6 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Caribbean’s Installed Geothermal Capacity and Share of Electricity Production TABLE 1.2:   Island Installed MW capacity Geothermal as percent of total electricity generation Guadeloupe 15 approximately five percent Source: World Bank. government support, present an opportunity to Grenadines, and St. Kitts and Nevis, also are facilitate geothermal growth in the sub-region. working to develop their geothermal resources. Governments in the sub-region have recognized Dominica is the most advanced of these islands, the need to integrate renewable energy into their as it has already completed production drilling country’s energy mix to limit the economic impact and has a fully designed project for the construc- of both oil price volatility and climate change. tion of a seven MW geothermal power plant and However, thus far Guadeloupe, an overseas terri- above-ground infrastructure. It has also conducted tory of France, is the only island where geothermal an analysis to ascertain the viability of further capacity has been installed (Table 1.2). expanding geothermal capacity for electricity exports. The Government of Dominica is in the Guadeloupe process of securing financing from the World Bank With nearly 500 MW in installed capacity, and other financial institutions for the construc- Guadeloupe’s electricity sector is one of the tion of the geothermal power plant, with plans to largest in the Caribbean. Guadeloupe’s elec- later expand the field capacity by installing a larger tricity sector is characterized by the presence of geothermal power plant to export power to neigh- a large state utility company (which manages the boring islands. The World Bank is also supporting majority of the island’s generation, distribution, the government of St. Lucia with early surface and transmission assets) and the importation of level studies and an Environmental and Social high volumes of oil-based fuels for electricity Impact Assessment (ESIA) to develop its first generation. Thermal generation accounts for over geothermal field. In the future, the World Bank 80 percent of island’s installed capacity, with also plans to provide financing for initial explo- renewable energy providing the remainder. ration drilling intended to confirm the resource Guadeloupe has an estimated geothermal capacity to operate a 15 MW to 30 MW power resource potential in excess of 40 MW.36 While plant. Several other multilateral development part- only a portion of Guadeloupe’s geothermal poten- ners and regional banks such as the Caribbean tial has been developed (15 MW), the island’s Development Bank (CDB), IDB, the UK’s first geothermal plant dates back to 1986. In Department for International Development, the recent years, developers have demonstrated a French Agency for Development (Agence française renewed interest in the island’s geothermal de développement (AFD)), and the governments market. In 2016, Ormat acquired a majority stake of New Zealand and Iceland, have been supporting in the island’s 15 MW geothermal power plant.37 other islands to advance geothermal development. Other Caribbean Islands The Caribbean sub-region has an estimated Various other Caribbean islands, such as geothermal potential of over 900 MW. 38 Dominica, St. Lucia, St. Vincent and the Developing even a portion of this capacity 36 World Bank 2013. 37 Ormat Technologies, Inc. 2016. 38 World Bank 2013. Chapter 1: Geothermal History and Opportunities in LAC 7 provides an opportunity to transform the elec- However, with an estimated potential of over 4,000 tricity matrixes of these islands and lessen their MW41 and several potential fields identified in extremely high dependence on oil for power most Andean countries, the geothermal sector generation. The presence of strong government could become a critical piece of the sub-region’s and development partner support can facilitate energy mix.42 In 2017, Geotérmica del Norte further development of geothermal resources in (GDN)—a joint venture between Enel Green Power the sub-region. High electricity prices in the (ENEL IT) and the public oil company, Empresa sub-region and government support in the form Nacional del Petróleo (ENAP)—started operating the of risk capital and financing for the geothermal region’s only geothermal power plant, located in sector are key ingredients to scaling up develop- Chile (Table 1.3). Other Andean countries also are ment. Governments in the sub-region have considering how to capitalize on their geothermal become increasingly aware of the role that resources, but only a few countries in this sub-region geothermal energy could play in: (i) decreasing have passed geothermal-specific legislation (for the reliance on imported fossil fuels for electricity example, Chile and Peru). Surface level studies to generation; (ii) protecting the sub-region’s identify geothermal potential in different fields are economy from the effects of climate change; and available for Argentina, Bolivia, Chile, Colombia, (iii) ensuring predictable39 and cost-competitive Ecuador, Peru, and Venezuela. Argentina and Bolivia electricity prices40 for consumers. also have conducted exploration drilling in their most promising geothermal sites, and Bolivia is preparing for the installation of a 100 MW power South America plant at the Sol de Mañana geothermal field.43 In Geothermal development in South America is addition, countries such as Chile, Peru, and still in its nascent stage, with only one Argentina are exploring ways to enhance the compet- geothermal plant currently in operation. While itiveness of geothermal in the context of their current the sub-region has significant estimated poten- electricity markets, which are dominated by an tial for geothermal energy, the majority of these abundance of lower cost energy sources. resources are in remote areas in the Andean mountain range. As a result, the economics of Chile each potential field will vary significantly, with In the early 1980s, Chile was one of first coun- fields located in high altitude areas that may be tries in the region to privatize its electricity over a hundred kilometers away from the trans- sector. As a result, there are many private-sector mission grid. These factors, along with region’s players operating in the generation, transmis- historical reliance on hydro resources and fossil sion, and distribution sub-sectors. With an fuels along with its highly competitive electricity installed capacity of nearly 20,000 MW, Chile’s markets (given the low prices offered by natural electricity sector is the third largest in the region. gas and hydro), have all played a key role in Despite its size, the sector faces various chal- constraining geothermal development in this lenges. First, Chile has among the highest elec- sub-region. tricity prices in the sub-region. Secondly, the 39 Between 2002 and 2012, electricity prices in the region increased nearly 80 percent. 40 There are several factors that will need to be addressed in order to reduce the high electricity prices in the sub-region, including sub-optimal generation infrastructure, isolated grids, and limited technical expertise. (IMF 2016). 41 Bona and Coviello (2016) provide an in-depth analysis of 37 geothermal sites that the authors believe have enough information to be classified as promising fields for commercial development. 42 Bona and Coviello 2016. 43 Bolivia conducted surface level studies in the 1970s and drilled several wells between 1988 and 1992. (Camacho 2014). 8 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC South America’s Installed Geothermal Capacity and Share of Electricity Production TABLE 1.3:   Country Installed MW capacity Geothermal as percent of total electricity generation Chile 48 < one percent (estimate) Source: World Bank. country imports over 70 percent of its total major exploration drilling. The only field that has primary energy supply, exposing the sector to become operational since that time is Cerro potential external price shocks. Pabellón (48 MW), operated by GDN. Chile has one of the largest estimated The traditional government policy in Chile has geothermal resource potentials in LAC, with a been to approach the country’s energy plan- likely potential of about 2,000 MW to 3,000 MW. ning through energy neutral methods, not bene- Until recently, Chile was believed to be an ideal fiting one energy technology over another. market for geothermal development, given the While such an approach has worked well for the presence of significant geothermal resource growth of both intermittent renewable energy potential, a competitive electricity sector with and fossil-based generation, geothermal energy multiple potential buyers, and strong energy faces a unique set of circumstances that require sector legislation. In fact, the Geothermal Energy special consideration. In order to tap into the Law in 2000 triggered a significant surge in country’s geothermal potential, the government concession applications and awards. However, is exploring ways to promote the sector’s devel- while the government has awarded more than opment and to address the obstacles recently 80 exploration concessions and twelve exploita- raised by private geothermal developers in Chile, tion concessions in the last decade, the great including (i) difficulty competing in electricity majority of these fields have not undergone any tenders that are dominated by solar and wind BOX 1.1 Chile Geothermal Roundtable Discussions As part of the World Bank geothermal technical assistance program, a Geothermal Roundtable was set up as a joint public-private exercise aimed at: analyzing the status of geothermal energy in Chile; identifying existing projects, their development perspectives, and corresponding challenges; assessing the country’s geothermal potential and estimating the costs to develop it; and analyzing the systemic impact that the inte- gration of geothermal energy may have on the interconnected electrical system. The Geothermal Roundtable brought together more than 35 entities of the geothermal industry in Chile, including public institutions, academia, sector organizations and associations, private developers, and other industry players. A total of 13 workshops took place, starting in December 2016 and finishing in December 2017. A total of 648 levelized cost of electricity scenarios and 216 capital expenditure (CAPEX) scenarios for geothermal projects were analyzed, and a total of 12 energy matrices were modeled. A final report with conclusions and recommendations from the Geothermal Roundtable is being prepared, and is intended as a first step in a process that will continue with further analysis under the technical assistance provided by the World Bank. Chapter 1: Geothermal History and Opportunities in LAC 9 offers, (ii) financial liabilities imposed by the The unique regulatory, market, and resources concessions, and (iii) a lack of transmissions lines conditions of each sub-region in LAC helps near geothermal fields. explain the asymmetrical evolution of the region’s geothermal sector. Central America has To identify and help address the main barriers, been most successful in promoting the growth of the World Bank is aiding the Ministry of Energy geothermal energy; however, there were certain of Chile in facilitating the development of the conditions—including high electricity prices, geothermal sector in the country. This technical larger markets, and more easily accessible fields— assistance aims to improve the policy framework that contributed to the early integration of and strengthen management capabilities for geothermal into the electrical grid. For example, mobilizing investments in geothermal energy and the high cost of imported fossil fuels for electricity to enhance market conditions for promoting generation not only incentivized policymakers to sustainable development of the sector. identify alternatives for electricity generation, but also made geothermal more economically compet- The geothermal sector in South America will itive with oil and gas power generation. continue to face significant challenges without additional government support. The competi- The drivers behind the low levels of geothermal tive nature of the sub-region’s electricity markets, development in the Caribbean and South the strong growth of other non-hydro renewable American sub-regions vary significantly. While technologies like solar and wind, and the limited the Caribbean faces many challenges similar to amount of geothermal risk mitigation measures those in Central America, the Caribbean’s have inhibited deployment of geothermal in the extremely small markets create a particularly sub-region. However, with countries like Bolivia difficult environment for geothermal develop- making significant progress toward deploying ment. For example, low electricity demand geothermal resources and other countries recog- requires smaller geothermal generation plants nizing the need for a more diversified set of (the only one that is currently operational has a renewable energy technologies, there is an oppor- capacity of 15 MW). This constrains the ability tunity to address the key challenges in the sub-re- of many geothermal developers to enter the gion and further develop the geothermal sector. Caribbean, since some developers have minimum project requirements that start at around 30 MW. In South America, the competitive nature of the Conclusions sub-region’s large electricity markets, which have The LAC region has a long history of developing access to large hydropower resources and and exploiting its geothermal resources for low-cost fossil fuels, is one of many factors that power production, with much of the initial have contributed to the slow uptake of geothermal reconnaissance and surface level studies and energy in this sub-region. Given the better prices drilling activities dating back to the 1970s and and lower risks offered by both fossil fuels and 1980s. As estimates for LAC’s geothermal poten- other renewable energy technologies, policy- tial run between 11 GW and 55 GW (Table 1.4), makers and private-sector entities have chosen even exploitation at the lower end of the range not to aggressively pursue geothermal energy in provides significant opportunity for scaling up this sub-region. Clearly, there is no one-size- geothermal capacity in the region. Nevertheless, fits-all approach to unlocking the growth of the geothermal energy development in LAC thus far geothermal sector in LAC. There are many has been uneven, with Central America and nuances to each sub-region and country to take Mexico accounting for 96 percent of installed into consideration when developing potential geothermal capacity. solutions. 10 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC TABLE 1.4:  Estimated Geothermal Resource Potential in LAC Region Estimated potential (MW) Installed geothermal Most likely Sub-region Country/Territory capacity (MW) Minimum Maximum Most likely sub-region total Sources Mexico and Central Mexico 957 1,900 3,250 2,000–2,500 5,640–6,900 8, 18, 21, 22 America Guatemala 49 800 4,000 900–1000 1, 2, 4, 5,6, 17, 18, 20 Honduras 35 100 500 100–150 1, 2, 4, 5, 6, 17, 20 El Salvador 204 400 1,450 500–700 1, 2, 3, 4, 5, 6, 17, 18, 20 Nicaragua 150 300 4,000 1,200–1,500 1, 2, 4, 5, 6, 17, 18, 20, 23 Costa Rica 207 400 3,500 900–1,000 1, 2, 4, 5, 6, 17, 18, 20 Panama — 25 230 40–50 1, 6, 17, 20 South America Colombia — 700 1,370 600–800 4,250–7,000 1, 9 Venezuela — 370 480 250–400 1, 9, 16 Ecuador — 420 8,000 450–600 1, 9, 13,14 Peru — 600 2,860 650–1,000 1, 9, 15 Bolivia — 510 1,260 500–600 1, 9 Chile 48 780 16,000 2,000–3,000 1, 9, 10, 11, 12 Argentina — 490 1,010 500–600 1, 9 Caribbean Dominica — 240 680 500+ 925+ 1, 19 Grenada — 180 360 30+ 1, 19 Montserrat — 130 280 100+ 1, 19 St. Kitts and Nevis — 450 590 25+ 1, 19 St. Lucia — 110 260 75+ 1, 19 (continued on next page) Chapter 1: Geothermal History and Opportunities in LAC 11 12 TABLE 1.4:  Estimated Geothermal Resource Potential in LAC Region (continued) Estimated potential (MW) Installed geothermal Most likely Sub-region Country/Territory capacity (MW) Minimum Maximum Most likely sub-region total Sources Caribbean St. Vincent and the Grenadines — 150 420 75+ 925+ 1, 19 Cuba — 10 30 30 1 Dominican Republic — 10 50 50 1 Saba — 500 1,000 no data 1 Guadeloupe 15 500 1,500 40+ 1, 7, 18, 19 Martinique — 500 1,500 — 1 Total LAC region 1,665 10,575 54,580 Sources: 1. Karl Gawell, Marsha Reed, and P. Michael Wright, “Preliminary Report: Geothermal Energy, the Potential for Clean Power from the Earth” (Washington DC: Geothermal Energy Association, 1999). 2. Liz Battocletti, Bob Lawrence, and Associates. Geothermal Resources in Latin America & the Caribbean (Livermore and Washington, DC: Sandia National Laboratory and the US Department of Energy, Office of Geothermal Technologies, 1999.) 3. Tomas Campos, “The Geothermal Resources of El Salvador: Characteristics and Preliminary Assessment” (Pisa: presentation at United Nations Workshop on the Development and Exploitation of Geothermal Energy in Developing Countries, 1987.) 4. Gustavo Cuellar, “Regional International Developments. Central America Region. Current Development and Future Plans” (Las Vegas: presentation at the Geothermal Resources Council 2013 Annual Meeting, September 29–October 2, 2013.) 5. Carlos Pullinger, “Geothermal Development in Central America: Opportunities and Difficulties” (Ahuachapán y Santa Tecla, El Salvador: presentation at the “Short Course on Surface Exploration for Geothermal Resources” organized by UNU-GTP and LaGeo, October 17–30, 2009.) 6. Paul Moya, “Geothermal Development in Central America” (Portland: presentation at the Geothermal Resources Council 2014 annual meeting, September 29.) https://www.geothermal.org/ Annual_Meeting/PDFs/ Central%20America.pdf 7. Ormat Technologies, Inc., Ormat Announces Closing. 8. Francesco Flores-Espino et al, Mexico’s Geothermal Market Assessment Report. 9. Bona and Coviello. 2014. Evaluation and Governance of Geothermal Projects in South Amerca: a proposed methodology. (Valoración y gobernanza de los proyectos geotérmicos en América del Sur: Una propuesta metodológica). Mexico City: United Nations Economic Commission for Latin America and the Caribbean. http://repositorio.cepal.org/ bitstream/handle/11362/40079/ S1600390_es.pdf.10. Diego Morata, “South America Region: Geothermal Progress” (Portland: presentation at: GRC 38th Annual Meeting, September 28–October 1.) 11. Alfredo Lahsen, Juan Rojas, Diego Morata, and Diego Aravena, “Exploration for High-Temperature Geothermal Resources in the Andean Countries of South America” (Melbourne, Australia: proceedings of the World Geothermal Congress, April 19–25, 2015.) OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC 12. Diego Aravena, Mauricio Muñóz, Diego Morata, Alfredo Lahsen, Miguel Ángel Parada, and Patrick Dobson. “Assessment of high enthalpy geothermal resources and promising areas of Chile,” Geothermics 59 (2016): 1–13. 13. Bernardo Beate and Rodney Salgado, “Geothermal Country Update for Ecuador, 2005–2010” (Bali: proceedings of the World Geothermal Congress, April 25–29, 2010.) 14. Andres Lloret and Jerko Labus, “Geothermal Development in Ecuador: History, Current Status and Future.” (Santa Tecla, El Salvador: presented at “Short Course VI on Utilization of Low- and Medium-Enthalpy Geothermal Resources and Financial Aspects of Utilization”, organized by UNU-GTP and LaGeo, March 23–29, 2014.) 15. JICA and West Japan Engineering Consultants, Inc., “The Master Plan for Development of Geothermal Energy in Peru. Final Report” (Lima: Republic of Peru, Ministry of Energy and Mines, February, 2012.) 16. R. Cataldi, E. Barbieri, and A. Merla, “Resources and Development Perspectives of Geothermal Energy in Central and South America,” Revista Brasilera de Geofisica 5 (1987): 245–265. 17. Marcelo J. Lippmann, “Geothermal and the Electricity Market in Central America,” Geothermal Resources Council Transactions 26 (2002): 37–42. 18. IRENA, Renewable capacity statistics 2017 (Abu Dhabi: IRENA, 2017). 19. World Bank, Got Steam? Geothermal as an Opportunity for Growth in the Caribbean (Washington, DC: World Bank, 2013.) 20. ESMAP, Drilling Down on Geothermal Potential: An Assessment for Central America (Washington, DC: World Bank, 2011.) 21. Gerardo Hiriart Le Bert, “Evaluation of Geothermal iEnergia in Mexico. Report for the Inter-American Development Bank and the Energy Regulatory Commission” (Evaluación de la Energía Geotérmica en México. Informe para el Banco Interamericano de Desarrollo y la Comisión Reguladora de Energía) (México, DF: IDB, 2011.) 22. Luis C.A. Gutiérrez-Negrin, “Update of the Electric Geothermal Potential in Mexico,” Geothermal Resources Council Transactions 36 (2012): 671–677. 23. CNE, Master Geothermal Plan for Nicaragua (Plan Maestro Geotérmico de Nicaragua) (Managua: CNE, 2001). C H A P T E R 2 : AT T R A C T I N G A N D S E L E C T I N G Q U A L I F I E D P R I VAT E D E V E L O P E R S D espite the considerable geothermal conditions and enabling frameworks that will potential for power generation in the attract qualified developers. This will include LAC region, actual development has implementing a process whereby potential devel- been limited. A key challenge, both in the LAC opers are carefully screened for their financial and region and globally, is attracting qualified technical qualifications prior to selection. LAC geothermal developers to invest in the exploita- countries need to lay a sound legal and regulatory tion of geothermal resources. The technical and foundation to enable private developers to enter financial qualifications of the geothermal devel- agreements that provide sufficient incentives for opers in the region have varied. While there are them to successfully advance through the multiple some well planned developments that have been stages of geothermal development, including power successful, in other instances poor practices and plant commissioning. There are also other key deviation from industry standards by developers conditions that developers, particularly private have led to undesirable impacts. Poor practices ones, consider before deciding to invest in a partic- that have occurred in the LAC region in the past ular country and geothermal field. include well blowouts, poor well targeting, exces- sive drilling, and inadequate disposal of spent The World Bank contacted a diverse group of fluids. Inadequate financial vetting of potential 12 private geothermal developers with experi- developers has led to instances in which less ence investing in geothermal fields to identify qualified developers are awarded concessions to some of the key conditions they seek before geothermal fields with high potential, only for deciding to undertake a geothermal investment development to stall due to a lack of funding. In in LAC. This chapter discusses the findings from other instances, the concession agreements did phone interviews that were conducted with the not provide sufficient incentives to invest in seven developers44 who responded to this request. exploration, since subsequent development rights In general, the developers interviewed had either were opaque. More qualified developers have a global investment focus or a regional and coun- limited interest in investing in relatively nascent try-specific investment strategy. The interviews or small markets, which may exacerbate the situ- conducted covered the following four key areas: ation in some countries by limiting the pool of i) geothermal resource conditions and risk; ii) the developers and choice. policy, legal, and regulatory framework; iii) insti- tutional and local capacity to oversee and develop It is vital that LAC countries that seek private geothermal capacity; and financial consider- geothermal investments establish the right ations. 44 EDC Chile, EDC Peru, Ormat, Polaris, Reykajavik Geothermal, Geotermia Andina, Orka Energy, and Energía Andina. C h a p t e r 2 : A t t r ac t i n g a n d S e l e c t i n g Q u a l i f i e d P r i v a t e D e v e l o p e r s 13 The sections in this chapter present the primary producing electricity. Many developers have faced considerations mentioned by the developers in significant challenges and have been unsuc- each of these areas and the perceived barriers cessful in developing new geothermal power they encounter when investing in geothermal in plants in the region, even when using their own the region. capital and experts. Developers thus consider geothermal resource risk, especially during the exploration stage, as a major barrier to overcome. Geothermal Resource Conditions and Risk Chapter 3 of this study looks at geothermal All geothermal developers said that the resource risks and global approaches to this chal- geothermal resource condition is one of the lenge in greater detail. main factors to consider before investing in a specific country and field. The condition of the Limited resource information. Developers iden- resource includes such considerations as: the esti- tified another investment barrier as the lack of mated geothermal resource potential in a country adequate data that would allow them to perform or field; the perceived geothermal resource risks; a resource assessment early in the exploration the amount of information available on the phaser. Developers considered that a repository geothermal resource quantity and quality; and of government-funded geothermal data and the stage of development of the geothermal field. industry benchmarking (such as those in the United States, Kenya, and Indonesia) would Geothermal resource potential. All developers provide developers and investors a framework indicated that their motivation to invest in the for investment evaluation and would help to LAC region has been driven largely by the quality reduce the risk inherent in the early stages of of the geothermal resources found in Mexico and geothermal development. Developers indicated Central America, and by the large, untapped that access to this information would help geothermal energy potential inferred in other simplify early stage exploration and minimize countries in the region such as Chile. A risk, which could increase investor confidence geothermal field’s estimated capacity to produce and stimulate more investment in geothermal power and estimated project size is a key consid- fields. The developers said that data sharing could eration that influences geothermal developers’ also lead to other benefits, such as enabling investment decisions, particularly for larger, more researchers to enter geothermal fields that have established developers that typically only not been developed and to innovate and test new consider bigger projects. technologies. Geothermal resource risks . Most of the Stage of geothermal development. Some devel- geothermal resources available in the region in opers mentioned that they are more likely to recent years are located in greenfields. The risk pursue geothermal investments that are advanced profile for geothermal projects is unique in that in their development phase and infrastructure. the actual existence and availability of the Smaller geothermal developers tended to enter a resource can only be verified through explora- geothermal development at the early reconnais- tion and appraisal drilling, which is expensive sance and exploration drilling stage and then and may not result in conclusive evidence about either sell their investment or partner with a the geothermal potential or the feasibility of a larger developer or utility for the later stages. The project. Geothermal investors must put a signif- larger, more established geothermal developers icant amount of capital (typically their own indicated that they have the capacity and are equity) at risk, without any guarantee that the willing to enter into a project at any stage of the geothermal resources will be suitable for geothermal project life cycle, so long as they are 14 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC able to take majority ownership and control. A Developers take into consideration whether there recent market sounding of geothermal devel- are renewable energy and/or geothermal policies opers45 undertaken by the World Bank Group for and legislation in place and whether there is a Nicaragua showed that the developers inter- supportive contractual environment. Important viewed expect prior surface level studies and at considerations include PPAs designed to facilitate least some drilling to have been completed before geothermal development; the tariff offered; the investing in a field. Thus, the stage of develop- fiscal incentives for geothermal; whether energy ment of a geothermal field is usually an important tenders enable geothermal participation; if there factor in developers’ investment decisions. are realistic concession time periods (given the greater complexity of developing geothermal proj- Ease of access to geothermal development. For ects, especially greenfield ones); and whether geothermal concessions located at high altitudes permitting processes are streamlined. and in remote areas far from demand centers (as in most projects in Chile and the Andean region), Renewable energy policies. One factor that has developers said that the remoteness of some influenced geothermal developers’ decisions to resources and the associated problems accessing invest in a particular country is that country’s drilling services and the electrical grid (such as commitment to expanding or upholding its local logistics and climatic conditions) are renewable energy targets. All developers indi- barriers to development. Not only does access to cated that a country’s renewable energy targets geothermal resources become more difficult, but provide an important signal on whether to pursue the cost of the total investment also increases, geothermal energy investments. Commitment can amplifying the financial risk. With developers be seen through executive branch actions, usually responsible for connecting geothermal supporting legislation, and creation of a legal facilities to the main transmission line, any steps environment that offers realistic opportunities a government can take to ensure construction of for the private sector to enter a power generation the necessary transmission lines and access infra- market. Developers like government commit- structure are viewed as very positive. Developers ments to include geothermal energy in their suggested that such infrastructure might be built national plans and goals for obtaining electricity by cost-sharing the additional investment in from renewable energy sources. transmission between the developer and the government, or by the government recognizing Renewable energy price and fiscal incentives. the developer’s contribution to this infrastruc- When it comes to project economics, the devel- ture as an additional investment cost and opers believe that fossil fuel subsidies, in general, allowing developers to recover such costs through create disadvantages for renewable energy and a temporary surcharge on the power purchase that FITs for geothermal energy would be a strong agreement (PPA) price paid by the off-taker. incentive to spur development. Regarding fiscal incentives and tax breaks, developers said that exemptions from import duties, value added Policy, Legal, and Regulatory Framework taxes, or income tax for a period following the All developers mentioned that the policy, legal, start of project operations would help facilitate and regulatory framework in a given LAC geothermal development. Some developers noted country influences their decision to invest. that when they approached large companies in 45 US Geothermal, Ormat, EDC Chile and Peru, GeothermEx, Mighty River, Enel Green Power (a subsidiary of Enel Group), and LaGeo. C h a p t e r 2 : A t t r ac t i n g a n d S e l e c t i n g Q u a l i f i e d P r i v a t e D e v e l o p e r s 15 the mining sector to enter into energy contracts, protect their assets and entitlements and to these companies (particularly those in the ensure stability in the governing regulations. If Andean region of South America) were not inter- the electricity off-taker is a public utility that ested in purchasing geothermal power. The governs all of a project’s revenues, the pure-play mining companies did not want to worry about developers indicated that a host government guar- transmission line interconnections and the time antee, designed to ensure that the govern- required to commission a geothermal project.46 ment-owned utility makes timely payments, is They continue to source energy from diesel-based essential to cover counter-party risk and to make power generators, even when doing so is more the PPA bankable. These developers also expensive.47 Some developers suggested that if suggested that multilateral development banks governments were to provide tax incentives to could provide host government officials with these potential large off-takers in exchange for capacity building on project contract issues to purchasing some amount of renewable base-load facilitate financial closure for projects. power, such incentives could enable geothermal developers to make these investments. Energy auctions. Latin America has seen an increase in the use of energy auctions to Contractual risk mitigation measures. The “pure- encourage development and construction of play” developers48 that pursue geothermal invest- renewable energy projects. This has allowed wind ments in low and middle-income LAC countries and solar companies, in particular, to bid and where there is no prior experience with indepen- win many tenders to produce energy at prices dent power producers (IPP) remarked that with which geothermal projects often cannot perceived regulatory and counter-party risks49 compete. Developers said that the structure of affect strategic and financial investors’ interests these auctions does not take into consideration and their decisions to invest in these countries. geothermal projects’ ability to provide firm Pure-play developers recognize that multilateral (non-intermittent) power that can help meet base- development banks can provide instruments, such load demand. Undertaking a feasibility study for as partial risk guarantees, to mitigate some of these a geothermal project to confirm resources and risks, but strategic and financial investors also provide investors greater certainty costs signifi- want project-specific commitments, such as invest- cantly more than a feasibility study for a wind ment stabilization or similar agreements between or solar project.50 Furthermore, completing feasi- foreign investors and the host government. bility studies for solar or wind power usually takes around one year, whereas an industry level To investors, this type of legal arrangement or geothermal feasibility study could take three host government contract is important, both to years or more. 46 In some cases, mining companies have facilities co-located with geothermal resources and are attractive prospects for developing geothermal energy. However, for mining companies, the timing of geothermal energy delivery is a major risk and they are often reluctant to enter into long term PPAs, which geothermal financing requires. 47 The intermittent nature of renewable energy and the lack of economical energy storage options limit the extent to which mining companies can rely entirely on wind and solar for their power needs. However, because the potential cost savings are too great to ignore, in recent years mining companies have started to buy solar or wind generated power during the day, supplementing this with diesel generated power at night. 48 A pure-play developer is a developer that focuses more on geothermal resource development than on power plant operation. 49 Counter-party risk is the  risk  to each party in a PPA contract that the  counterparty  will not live up to its contractual obligations. 50 A geothermal feasibility study would typically require that at least two to three wells be drilled, which can cost anywhere from US$2 million to US$8 million each. An average investment of US$1 million to US$2 million is needed to prepare a detailed feasibility study for a solar or wind project. 16 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC If a government wishes to promote geothermal at later stages of development to guarantee the development, developers felt that government production level of a geothermal plant over the auctions should consider the differences in renew- 20-year lifetime of a PPA agreement, if the devel- able energy sources and not award tenders based oper was not involved in developing and modeling only on the lowest cost. Geothermal projects are the resource from the beginning. Some devel- not well suited to compete in auctions that do opers prefer to undertake the exploration drilling not distinguish between base-load and intermit- and feasibility analysis themselves, even without tent load technologies. Geothermal developers public support, to ensure that these activities recognize that competitive auctions ensure value meet industry standards. for money to electricity consumers but feel that governments could run separate auctions for Concession period and environmental and renewable energy sources that can provide base- social considerations. Another factor that devel- load power to help ensure long-term electricity opers consider before investing is the length of system reliability. the geothermal concession to explore and develop the resource. Governments in the region gener- Power purchase agreements. Given resource ally want a shorter concession period, especially uncertainty, geothermal developers indicated that for exploration concessions and to maintain their participation in an energy auction likely greater control over the resource. Developers seek would require the use of preliminary exploration longer exploration terms to ensure that there is data in order to be able to bid an electricity power adequate time to confirm the viability of the purchase price for an estimated amount of power geothermal resource. A balance needs to be generation capacity. Bidding with such unknowns struck between governments and developers to is a substantial economic risk for geothermal proj- achieve the shared goal of developing geothermal ects, as the auction price and capacity typically resources and producing power. For example, feed into the fixed PPA price that results from several developers indicated that the two-year the auction. period for exploration concessions in Chile is insufficient for concessions that are located in One developer recommended that a potential areas that require negotiation or mediation solution would be for governments to grant a processes with local communities or lengthier conditional PPA to a geothermal company at the environmental impact studies. Developers noted project pre-feasibility stage, which first would be that building trust with communities is essen- verified by a competent third party. This arrange- tial for the success of a project and this takes ment could send a positive signal to potential time. However, this is not the case for all explo- investors by creating a potential off-taker and ration concessions, particularly for countries with showing that some level of certainty exists for geographic, environmental, and social challenges the quantity of electricity that a given geothermal that are not so complex and where exploration project could produce. Under such a conditional activities can be completed more quickly. PPA arrangement, once an industry level feasi- bility study is completed that defines the proj- Permitting and licensing process. In addition to ect’s production capacity level, a definitive concession awards and contracts, additional land, electricity purchase price could be set that falls environmental, water, and other permits and between the minimum and maximum price range licenses are often required before starting initially stated in the conditional PPA. geothermal exploration and exploitation activi- ties. These may come from central governments, Another developer mentioned that it is more diffi- environmental and water authorities, or local and cult for private geothermal developers entering municipal governments, as well as land holders. C h a p t e r 2 : A t t r ac t i n g a n d S e l e c t i n g Q u a l i f i e d P r i v a t e D e v e l o p e r s 17 Developers noted that overly bureaucratic and information are needed in the public, private, processes for obtaining the necessary licenses and and social sectors for successful development and permits can cause delays, add to geothermal management of geothermal energy. project costs, and possibly discourage invest- ment. 51 Streamlining or consolidating these Selecting qualified developers. The large, more processes could help speed-up the pace of established geothermal developers noted that, in geothermal development. some countries, geothermal concessions are not being developed because they were granted to Chapter 5 of this study provides more detail about firms that do not have the capacity to develop key policy, legal, and regulatory conditions that geothermal projects themselves. They believe are important to facilitate geothermal development. many speculators have entered the concession award process with the intention of later selling their rights or investments to larger developers, Institutional and Local Capacity to Oversee and that these speculators impede geothermal and Develop Geothermal Capacity development. By allowing speculation that makes Institutional and local capacity also influence concessions more expensive for experienced devel- most developers’ investment decisions. opers, some governments inadvertently have “Capacity” includes government institutions increased the cost of development. This situation awareness of and ability to oversee the geothermal also can lead to geothermal concessions remaining sector; the capabilities of government employees undeveloped for many years, if experienced devel- to evaluate the qualifications of developers opers with the capacity to develop the fields are seeking concessions; geothermal technical unwilling to pay the speculative prices required capacity within the country; and the availability to acquire the concession. Developers recommend and type of geothermal development equipment that government institutions undertake a detailed available, often within the country as a whole. evaluation of private developers to ensure that they are technically and financially qualified to Limited awareness and capacity. Many devel- receive a concession and to ultimately develop opers mentioned that there is a lack of technical the geothermal resources. In some instances, the knowledge and information about geothermal capacity of government officials may need to be resources and the advantages of environmentally strengthened to ensure that they can adequately benign geothermal base-load power in govern- perform this role. ments of countries with untapped geothermal potential.52 They also believe that a lack of local Drilling costs and technical expertise. The lack expertise in geothermal regulation and promotion of local drilling rigs, services, and trained crews in causes delays in obtaining and granting conces- many LAC countries drives drilling costs higher, sions. Developers hold that more geothermal undermining the cost competitiveness of geothermal expertise within governments would not only help power facilities and hindering geothermal explo- to elevate the profile of geothermal energy, but ration. Developers mentioned that drilling compa- also increase consideration of it in future resource nies are less likely to keep drilling rigs on a planning and energy diversification efforts. The permanent basis in a country where the critical developers stated that education, capacity building, mass of drilling business is small. Developers that 51 Such delays also add to project costs for other types of renewable and non-renewable energy investment projects. 52 A regulatory framework specific for geothermal is also lacking in most of these countries. In Latin America, only Mexico, Nicaragua, Chile, and Peru have geothermal laws. 18 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC operate in countries where there are several Public support and risk mitigation. Some devel- geothermal concession areas believe that industry opers indicated that the public sector’s mitigation and governments should coordinate the develop- of the risks involved with geothermal exploration ment of projects in similar concession areas to by undertaking drilling activities and confirming create a pool of drilling equipment and trained the resource is positive and helpful. Developers geothermal expertise that can be drawn upon. mentioned that cost-shared exploration drilling, support for expanding transmission infrastructure, and creation of a space for geothermal power in Financial Considerations electricity auctions are all important factors. They Many developers said that financial consider- view grants or cost-shared investment for early ations influence their investment decisions. stage geothermal development as the most effec- Some of the financial considerations mentioned tive means of public support. include the availability of public support, risk mitigation measures, and perceived financial Financial and resource risk. Various developers risks, which are considered a challenge for devel- indicated that geothermal resource risk outweighs opers investing in the early phases of geothermal other risks such as regulatory or country risk in development. financiers’ decision to invest in a particular project.53 These developers would be more likely Access to finance. For smaller pure-play to extend finance to pursue brownfield geothermal geothermal developers, which are common in investments (that is, geothermal fields already the LAC region, access to finance is a particular producing power) and to accept political risk in a challenge. These developers indicated that they particular country. This would be more attractive normally would seek funding from venture capi- to them than investing in a geothermal greenfield talists or industry investors to conduct the initial where resource risk is higher, even if it is a more exploration drilling phases. However, some devel- stable country. The time to first cash flows is also opers mentioned that in recent years this type of an important factor in their investment decision risk capital has become very difficult to raise. In process and the reason why some developers prefer a typical scenario, smaller developers in the fields at a more advanced stage of development. post-exploration stages of development would Early cash flow is even more relevant today, one approach more established geothermal developers developer indicated, because most financial or utilities to help them complete and finance the backers have become interested in earlier, more production drilling, steamfield development, and secure, and steady dividend payment streams. power plant construction stages. However, the costs and risks associated with the exploration Chapter 4 discusses in-depth investment needs, phase makes finding early stage financing a the challenges in mobilizing financing for significant challenge for smaller developers. geothermal development in LAC, and the funding Larger, more established, integrated geothermal sources available. developers do not see access to finance as a major challenge. These developers typically have the ability to finance and assume the exploration risk Conclusions but are more selective about the geothermal fields A geothermal developers’ decision to invest in in which they invest. LAC is influenced by a number of factors. First, 53 Geothermal resource risk refers to drilling success and sustainability of resource exploitation, whereas political risk is the risk that an investment’s returns could suffer as a result of political changes or instability in a country. C h a p t e r 2 : A t t r ac t i n g a n d S e l e c t i n g Q u a l i f i e d P r i v a t e D e v e l o p e r s 19 it is largely driven by the quality of the geothermal particularly in greenfield sites. Developers iden- resources encountered in the region, the esti- tified four principal areas that they consider mated resource potential, and the level of existing crucial when deciding to invest: i) geothermal information on geothermal fields. Countries’ resource conditions and risk; ii) the policy, legal, renewable energy and geothermal policies and and regulatory framework and whether it legislations also provide an important signal for supports geothermal development; iii) institu- the developers’ investment decisions. Despite tional and local capacity in the geothermal sector; their interest and investments made to date, most and vi) financial considerations. These key developers have faced challenges in developing considerations are summarized in Table 2.1 and expanding geothermal capacity in the region, below. TABLE 2.1:  Key Factors for Attracting Qualified Geothermal Developers in LAC Company Company Company Company Company Company Company Key considerations 1 2 3 4 5 6 7 Geothermal resource conditions and risk Geothermal resource potential ü ü ü ü Geothermal resource risks ü ü ü ü ü ü ü Limited resource information ü ü ü ü ü ü ü Stage of geothermal development ü ü Ease of access to geothermal resource ü ü ü ü Policy, legal, and regulatory framework Renewable energy policies/plans ü ü ü ü ü ü ü Renewable energy price and fiscal ü ü ü ü ü ü ü incentives Contractual risk mitigation measures ü ü ü ü Energy auctions ü ü ü ü ü Power purchase agreements ü ü ü Concession period ü ü ü ü Environmental/social considerations ü ü Permitting and licensing process ü ü ü Institutional and local capacity Limited awareness and capacity ü ü ü ü ü ü Selecting qualified developers ü ü ü ü ü Drilling costs and technical expertise ü ü ü ü ü ü Financial considerations Access to finance ü ü ü ü Public support and risk mitigation ü ü ü ü ü ü Financial and resource risk ü ü ü ü ü ü ü Source: World Bank. 20 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC CHAPTER 3: GEOTHERMAL RESOURCE R I S K S A N D O P T I O N S F O R M I T I G AT I O N (This Chapter is an updated extract from two recent World Bank publications)54 The Key Challenge of development. Furthermore, completing the Geothermal power is typically developed in a stages before a geothermal power plant can be series of stages so that risks are progressively commissioned for operation takes years. Figure reduced as the resource capacity and the invest- 3.1 illustrates the key stages in developing ment costs become more predictable. However, geothermal resources for power generation, the advancing through these stages can require associated risk, and cost profiles, along with significant investment, depending on the scale typical costs and time duration.55 FIGURE 3.1:  Overview of the Typical Geothermal Development Process Upstream Resource Development Downstream Plant Construction/Operations High 100% Risk Level Moderate 50% Risk Cumulative Costs Low 0% I II III IV V Stage Surface Exploration Production SAGS + Operation + Reconnaissance Drilling Drilling Power Plant Maintenance ($1–2 mil) ($20–30 mil) (~$20–120 mil) (~$20–200 mil) Year 1–2 Year 2–3 Year 4–6 Year 6–8 Year 8+ Time Source: Adapted from ESMAP 2012. Note: Illustrative CAPEX costs a in US$, million are typical for development of 10 MW to 100 MW power plant. a Operations and maintenance (O&M) cost is not shown in the figure. Using reported reference values for fixed and variable O&M cost for geothermal power plants (ESMAP 2012) the estimated O&M cost for a 10 MW to 100 MW power plant is about US$0.5 million and US$5 million per year. 54 This chapter is an extract from two recent World Bank publications on this topic: 1) Subir K. Sanyal et al., Comparative Analysis of Approaches to Geothermal Resource Risk Mitigation: A Global Survey, ESMAP Knowledge Series; 024/16. (Washington, DC: World Bank Group, 2016.); and 2) Roberto La Rocca, Peter Johannsen, Laura Berman, and Migara Jayawardena, Mobilizing Risk Capital to Unlock the Global Potential of Geothermal Power, Live Wire; 2017/71. (Washington, DC: World Bank, 2017). 55 For more information on geothermal development stages and technology, see ESMAP Geothermal Handbook: https://www. esmap.org/sites/esmap.org/files/DocumentLibrary/FINAL_Geothermal%20Handbook_TR002-12_Reduced.pdf). C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 21 While a variety of factors contribute to the slow The most common geothermal development pace of geothermal development around the approaches applied successfully within LAC and world, one of the most widely recognized and other regions are described below. unique obstacles is the high resource risk during the early stages of the geothermal development Public Sector as the Total Geothermal process. During the surface reconnaissance and Project Developer exploration drilling stages there is considerable Globally, the public sector has been a major uncertainty regarding resource flow capacity and developer of geothermal resources. As shown temperature. Given the limited amount of avail- in Table 3.1, either the government or quasi-gov- able information in these stages, developers cannot ernment agencies have undertaken the full scope predict whether a geothermal project will result of geothermal project development for about a in commercially productive wells that will sustain third, or over 3.9 GW, of the installed geothermal generation long enough for the project to be capacity around the world. In all of these commercially viable. There is also uncertainty geothermal fields, public sector financing was regarding the overall cost to extract the geothermal used for every stage of geothermal development, fluids and to inject the heat-depleted brine to as shown in Figure 3.2. replenish the reservoir. Uncertainty is reduced after drilling and testing confirms geothermal resource In countries where developers were backstopped availability, but this is only achieved after explo- financially by the government and in which ration drilling is completed. Only then can a feasi- there was technical capability, geothermal has bility56 assessment be carried out to determine the been successfully expanded by the public sector. “bankability” of the project and whether to invest In the LAC region, this was the case for Costa Rica, in subsequent stages of development. This also El Salvador (both for the initial greenfield devel- makes raising the initial risk capital for geothermal opment and again in recent years), Nicaragua (for exploration challenging for developers, especially the Momotombo geothermal field), Guadeloupe, those in the private sector. This “resource risk” is and Mexico (for all but one geothermal develop- a common barrier to advancing geothermal devel- ment). Public sector led geothermal development opment globally. in LAC has resulted in the bulk of geothermal capacity installed in the region, 1,362 MW in ten different geothermal fields. Approaches to Geothermal Resource Risk Mitigation Many countries outside LAC also undertook full A number of approaches to geothermal devel- public sector geothermal development. This has opment have been applied around the world included the Philippines (for the initial green- with varying degrees of success. Public support, fields developed), New Zealand, and Iceland, all either by itself or in collaboration with the private of which are among the top ten geothermal coun- sector, has played a major role in the expansion tries worldwide, based on the amount of installed of geothermal energy. While there is no one-size- capacity. fits-all solution, worldwide, very few geothermal developments have advanced without some form However, in countries where governments could of government or development partner support. not continue this high level of investment, 56 The decision whether to proceed or not is typically made on the basis of results from a feasibility assessment based on proven steam supply of 50 percent (technical, financial, and economic) as well as on an environmental and social impact assessment (safeguards). 22 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Government-Led Development of Geothermal Generation Capacity (2017) TABLE 3.1:   Country Number of fields supported Installed capacity (MW) Costa Rica 2 177 El Salvador 2 149 Nicaragua 1 70 Mexico 4 1030 Guadeloupe 1 15 Indonesia 5 547 Philippines 5 608 New Zealand 2 220 Iceland 6 664 Turkey 1 15 Ethiopia 1 8 Kenya 2 488 Total 32 3,991 Source: Using World Bank/ESMAP updated data, table from Subir K. Sanyal et al., Comparative Analysis. FIGURE 3.2:  Development Stages in Public Sector as Total Geothermal Project Developer I II III IV V Stage of Surface Exploratory/ Production SAGS and Operation and development reconnaissance test drilling drilling power plant maintenance Financing Public funding Public funding Public funding Public funding Developer Public sector Public sector Public sector Public sector Public sector Source: World Bank. geothermal expansion sometimes slowed or However, as mentioned previously, the private stalled. Lessons learned from global experience sector can find it challenging to mobilize the show that when the public sector takes the lead necessary risk capital and funding, especially for in geothermal development, it is essential to have early drilling activities. Given this situation, in well-coordinated policies, clear mandates, suffi- recent years governments have sought ways to cient multi-year financing, access to equipment, mitigate enough risks to attract qualified and technical capacity. geothermal developers to invest. Cost-Shared Drilling to Mobilize Private Risk mitigation to attract the private sector is Geothermal Investment usually achieved through two broad approaches: Many governments who want to develop a) the public-sector funding surface reconnaissance geothermal may be unable to do so due to lack and early stage drilling activities, before offering of technical capability, financing capacity, or a more “de-risked” project to the private sector for interest in undertaking full development of the development; or b) the government provides devel- geothermal sector. In these cases, the govern- opment rights to a private developer, along with ment may look to attracting the private sector. support through a financial scheme to shift some C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 23 Estimated Geothermal Generation Capacity Resulting from Cost-Sharing Schemes (2017) TABLE 3.2:   Country Number of fields supported Resulting installed capacity (MW) Costa Rica 1 30 Chile 1 48 El Salvador 1 44 Guatemala 2 52 Mexico 1 25 Nicaragua 1 72 Indonesia 1 60 Philippines 5 1,260* New Zealand 6 547 United States 6 150* Turkey 5 309* Japan 15 534* Kenya 1 100 Total 45 3,231 Source: Updated version, using World Bank/ESMAP data, of table from Subir K. Sanyal et al., Comparative Analysis. Note: * Estimated capacity. risk for early stage exploration drilling away from have been applied in Costa Rica, Chile, El Salvador, the private developer. Under both approaches, Guatemala, and Nicaragua and successfully led described in the following sections, the goal is to to the installation of 198 MW of installed capacity complete an exploration program and confirm in six different geothermal fields. resources, after which the private developer is in a better position to mobilize financing and under- take the remaining stages of development until the Public-Sector led Exploratory Drilling power plant is commissioned. Under this cost-sharing approach, to mitigate risk the public sector retains the development As shown in Table 3.2, these types of approaches rights to the geothermal field throughout explo- have been used by many countries and have ration drilling, with the remaining stages of led to the development of over three GW of development offered to the private sector after geothermal capacity worldwide. In the LAC resource confirmation. This scheme (depicted in region, these types of cost-sharing approaches Figure 3.3 below) utilizes public resources and FIGURE 3.3:  Development Stages in Public-Sector led Exploratory Drilling I II III IV V Stage of Surface Exploratory/ Production SAGS and Operation and development reconnaissance test drilling drilling power plant maintenance Financing Public funding Public funding Private funding Private funding Developer Public sector Public sector Private sector Private sector Private sector Source: World Bank. 24 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC technical capacity (either in-house or contracted • Nicaragua, where publicly funded exploration from the public sector), to undertake surface and initial production drilling proved the reconnaissance (Stage I) and exploration drilling geothermal resources at the San Jacinto- (Stage II) to confirm the geothermal resource, in Tizate field before the development rights line with industry standards. This helps de-risk were awarded to a private developer that the project for subsequent investors. Following undertook the remaining production drilling, resource confirmation, the government then trans- well field expansion, and construction of the fers the development rights to a private developer, power plant and associated facilities. through either a negotiated agreement or a • Guatemala, where government drilling competitive process.57 reduced risk and was a successful catalyst that encouraged private participation in geothermal Since the public sector is responsible for development at Zunil and Amatitlan. geothermal development Stages I and II (see Figure 3.3), the selected private developer takes As there is still considerable risk after explora- over the project at a time of far greater invest- tion, particularly during steamfield development, ment certainty. The reduced exposure can attract in some cases the public sector has undertaken more qualified developers that are willing and all upstream development (Stages I, II, and III), capable of mobilizing larger amounts of financing before offering only construction and operation of to complete production drilling (Stage III), to the power plant to the private sector. There are construct the steam-above-ground system (SAGS) also instances, such as the Momotombo geothermal and power plant (Stage IV), and to continue with field in Nicaragua, in which the public sector has plant O&M (Stage V). Under this scheme, the undertaken all upstream geothermal development public sector bears all of the risk during initial and maintained ownership but transferred the surface reconnaissance and exploration. The geothermal power plant and steamfield operations public sector entities that carry out the explora- and maintenance to a selected private company. tion drilling should have sufficient risk capital In other instances, including in Costa Rica, the to finance a robust drilling plan and the tech- Philippines, and Indonesia, the public sector nical capability to carry out the plan consistent continued to operate the upstream field and then with industry standards (or to contract recog- sold the steam to a private power producer. Global nized firms that have this expertise) in order to experiences for schemes that split the geothermal instill confidence and attract subsequent private steam production and power generation have been developers. It is equally important that the mixed, however, and the steam sales model has selected private developer be qualified and not always worked well. The main disadvantage capable of undertaking the remaining develop- of the steam sales model is the inability of the ment stages and commissioning the power plant power producer to manage the reservoir and control in a timely manner and in line with industry the steam supply. This leaves the power producers standards. exposed to resource risk that is out of their control while at the same time remaining obligated to In the LAC region, countries in which govern- supply power under the PPA. ments undertake early stage reconnaissance and drilling activities before offering projects to While there are many successful global exam- private developers have included: ples of using this approach, there are also a few 57 Given the small size of the geothermal sector globally, attracting a significant level of qualified competition may be challenging, especially in small and nascent markets where the investment climate is weak. C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 25 drawbacks. First, public sector led exploration investment. This can be especially useful when ties up a relatively large amount of public the government has limited sector experience resources. It also leverages limited private invest- and the private sector has expertise but finds it ment and very little of the technical know-how difficult to raise the necessary funding. In this of private developers. However, under a few cost-shared drilling scheme, if the results of public sector-led drilling scenarios, the govern- exploration are favorable and the project is deter- ment can sometimes recover its investment. This mined to be “bankable,” the private sector usually can be done either through lower tariffs given develops the subsequent stages (Stages III and the reduced risks, or through compensation from IV) alone, and then operates and maintains the the selected private developer when the exploita- facility (Stage V). tion concession is awarded. There are several examples of cost-shared, risk Cost-Shared Exploratory Drilling mitigation schemes in which governments have An alternate approach is government use of established financial mechanisms that provide financial mechanisms to mitigate risk to attract financing directly to the private sector to help subsequent private investment. As depicted in mitigate early stage geothermal resource risks. Figure 3.4 below, under this scheme the field Japan and the United States have successfully development rights are granted by the govern- implemented cost-shared exploration schemes to ment to a qualified private developer from the catalyze private sector geothermal exploration start. Since private developers are often chal- investments, which has led to substantial follow-on lenged in raising risk capital, the public sector development (see Figure 3.5). In various instances can provide part of the funding to cover surface over the past few decades, Japanese developers reconnaissance and exploration drilling (Stages benefited from a scheme that included a cost-share I and II). This approach lowers the investor’s of up to 50 percent for exploration wells and a 20 potential losses and costs by reducing the amount percent cost-share on production and injection of risk capital the private developer needs to raise. wells. This cost-sharing brought about the instal- At the same time, this cost-sharing strategy lation of most of the 536 MW of geothermal power reduces the risks and potential losses that would capacity operating in Japan today. In the United need to be absorbed by the public sector if the States, developers were able to confirm produc- project does not advance, compared to the public tive conditions at several fields under this sector solo undertaking of these activities. approach, which were later developed for a total of about 150 MW of geothermal capacity. This approach offers an opportunity for the public sector to rely on private sector expertise In both Japan and the U.S., the national geolog- and, if desired, remain at arms-length from the ical survey initially identified the most FIGURE 3.4:  Development Stages in Cost-Shared Exploratory Drilling I II III IV V Stage of Surface Exploratory/ Production SAGS and Operation and development reconnaissance test drilling drilling power plant maintenance Financing Public funding Public funding Private funding Private funding Private funding Private funding Developer Private sector Private sector Private sector Private sector Private sector Source: World Bank. 26 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Evolution of Geothermal Power Generation Capacity in the United States and Japan FIGURE 3.5:   100 Installed capacity (percent) 80 60 U.S. cost-shared 40 drilling program 20 Japanese cost-shared drilling program 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Time in Years Japan United States Source: Sanyal et al. 2106. promising fields that would be eligible for cost- stated in terms of megawatt capacity or a combi- shared drilling, but the subsequent drilling and nation of flow rate and enthalpy. After initial due development were carried out by the private diligence is carried out by the insurer, the devel- sector. The government reviewed the drilling plans oper and the insurer jointly establish the success and confirmed the private developer’s ability to criteria. Based on the likelihood of payouts, the successfully execute the program. Figure 3.5 illus- insurer will then set a premium that must be paid trates the noticeable expansion in geothermal up front by the developer to secure the policy. It capacity several years after establishing such is the responsibility of the developer to ensure programs, as the initial investment cost-sharing that the drilling target is reached. Following the enabled projects to move forward. This figure also drilling, the results are then confirmed through highlights how expansion slowed down soon after various tests. If the result falls outside the range these government-sponsored programs closed, of success agreed to by both parties, it would indicating the importance of having consistent trigger a payment from the insurer to the devel- and long-term strategic policies to support oper to cover its “losses.” Although single wells geothermal development. Currently, the World have been insured in the past, current thinking Bank is supporting similar cost-shared explora- regarding geothermal insurance is to cover the tion efforts in countries such as Nicaragua and aggregate output of a group of wells. Turkey. The German development bank Kreditanstalt für Wiederaufbau (KfW) has also While insurance schemes offer a fully private set up a similar Geothermal Risk Mitigation Facility sector solution and appear attractive, explora- in East Africa and, most recently, in the LAC region tion drilling insurance schemes in geothermal (which is described further in Chapter 4). have, to date, seen limited application (a few tens of MWs). Some countries have attempted to Geothermal Resource Risk Insurance apply this method (most notably Germany) with Geothermal resource risk insurance schemes modest success. Driven in part by its high FIT are designed to insure the productivity of a well for geothermal power, Germany succeeded in or a portfolio of wells. This productivity can be implementing this type of insurance product. C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 27 There are several reasons that geothermal • Geothermal fiscal incentives that support resource risk insurance schemes have not been geothermal projects at the exploration and widely used. The primary reasons for the limited early drilling stages, including exemption use are that geothermal development is a small from certain taxes and import duties; sector globally, and insurance companies have • Renewable Energy tax credits, such as the been unable to amass an appropriate scale for Investment Tax Credits (ITC) at the start of such coverage to be efficient (that is, a sufficiently power generation, or Production Tax Credits large portfolio to spread the risk); and the typi- (PTC) for operating geothermal projects; and cally high premiums (due to the significant • Development of associated infrastructure uncertainty during the exploration stage) may (roads and transmission lines), which not be affordable to some developers. Additionally, is another way to facilitate geothermal the actuarial process of preparing an insurance development, particularly in remote areas. scheme can be complex and time consuming. To date, such schemes have not proven effective in Although not all of these approaches are specific helping to scale up geothermal during the higher “resource risk mitigation” schemes, they risk exploration stage. However, there may be enhance the overall viability of an investment some suitable opportunities for drilling insur- and can help attract private investment to the ance to be used at the production drilling stage sector. The resulting higher returns that devel- to advance development of steam fields. opers can make from a project compensate for some of the risks, making geothermal develop- Because of these complexities, two attempts at ment a more attractive investment opportunity. using a geothermal insurance scheme in This increased potential to make profits can ease Turkey and in Mexico have fallen through. It the burden of project financing and help advance is worth noting that in countries where there is development. little information about the resource character- istics of different geothermal fields, other Several countries have implemented fiscal incen- approaches to reducing resource risks may be tives for geothermal in different ways. Some of more effective. the forms used include: waiving duties on the import of geothermal equipment and income tax Other Types of Complementary Support breaks for the first years of geothermal operations Countries have also used an array of comple- (Nicaragua, Ethiopia, and Kenya); tax exemptions mentary tools and strategies that indirectly or reductions in taxable income (Indonesia); 100 mitigate risk and incentivize investment in percent tax deduction on investment on renew- geothermal development. Some of these include: able power (Mexico); exemption of taxes on machinery imported for geothermal development • Renewable portfolio standards (RPS), which (Indonesia and the Philippines); and exemption include a mandated target percentage of of all taxes, except income tax, for geothermal renewable power in the energy portfolio of a project developers (the Philippines). These incen- country, state, or utility company; tives are implemented through legislation and their • FITs, which sets the minimum prices for application typically does not require significant renewable energy and mandates off-takers to up-front public financial support, although some purchase renewable energy at these set prices; fiscal revenues may be lost. Tax credits (such as • Loan guarantees for geothermal projects, the ITC and the PTC in the United States) have including government full faith and credit helped many geothermal developments and are guarantees, as well as partial risk guarantees likely to have had some impact on the pace of and letters of support; development, but this is difficult to quantify. 28 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Other tools that have facilitated geothermal examples in the region in which the private sector development are FITs. For instance, the very attrac- further develops the steam field and constructs tive FITs offered for geothermal energy in coun- and operates the power plant, such as Polaris tries such as Germany are typically calculated on Energy Nicaragua S.A and Grupo Dragón at Domo the basis of development costs. Because Germany’s San Pedro geothermal field in Mexico. geothermal resources are often deep and difficult to develop, the price that has been mandated for The World Bank is currently working with geothermal power is accordingly high and this has governments, utilities, and geothermal devel- helped attract investors into the sector. opers in several LAC countries to customize geothermal resource risk mitigation approaches Similarly, RPS programs—essentially a mandate and to help finance the implementation of such for a state, region, or utility district to have a approaches. While many of these World Bank specific percentage of renewable power supported projects build on the risk mitigation sources—have also been useful. These have led approaches discussed earlier, they also have to higher price offers for renewable power in order unique considerations: (i) the state of geothermal to mobilize sufficient investments to meet these development in each country; (ii) the nature of obligations. The resulting improvement in the the field; and (iii) local technical capacities. overall long-term returns for developers have However, as the emerging approaches in Dominica, helped promote investments in geothermal. Nicaragua, and St Lucia described below have not yet begun implementation, it is too soon to draw While these different schemes can help incen- lessons learned from these approaches. tivize renewable energy and geothermal invest- ments, it is unlikely that any of them in a Dominica vacuum will be sufficient to catalyze signifi- Over the past decade, Dominica has been trying cant geothermal investment in LAC. Their to develop its geothermal resources as a means implementation—in combination with targeted to lower and stabilize the costs of electricity in geothermal resource risk mitigation approaches the country. Dominica faces some of the highest and other policy, regulatory, and financing strat- electricity prices in all of LAC, given its heavy reli- egies—will be key to stimulating successful ance on diesel for power generation. While the geothermal development in the region. country has some hydropower capacity installed, further diversification of the country’s energy matrix through the exploitation of the country’s Emerging Approaches in LAC large estimated geothermal resource potential has The existing geothermal power facilities oper- been a top priority for the government. Geothermal ating in the LAC region have been developed development in Dominica has been conducted by a combination of fully public efforts and thus far under a public-led drilling approach, cost-shared approaches between the public and which is facilitating subsequent development by private sector. As seen in other parts of the the private sector. Early geothermal surface level world, typically the early stages of geothermal work and exploration studies were done by the development—especially surface reconnaissance, government, with support from various develop- exploration drilling, and sometimes even produc- ment partners and agencies. tion drilling—have been undertaken by public sector entities, such as CFE in Mexico and ICE The Wotten-Waven field in the Roseau Valley in Costa Rica. In other cases, they have been has a theoretical capacity of up to 100 MW, the developed by way of PPPs such as Enel Green largest in the Caribbean region. The early recon- Power and ENAP in Chile. There are also various naissance and surface level studies at the C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 29 Wotten-Waven field were conducted as part of a Wotten-Waven field. A private enterprise, called European Cooperation Programme in 2008, in the Dominica Geothermal Development Company partnership with several other regional and inter- (DGDC), was established to own and operate the national agencies. Afterwards, the government, geothermal power plant. The DGDC is staffed by through its Ministry of Public Works, Energy, and a combination of local and international Ports, invested about US$10 million (financed by personnel, and technical assistance is being an AFD loan) to conduct additional surface studies provided by the government of Zealand to support and exploration drilling in 2011–2012. This initial its operationalization. The technical support exploration drilling work identified the presence, provided by development partners has been key with a 50 percent probability, of a geothermal in supporting the GoDC and DGDC to advance resource able to support approximately 65 MW development of the Wotten-Waven field. The of power generation capacity. While the govern- financing needed to construct the small ment of the Commonwealth of Dominica (GoCD) geothermal power plant is being provided by the has consistently sought to attract a private devel- GoDC IDA, the Clean Technology Fund (CTF), oper to further develop the field, it has been so DFID, SIDS-DOCK, and the government of New far unsuccessful due to the risks associated with Zealand. This financing will then be on-lent by geothermal development, especially for a small the GoCD to DGDC on the same terms as the country and an untested market like Dominica. financing is received, to help bring down the cost The country thus decided to revert to using a of geothermal power production (compared to public sector-led development approach. From the cost if commercial financing were used) so 2013–2014, the government undertook production that the country can benefit from more afford- drilling and confirmed the availability of sufficient able power. The expectation is that once the small steam at the wellhead to develop a seven MW power plant is commissioned and the operational plant. During this time, the World Bank provided viability of the field proven, this will help attract technical assistance to GoCD, through an ESMAP/ private investors. Depending on resource avail- Small Islands States (SIDS)-DOCK grant. This ability, a large geothermal power plant with a assistance was to support review of the drilling capacity of around 40 MW to 100 MW could be results, identify key gaps in the baseline environ- developed for electricity exports to Guadeloupe mental and social work, and recommend actions and/or Martinique through undersea cables. This to address any gaps to ensure that the geothermal larger, more complex investment will require field was developed in line with industry and partnering with the private sector, but it is still international standards. too early to determine under what approach it would be developed. Dominica is an example of With the field’s geothermal resources now a cost-shared drilling approach that was initially proven, the GoCD is now planning to construct publicly led, but that is expected to mobilize a seven MW geothermal power plant through significantly more private geothermal investment. a PPP approach, with support from the World Bank, DFID, and the government of New St. Lucia Zealand. This small geothermal power plant will The government of St. Lucia (GoSL) has also feed domestic demand, as well as confirm the prioritized the development of geothermal production capability of the steamfield, which is resources to help diversify the country’s energy a prerequisite to further expanding the mix.58 St. Lucia faces many of the same challenges 58 GoSL has established renewable energy targets of 35 percent by 2035 and 50 percent by 2050. Project Information Document/ Integrated Safeguards Data Sheet (PID/ISDS), World Bank, May 2017. 30 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC encountered by other Caribbean islands, including the areas where the recently completed surface high electricity prices, reliance on imported diesel studies suggested the existence of a geothermal fuels, and a small electricity market. Geothermal reservoir. The government’s Department of surface level studies conducted thus far have been Sustainable Development will implement the public sector led. However, once the public sector project and will establish a dedicated geothermal mitigates early stage geothermal risks—including implementation team. The government also plans through the upcoming World Bank supported to contract an external exploration management exploratory drilling—the intention is to attract a consultant to enhance its capacity to implement qualified private developer to take on the produc- and oversee the drilling program. The government tion drilling and power plant construction phases and development partners such as the World and to then operate the plant. St. Lucia has a long Bank, CTF, SIDS-DOCK, and DFID, among others, history of working to develop it geothermal plan to finance this US$22.5 million project. Under resources. The Sulphur Springs area has tradition- the project’s most recent design, technical assis- ally been considered the most promising area and tance will also be provided to the government for has been studied since 1951 through reconnais- support in selecting and contracting a private sance studies funded by the United Nations and developer to carry out the subsequent phases of drilling in the 1970s and 1980s. However, this geothermal development, if commercially viable. work did not confirm the commercial viability of Thus, St. Lucia plans to use a public sector-led using the geothermal resources to produce power. exploration drilling approach to mitigate risk, and Furthermore, as the location of the initial areas after will offer the remaining stages of develop- were within the Pitons Management Area (PMA), ment to the private sector. a UNESCO-designated World Heritage Site, this further stalled development. Nicaragua There is considerable potential for Nicaragua In recent years, GoSL, with the help of the World to use geothermal to diversify its generation Bank and other donors, has contracted several mix and lower and stabilize energy costs. additional surface level studies to further assess Nicaragua has the highest geothermal resource the viability of the country’s geothermal potential in Central America, but less than 10 resources. From 2014 to 2016, the government percent is used for power production. While also received technical assistance from the World geothermal power plants in the Momotombo and Bank to develop a geothermal roadmap for iden- San Jacinto-Tizate fields are operational, it has tifying, exploring, and exploiting the geothermal been difficult for the country to expand its resources for electricity generation. This included geothermal capacity. Like many countries, a early surface level studies, which lead to a compre- major obstacle to geothermal development in hensive pre-feasibility study and an ESIA for the Nicaragua is resource risk. This resource risk next stage of exploration drilling. The findings makes it difficult to secure the funding required from these surface exploration studies suggest the to confirm the geothermal resource potential in possible existence of a geothermal reservoir, just Nicaragua’s 10 remaining greenfields. outside of the PMA area, that had not been iden- tified by previous studies. The GoN is looking to expand its geothermal power capacity to reduce and stabilize the The government now plans to implement an overall cost of the country’s power supply by exploration drilling program using public diversifying away from fuel oil. To facilitate resources to finance the drilling of three to five geothermal development, over the past four years, deep exploration wells. This project aims to the World Bank has provided the GoN with tech- assess the quality of the geothermal resources in nical assistance, including: conducting a C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 31 geothermal sector diagnostic, screening, and risk capital necessary to complete the exploratory prioritization of Nicaragua’s undeveloped drilling activities and confirm the resources. geothermal fields; assessing of global approaches to geothermal resource risk mitigation; conducting The GoN has decided to support geothermal a market sounding with geothermal developers resource risk mitigation in the Casita field to to ascertain their interest in investing in Nicaragua; enable field development to move forward so that and supporting a geothermal resource risk miti- the country can benefit from the lower cost gation investment project. Based on a screening power that could be produced. The GoN, utilizing and prioritization of fields in Nicaragua’s a US$45 million International Development Geothermal Master Plan by the GoN and the World Association (IDA) credit from the World Bank, Bank, the Volcán Casita San Cristobal geothermal plans to finance a three-to-five-well exploration field (Casita field) was identified as the most prom- drilling program, industry standard feasibility ising geothermal prospect in the country. study, and the accompanying environmental and social safeguard implementation work. The GoN Advances in Casita field development have would provide this funding to the state-owned largely been due to the efforts of and funding utility ENEL(NI), which will invest in the afore- from Cerro Colorado Power (CCP), a private mentioned exploration activities and in exchange company that was awarded the concession for receive shareholding in CCP. If the commercial development of the Casita San Cristobal viability of the geothermal resources for power geothermal field by the GoN. Between 2009 and generation is confirmed, it will likely enable CCP 2011, surface studies (geological, geophysical, and to raise significantly more finance from private geochemical) were completed, an access road and and multilateral development banks to undertake drilling platform was constructed, and a slim/core production drilling and the construction of the hole was drilled that identified the availability of SAGS and an initial 25 MW to 35 MW power plant. a high temperature steam resource. Despite this This is the first time that a PPP approach to positive outcome, the remaining resource risks in geothermal development will be used in Nicaragua. the field have prevented the project from advancing However, similar approaches in which state-owned further, as CCP has been challenged to raise the enterprises or PPPs do upstream field development TABLE 3.3:  Emerging Geothermal Development Approaches in LAC Stage of Development/ Financing Geothermal Development Surface Exploratory Production SAGS and Operation and Approach reconnaissance drilling drilling power plant maintenance Financers Dominica Public sector Public sector Public sector Cost-shared Private sector- IDA, CTF, DFID, (Wotten-Waven field) (GoCD) (GoCD) (GoCD) (GDC, with public GDC (proposed) SIDS-DOCK, financing) government of New Zealand, GoCD St. Lucia Public sector Public sector Private Private Private (proposed) IDA, CTF, SIDS- (Fond St. Jacques, (GoSL) (GoSL) (proposed) (proposed) DOCK, ESMAP, Belle Plaine, Mondesir- DFID, GoSL Saltibus fields) Nicaragua Private sector Cost-shared Private sector- Private sector- Private sector-CCP IDA, ENEL(NI), (Casita San Cristobal (CCP) (ENEL/CCP) CCP (proposed) CCP (proposed) (proposed) CCP field) Source: World Bank, various. 32 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC and then private sector entities conduct the down- the private sector is willing to take on some stream activities are common in the oil and gas of the burden of geothermal development, industries. Thus, a PPP variation of the cost-shared targeted public investments can be catalytic drilling approach mentioned earlier in this chapter for later harnessing private investment. would be applied to this project. Full or partial investments by governments through the mobilization of risk capital Some overall lessons that have emerged from for exploration drilling can significantly these new geothermal approaches are: (i) recog- de-risk geothermal operations and help nition that the risks associated with the initial attract private investment for the remaining stages of geothermal development are one of the stages of development. This has been the leading factors that slows down geothermal field case in various LAC countries, and is also development; (ii) concessional finance is key to essential for advancing the new geothermal both funding early drilling activities, but also to developments in Dominica, St. Lucia, and lowering the cost of a geothermal project and the Nicaragua. electricity produced; and (iii) technical support • Approaches to scaling up geothermal from development partners is critical, given the should be customized and commensurate limited geothermal expertise in the LAC region, to country-specific circumstances. While especially in countries that are developing resource risk mitigation can be catalytic geothermal for the first time. A summary of the in unlocking the potential for commercial geothermal development approach used in each development in geothermal fields, this alone of these countries by development stage is cannot guarantee successful installation depicted in Table 3.3 above. of geothermal generation capacity. In some instances, the exploration drilling and feasibility study may determine that a Conclusions project is not commercially viable. In cases The following key lessons have emerged through in which a viable resource is confirmed, the comparative analysis of global and regional there may be a need to address other country, approaches to geothermal resource risk mitigation: market, and sector related barriers that impede projects, and to launch additional • Public support is central to geothermal financial incentives and mechanisms. Thus, development, especially for reducing a comprehensive approach to geothermal project risks. Very few geothermal resources development is needed in order to most worldwide, including in LAC, have been effectively scale up geothermal development developed without some form of public in LAC and globally. intervention, either through investments or by regulatory means. Public support is A more detailed comparison of the different especially important for reducing resource geothermal resource risk mitigation schemes risks, as seen in a number of countries presented in this chapter and the key features of in the LAC region. Early investment by each scheme can be found in the World Bank/ governments in surface reconnaissance and ESMAP full report Comparative Analysis of exploration drilling has been a critical catalyst Approaches to Geothermal Resource Risk in advancing geothermal development. Mitigation: A Global Survey, which can be • Well-targeted public support can leverage accessed at: https://openknowledge.worldbank. private participation. In instances in which org/handle/10986/24277. C h a p t e r 3 : G e o t h e r m a l R e s o u r c e R i s k s a n d O p t i o n s f o r M i t i g at i o n 33 San Jacinto-Tizate Geothermal Plant. Photo courtesy of Polaris Energy Nicaragua S.A. CHAPTER 4: MOBILIZING FINANCING FOR GEOTHERMAL DEVELOPMENT Power and Geothermal Investment investment returns, which, coupled with the Landscape to Date high-risk profile of geothermal investments, The unique characteristics of geothermal devel- makes it difficult for investors to justify financing opment may help to explain the relatively low projects. 62 Thus, even though developing levels of private investment in the global sector. geot her ma l requ i res sim i la r “w i ld-cat” While often grouped together with other renew- approaches as the oil and gas industry, the able energy technologies,59 geothermal energy is economic drivers are very different. Not surpris- in fact very different from many renewables, not ingly, there are only a small number of investors only in terms of its uses (base-load power), but and companies with the necessary capital and also in terms of its economics and financing. risk tolerance to embark on a geothermal project. Extracting geothermal energy is a capital-inten- In fact, just 20 companies control over 70 percent sive activity, with the first phase alone (resource of global geothermal electricity production world- confirmation) requiring investments in excess of wide.63 There is also a limited number of finan- US$20 million to US$30 million over two to three cial institutions willing to back these investments. years.60 At the same time, the early stages of geothermal development have a relatively high- Private investment flows into the geothermal risk profile (only 60 percent probability of sector in the LAC region have been influenced success).61 Unlike other energy extractive by each country’s electricity market, geothermal resources, geothermal steam cannot be trans- resource conditions, and investment climate. ported far. It is usually converted into electricity Factors such as the relative price of other close to where the resource is extracted and sold competing technologies, local legislation, market to a local off-taker at prices consistent with the size, local utility credit risk, and the topography average cost of electricity within a country. This and accessibility of the location of the geothermal means a relatively low cap on potential resource all play a key role in determining the 59 Author conversations with several developers in the LAC region. 60 Illustrative costs in US$ million are typical for development of a 10 MW to 100 MW power plant, based on data presented in ESMAP 2012a. 61 The success rate averaged over the first five wells drilled was 59 percent, based on global database of wells in geothermal fields which together supply power to 71 percent of the world’s installed geothermal electricity generating capacity. IFC 2013. 62 The topography and accessibility of a particular geothermal field may have significant cost implications. For instance, in South America, many of the geothermal fields are located in remote areas of the Andean mountain range, which increases the cost of developing the fields. As a result, the average cost per megawatt of developing a geothermal field in South America is above $US6 million, significantly over the $US4 million to US$5 million per megawatt that it costs to develop a field in Central America. 63 World Energy Council 2016. Chapter 4: Mobilizing Financing for Geothermal Development 35 relative attractiveness of investing in a country’s sector, with France absorbing the geothermal geothermal sector. In the LAC region, the stark development risk of its overseas territory. Most differences among the electricity markets, and of the geothermal fields being developed in the the political, regulatory, and country conditions Caribbean rely heavily on government and devel- of the Central America and Mexico, the opment partner financing. While high electricity Caribbean, and South America sub-regions have prices provide a strong incentive for geothermal also influenced the amount of private investment development in this sub-region, the high capital in the geothermal sector. cost of geothermal investments, small market size, and limited borrowing capacity of many The Central America and Mexico sub-region Caribbean governments have led utilities and has received the vast majority of private potential developers to limit investment. However, geothermal investment in LAC. From 1993 there is still significant interest by the public through 2017, there was over US$1 billion of sector in developing and exploiting the geothermal private investment in the geothermal sector in resources in this sub-region given the potential this sub-region. Private investment has contrib- to help lower and stabilize electricity prices. uted to the development of about 564 MW (36 percent) of geothermal capacity in the Central The South America sub-region has attracted a America and Mexico sub-region. In contrast, the limited amount of private investment to the public sector has financed about 64 percent of geothermal sector. Chile is still the only country the total geothermal capacity installed in this in this sub-region with any installed geothermal sub-region (that is, 1,038 MW). A number of capacity, with approximately US$320 million of factors have facilitated this geothermal invest- private investment used to develop the 48 MW ment, including the larger size of electricity Cerro Pabellón geothermal power facility. The markets in this sub-region compared to the South America sub-region is attractive to investors Caribbean. However, with the exception of because of larger-size electricity markets and signif- Mexico, most markets are still small to medium icant estimated geothermal resource potential. size by regional standards, and political insta- However, lower electricity prices and significant bility and violence have impacted the investment competition from other electricity generation tech- climate in some countries. Nevertheless, given nologies, less geothermal resource knowledge from the large estimated resource potential and actual drilling, difficult terrain complicating access existing knowledge about the resource charac- to the resources, and less local experience and teristics in many fields, there is both public and capacity make South America a less attractive private sector interest in further geothermal sub-region for geothermal investors. Geothermal development. Governments in this sub-region has been at a significant disadvantage compared have had long-standing interest in developing with large hydro, fossil-based fuels, and even their geothermal resources to limit exposure to non-conventional renewables like small hydro solar oil and diesel price volatility. There has also been and wind, making it difficult for geothermal devel- active geothermal investment and operations in opment to gain traction and interest from inves- the region for decades, so there is more local tors. Out of the eight geothermal plants that have capacity and awareness about the geothermal come online since 1993 in LAC, Cerro Pabellón was sector than in other sub-regions. the only one located in South America. The very limited amount of geothermal capacity While the amount of geothermal development installed in the Caribbean sub-region has been and investment has varied in each sub-region publicly financed. In Guadeloupe, the 15 MW of of LAC, lack of financing is one common factor installed capacity was developed by the public across all sub-regions. Private geothermal 36 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Private Sector Investment in the Power and Geothermal Sectors in LAC, 1993–2017 TABLE 4.1:   Countries Power sector (US$ million) Geothermal sector (US$ million) Costa Rica 1,600 70 Chile — 320 El Salvador 1,300 46 Guatemala 3,930 104 Honduras 2,600 180 Mexico 15,900 160 Nicaragua 1,200 451 Total 26,530 1,331 Source: PPIAF database. Note: The PPIAF database does not include information for Chile and Guadeloupe on the amount of private investment that has been mobilized in the power sector. investment represented only five percent of total regions of the world. LAC’s private investment private investment in the power sector in LAC in the geothermal sector represents only six from 1993 to 2017 (Table 4.1). While mobilizing percent of total private geothermal investment funds for exploration drilling may be the largest globally from 1993 to 2017. As seen in Figure 4.1, barrier, developers continue to face challenges the LAC region’s private geothermal investment in finding finance even after the resource has was dwarfed by that of the East Asia and the been proven and the viability of the project Pacific region, where total private investment confirmed. Given the risk profile of geothermal (US$10.5 billion) was 15 times greater than in development, companies often need to raise LAC. Private geothermal investment in LAC capital on a stage-by-stage basis, which can create during this time period was more comparable to significant project delays and increase costs. that seen in the Europe and Central Asia and Sub-Saharan Africa regions. Overall, the LAC Private Investment in LAC’s geothermal sector region ranks third among all regions in the has also been moderate compared to other amount of private geothermal investment Private Geothermal Investment by Region, 1993–2017 (US$ Billion) FIGURE 4.1:   East Asia and Pacific Europe and Central Asia Latin America and the Caribbean Sub-Saharan Africa South Asia 0 2 4 6 8 10 US$ Billion Source: World Bank. Chapter 4: Mobilizing Financing for Geothermal Development 37 attracted from 1993 to 2017. However, as LAC’s 2017. Thus, raising the level of funding required estimated geothermal resource potential could to develop LAC’s planned geothermal capacity range from 11 GW to 55 GW, the region has an expansion will be challenging. Mobilizing the opportunity to significantly scale up investment finance required to develop LAC’s entire 11 GW in this sector. to 55 GW of estimated potential would present an even greater challenge. Looking at the Horizon: Investment Needs Central America and Mexico in the Geothermal Sector The Central America and Mexico sub-region Future Investment Needs to Enable has over 400 MW of geothermal developments Geothermal Development in LAC planned for the next ten years. Given that this During the next 10 years, the LAC region will is the sub-region with, by far, the most advanced require an estimated US$2.4 billion to US$3.1 geothermal sector, many of the sector’s investors billion to finance the cost of developing about and companies have experience in this market. 776 MW of geothermal power generation T h i s m ay he lp mobi l i z e t he ne c e s - capacity.64 This level of investment encompasses sary US$1.7 billion to US$2.2 billion that will be the cost of fully developing all stages of the 19 required to develop the region’s planned geothermal fields that LAC countries plan to geothermal projects. However, developing this develop in this period (Table 4.2). An estimated capacity will also likely require support from the US$240 million to US$330 million65 will be needed public sector and international financial institu- just to cover the riskier exploration stage costs tions, given the low levels of private geothermal and confirm the resource in these geothermal investment historically seen in LAC. Table 4.3 fields, which is typically the most difficult provides a summary of the geothermal invest- funding to raise. Since 1993, LAC’s private sector ments planned for the Central America and investment into the geothermal sector has aver- Mexico sub-region that are likely to be initiated aged only US$54 million per year from 1993 to over the next decade. Planned Geothermal Developments in the LAC Region TABLE 4.2:   Central America Caribbean and Mexico (OECS) South America Total Number of fields with planned investments 10 7 2 19 Planned capacity additions (MW) 448 195 133 776 Estimated exploration costs (US$, million) 180 to 270 60 to 90 Financing already secured 240 to 330b a Estimated total development cost (US$, billion) 1.7 to 2.2 0.72 to 0.92 Financing already secured 2.4c to 3.1d a This figure includes an estimated exploration cost of US$25 million per field. However, adjustments have been made for fields for which developers have already secured the funding to finance the exploration stage. b This figure includes an estimated exploration cost of US$30 million per field. However, adjustments have been made for fields for which developers have already secured the funding to finance the exploration stage. c This figure includes an estimated cost of US$3.9 million per megawatt installed d This figure includes an estimated cost of US$5.0 million per megawatt installed. 64 These calculations assume a total development cost ranging from US$3.8 million to US$5 million per MW installed. Estimations are based on those used in ESMAP Geothermal Handbook, World Bank, 2012. Adjustments have been made to these assumptions for the fields for which the financing has already been secured. 65 These figures assume and estimated exploration cost of US$25 million to US$30 million per field. However, adjustments have been made where developers have already secured the funding to finance the explorations stage of a particular field. 38 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Planned Geothermal Projects in Central America and Mexico Region (Next 10 Years) TABLE 4.3:   Estimated capacity Estimated investment Country Number of fields (MW) required (US$)a Costa Rica 3 fields (Borinquen field units I and II, Las Pailas 163.5 US$640 million to US$820 million units III and V, and Backpressure unit)b El Salvador 2 fields (Chinameca and San Vicente) 80.0 US$312 million to US$400 million Guatemala 1 field (El Ceibillo)c 25.0 US$97.5 million to US$125 million Mexico 1 field (Nayarit field, Ceboruco unit) 25.0 US$117 million to US$150 million Nicaragua 3 fields (Casita San Cristobal field, Volcán d 149.0 US$561.1 to US$715 milliong Cosiguina fielde and San Jacinto expansion)f Total 10 fields 447.5 US$1.7 billion to US$2.2 billion a Cost estimations are based on those used in ESMAP 2012a. b GEA 2016. c US Geothermal (recently acquired by ORMAT), recently received a US$3.4 million grant from the Geothermal Development Facility for Latin America to aid the development of three production wells. (Richter 2017; and GEA 2016. d World Bank 2017a. e IDB 2016. f GEA 2016. g This particular figure assumes zero exploration costs, since the IDB and the government of Nicaragua already have developed a resource risk mitigation project aimed at validating the presence of commercial levels of geothermal energy in the Consiguina field. (IDB 2016). Caribbean only one plant that has been developed in The Caribbean has around 195 MW in planned Guadeloupe, many islands in the Caribbean (such geothermal developments that would require as Dominica, St. Lucia, and St. Kitts and Nevis) the mobilization of over US$700 million in are actively looking to develop their geothermal financing (Table 4.4). While there is currently resources, having already conducted various Planned Geothermal Projects in Caribbean Region (Next 10 Years) TABLE 4.4:   Estimated Estimated investment Country Number of fields capacity (MW) required (US$ million)a Dominica 1 field (Wotten-Waven field)b 40 136 to 170 Grenada 1 field (Mount St. Catherine) field) c 30 117 to 150 Guadeloupe 1 field (Bouillante 3 field, expansion unit)d 30 97 to 120 Monsterrat 1 field (Cork Hill field) e 5 19.5 to 25 St. Kitts and Nevis 1 field 45 f 175.5 to 225 St. Vincent and the Grenadines 1 field 15g 58.5 to 75 St. Lucia 1 field (Soufriere)h 30 117 to 150 Total 7 fields 195 720 to 915 a Assuming completion of project if exploration and drillings are successful and consistent with estimations. b World Bank 2017a. c GEA 2016. d GEA 2016.. e The Montserrat geothermal power plant will provide from two MW to five MW. (Crawford 2016). f NREL 2015. g Richter 2018b. h World Bank 2018b. Chapter 4: Mobilizing Financing for Geothermal Development 39 surface level studies and other preliminary activ- the sub-region with concessions. It is feasible that ities. For instance, as mentioned previously, in several additional geothermal projects could Dominica the government is developing a seven begin development in the South America sub-re- MW plant that will serve the local market. Plans gion over the next decade, in which case addi- calls for a later expansion of capacity to between tional financing would be needed. 40 MW to 100 MW to be able to export neigh- boring electricity to markets.66 Financing Geothermal Development South America Financing geothermal development is a complex endeavor. Each stage of a geothermal project has Most development financing has been secured a unique set of resource risks, capital demands, for the estimated 133 MW in geothermal devel- and operational challenges. Thus, financing is opments that South America has planned for typically raised on a stage-by-stage basis from the next decade (Table 4.5). With countries such different types of investors and may utilize a range as Chile leading the way, the region’s resource of financial structures. Given the high-risk profile potential seems strong, but there is still ample and low return potential of geothermal relative to opportunity to include geothermal in the resource other extractive sectors, raising financing for development plans of many other countries. geothermal is more difficult, and very different Geothermal development in this sub-region has from raising financing for similar extractive busi- underperformed that of other LAC sub-regions nesses, let alone for other renewable technologies due to various reasons, including low prices for like wind and solar. Moreover, it is important for fossil-based fuels, competitive markets, and lack public sector actors and development institutions of government interest in developing the resource. that are interested in promoting geothermal devel- Recently, countries like Chile and Peru have been opment to address not only the financing attempting to jump-start their geothermal sectors constraints at each stage, but also to help ensure by developing legal frameworks and assigning that there is timely access to such resources. In a concessions, among other actions. Chile has business where operational delays cost millions awarded more than 80 exploration concessions of dollars, access to capital when it is needed can and nine exploitation concessions in the last make or break a project. decade, so the investment requirement in Chile could far surpass the US$642 million that has been raised to develop the Laguna Colorada field Funding Sources in the LAC Region in Bolivia and to expand the Cerro Pabellón field Given the different risks and investment require- in Chile. However, there has been no exploration ments for the various stages of geothermal devel- drilling in the majority of geothermal fields in opment, the types of funding secured will include Planned Geothermal Projects South America Region (Next 10 Years) TABLE 4.5:   Number Estimated capacity Estimated investment required Country of fields (MW) (US$ million) Chile 1 (Cerro Pabellón expansion) 33 120 (already secured) Bolivia 1 (Laguna Colorada) 100 552 (already secured) Total 2 133 0 (funding already secured) 66 World Bank 2017. 40 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC public financing, grants and loans from interna- Some larger, more established private geothermal tional financial institutions, private equity, and developers in the region that have very strong loans from commercial banks. Within the LAC balance sheets, such as ORMAT and ENEL(IT), region, commercial lenders generally have been have fully financed all stages of geothermal reluctant to extend credit for the exploratory stages development. Given the capital requirements of of geothermal development. There have also been geothermal projects, many large-scale developers few high-risk investors, such as private equity take a portfolio approach to developing this funds, with the risk appetite and capital required resource and diversify their resource risk by to fund geothermal projects. Consequently, most investing in multiple fields in various locations, successful geothermal ventures in LAC have been but the presence of this type of developer in LAC funded with public and development partner is limited. financing, at least during the initial stages of devel- opment. Governments and other public-sector In contrast, the medium-sized private entities have been making significant efforts to geothermal developers in the region tend to mobilize concessional funding for geothermal focus their financial resources in only one or development and to attract private investors, but two markets. While these entities still have good far greater support will be needed to fill the balance sheets that they may be able to leverage geothermal investment gap in LAC. to raise finance for each project, their resources and ability to explore various fields simultane- Geothermal Developers ously are limited. In a few cases, these entities In the absence of external financiers with suffi- may conduct much of the groundwork to develop cient interest in geothermal investment, a particular field (securing concessions rights, geothermal developers often have used their development rights, conducting several studies, own resources to fund exploratory activities. and proving the resource) and then attempt to This may help slightly lower the rate of return sell the project to a larger company. required by investors for these stages of devel- opment, but it also locks up a substantial portion Government and Public Entities of a company’s capital into a single project for Today, the public sector is the largest investor several years.67 in the geothermal sector in the LAC region, having developed the majority of the 1.6 GW of Publicly-owned developers have been key installed capacity in the region (Table 4.6).68 drivers of geothermal development in the LAC These entities often use their own government region. Developers like ICE, ENEL(NI), LaGeo, revenues or borrowing capacity to acquire loans and CFE developed over 1,300 MW of geothermal and grants from different international and bilat- capacity in LAC, using their own balance sheets, eral entities to fund this development. The high as well as obtaining funds from their govern- level of public sector participation is not ment partners and international financial insti- surprising, since the electricity sectors with the tutions. In addition, these developers have also highest levels of geothermal development, Mexico conducted critical exploration and pre-feasibility and Central America, have been historically studies that have incentivized private sector managed by public utilities. In addition, the high- developers to participate in the geothermal sector. risk nature and large capital requirements of 67 Identifying and verifying the availability of geothermal resources can take an average of two to three years. In addition, drilling and completing the construction of the plant can extend for another three to five years. 68 Yepez-García et al. 2010. Chapter 4: Mobilizing Financing for Geothermal Development 41 geothermal development have driven govern- Over the past few years, there have been a few ments to take a leading role in the region’s partnerships between international financial geothermal sector. institutions and financial intermediaries to develop credit lines with tranches earmarked Private Equity for clean energy projects, including geothermal. Developers sometimes seek private equity For instance, the IFC and the European Investment investors to help fund the initial stages of a Bank (EIB) together have allocated US$225 geothermal development, since these investors million to projects in which they have part- generally have a higher risk appetite. However, nered with banks in the region to support climate private equity investors require rates of return change mitigation projects through framework that are commensurate with a high level of risk, loans. However, the mid-term reporting of those which may limit a geothermal company’s ability institutions seems to suggest that the level of to offer competitive prices in the local markets. geothermal projects accessing this financing is In the LAC region, private equity investors have low, compared to other clean energy options. mostly stayed away from early stage geothermal Nevertheless, the fact that such programs are ventures, and either invested at a later stage or being established is a step in the right direction. opted to invest in other renewable energy tech- nologies that are more certain. Development Finance Institutions Multilateral and bilateral development finance There are several well-funded and established organizations have played a key role in private equity funds with renewable energy promoting the development of geothermal in portfolios operating in the region. Recently, the the LAC region thanks to their ability to mobi- private equity funds that have shown appetite lize finance and technical assistance. These for early stage geothermal investments are those institutions have supported geothermal develop- established with a blend of concessional financing ment through technical assistance grants, direct from international donors. The ability of these loans to governments, project finance to private blended finance programs to mobilize private developers, lines of credits to financial interme- investment in the geothermal sector has shown diaries that provide financing to geothermal that geothermal developers are receptive to these developers, and other financial instruments like financing instruments, particularly those that concessional loans. offer incentives compared to other financing options available in the region. The World Bank Group is the leading multilat- eral development bank providing geothermal Commercial Banks development assistance globally. With over Commercial banks have ample experience in US$2.3 billion mobilized in investment financing providing loans for extractive energy busi- and technical assistance, the World Bank Group nesses. However, given the high-risk nature of accounts for nearly 60 percent of the US$3.8 geothermal development, commercial banks typi- billion invested by all multilateral development cally only involve themselves during the late banks from 1978 to 2017. The World Bank is stages of a project—once resources have been present in the region through its own investment proven, and a PPA has been secured. Experience financing operations, as well as through the in LAC has shown that some commercial banks multiple funds it manages. ESMAP leads the only consider offering financing for plant Global Geothermal Development Plan (GGDP), construction once at least 50 percent of the an initiative by multilateral and bilateral devel- geothermal fluid required to fulfill the plant opment organizations to mobilize new funds for generation capacity is already available. initial investment phases of geothermal projects, 42 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC specifically exploration drilling. Overall, the in Costa Rica, El Salvador, Bolivia, Chile, GGDP has raised US$235 million so far, of which Nicaragua, Mexico, and the Eastern Caribbean. US$70 million has been allocated to support Currently, the IDB has five geothermal projects in development of projects in the LAC region. The execution and one more in the pipeline, comprising World Bank is providing technical assistance to more than US$1.3 billion in financing, which the governments of Chile, Dominica, Nicaragua, includes IDB’s ordinary capital and co-financing El Salvador, and St. Lucia to advance develop- from other donors. In addition, the IDB has a US$4 ment of geothermal resources and will soon start billion joint venture with JICA (Co-Financing for supporting Mexico. The World Bank is also Renewable Energy and Energy Efficiency) to working to secure a combination of concessional support renewables in the LAC region, which and traditional loans and grants and to leverage includes geothermal. Geothermal co-financed proj- additional funding from other development orga- ects in this joint venture include a US$200 million nizations to help its clients finance several loan to Costa Rica for the construction of the Las geothermal projects in LAC. This includes the Pailas II and Borinquen I geothermal power plants. US$48.2 million Geothermal Risk Mitigation With JICA, the IDB also started a US$600 million Project in Dominica, the US$22.5 million fund to finance renewable energy projects in Renewable Energy Sector Development Project Central America and the Caribbean, including for in St. Lucia, and the US$45 million Geothermal geothermal power generation. Resource Risk Mitigation Project in Nicaragua. All are currently under preparation and are The Caribbean Development Bank, together with expected to be approved in 2018 and early 2019. the IDB, established a Sustainable Energy Facility for the Eastern Caribbean (US$71.5 million in The IFC, part of the World Bank Group, offers loans and grants) in 2015 to support renewables debt and equity financing to the geothermal sector, development, including geothermal power. Part with structuring options and technical expertise of this facility uses concessional financing from on issues such as resource risk. The IFC currently the CTF (US$19 million) and a grant from the participates in three active financing lines in LAC Global Environmental Facility (US$3 million). that geothermal companies may harness: a US$130 million loan to Banco Galicia that includes one On the technical assistance side, there is also a tranche to finance sustainable energy projects in Regional Geothermal Training Programme Argentina; a US$20  million contribution to a (US$2.7 million) jointly financed by the Nordic US$160 million fund (the Central American Development Fund (NDF), IDB, and the govern- Mezzanine Infrastructure Fund II), which seeks ment of El Salvador. Its objective is to develop a investments in equity, quasi-equity, and subordi- geothermal training program and facilitate the nated loans in renewables; and a 10-year senior training activities in El Salvador to serve the LAC debt package for up to US$75 million to Banco region. Bice to support a pre-identified pipeline of renew- able energy projects, including geothermal. The JICA also has direct geothermal lending programs IFC also made a direct US$60 million investment in the region to support resource development and to help develop the San Jacinto power plant in construction of geothermal plants. JICA’s support Nicaragua. With 72 MW in installed capacity, the includes a concessional loan of US$560 million in San Jacinto plant is now the second operational Costa Rica for the construction of several geothermal power plant in Nicaragua. geothermal power plants in the Guanacaste Province and a concessional loan of $US552 The IDB began financing geothermal power in million to the government of Bolivia to finance the 1985, and has since financed geothermal projects development of the Laguna Colorada field. Chapter 4: Mobilizing Financing for Geothermal Development 43 The EIB has an energy portfolio that includes Multi-Donor Funds/Facilities activities to support the construction, extension, There are also several multi-donor funds and and rehabilitation of renewable energy power facilities that both governments and geothermal plants. For projects above US$26 million, the EIB developers may access to help finance can either provide direct finance to project geothermal projects in the region. International promoters or indirect finance through a govern- finance organizations and donor countries have ment or other financial intermediaries. The EIB developed a suite of tools that governments and currently uses both mechanisms in the private sector entities can use to expand both geothermal space in the LAC region. In Costa renewable energy and geothermal development Rica, the EIB is financing the construction of a in LAC and globally. These tools include cost- geothermal plant (Las Pailas II, US$60 million). sharing drilling schemes, grants for surface level The EIB also partners with national and regional studies and pre-drilling work, and concessional banks to support climate change mitigation proj- loans, among other financing instruments. Some ects through framework loans, such as its recently of the regional and global multi-donor facilities approved US$150 million loan to Banco de and funds that LAC countries may access to Santander in Chile to increase finance options expand geothermal development include: for renewable energy projects in the country. The Geothermal Development Facility for Latin In addition to its participation in multi-donor America (GDF) is a multi-donor initiative to programs, the German Center for International promote geothermal energy in the region by Cooperation (GIZ) started a program to promote promoting both public and private investments.69 geothermal in Central America. With US$6 million It was established primarily by the German in financing, the initiative seeks to improve the government, KfW, and the European Union, and investment climate and human resource capacity in collaboration with other partners such as the to facilitate the implementation of geothermal World Bank, ESMAP, Development Bank of Latin projects in the region through policy dialogue, America (CAF), Central American Bank for knowledge dissemination, capacity building, and Economic Integration (CABEI), IDB, AFD, EIB, direct project development. The program is active JICA, NDF, German Federal Institute for in Costa Rica, El Salvador, Guatemala, Honduras, Geosciences and Natural Resources (BGR), and Nicaragua, and Panama. GIZ.70 The initial capitalization was €50 million for risk hedging instruments, with an anticipated AFD is only present in the region’s geothermal €700 million for credit lines to be pledged over space through its participation in multi-donor time. The duration of the facility was established initiatives. In the past, AFD has also provided at 10 years.71 The GDF will finance preparation, direct finance to geothermal projects (for exploration drilling, production drilling, and example, a concessional, non-sovereign loan of construction through its financing lines. The about US$10 million to finance exploratory surface exploration grants cover up to 40 percent drilling in Dominica in 2008–2012). of the cost of these activities to a maximum of 69 GDF is managed by IDA Fund Management, which is a consortium of Interlink Capital Strategies, a management consulting firm, and Dewhurst Group, LLC, a geothermal exploration and development company with offices in Latin America. 70 The grant providers are the German Federal Ministry for Economic Cooperation Development (BMZ) and the European Union through the Latin America Investment Facility (EU-LAIF), respectively, through KfW Development Bank. Further grants are foreseen by members of the Stakeholder Group and third donors. GDF Stakeholders are BMZ, EU-LAIF, KfW, CAF, CABEI, World Bank, ESMAP, IDB, AfD, EIB, JICA, NDF, BGR, and GIZ. 71 Funds approved to date. When it was first launched in 2014, the facility was expected to provide at least US$75 million in tailored risk mitigation instruments and US$1 billion in tailored bridge and investment financing. 44 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC €0.6 million. For exploration drilling, financing with US$3.8 billion already under implementa- covers up to 40 percent of the cost of exploration tion (including the US$235 million funding for drilling of as many as three wells, to a maximum early stage geothermal exploration raised by the of €5.8 million. If exploration is successful, GGDP). The CTF invests in renewable energy and project developers commit to repay 80 percent of clean technology projects. In LAC, CTF funding the funds received, which can be refinanced has primary focused on Brazil, Chile, Colombia, through bridge and investment financing lines Mexico, and Peru. There are several CTF funded provided by the different multilateral and bilat- geothermal operations under implementation in eral development banks that are part of the the LAC region—in Mexico, Columbia, Chile, and facility. If the exploration results are unsuc- the previously mentioned sustainable energy fund cessful, then there is no repayment by the devel- for the Caribbean—that are being channeled to oper. The facility allows up to one project per clients through the World Bank, IDB, and CDB. developer, per country, to be submitted during There are also several geothermal projects under each application round for each type of instru- preparation (in Dominica and St. Lucia) that ment. Overall, the GDF seeks to facilitate at least would be co-financed with CTF funding extended 350 MW of geothermal generation capacity devel- through the World Bank. opment in the LAC region. Another comparable multi-donor effort is the To date, the GDF has undertaken one round of Scaling Up Renewable Energy in Low-Income financing, providing US$22 million in grants for Countries Program (SREP), a program to channel drilling activities and surface studies in six coun- resources for renewable energy solutions in tries (Colombia, Guatemala, Honduras, Bolivia, low-income countries through five multilateral Ecuador, and Chile) for eight projects (four explo- development banks. The only LAC countries that ration drilling programs and four surface studies qualify for the funds are Nicaragua, Honduras, programs). If successful, the first round of GDF and Haiti. Currently in the LAC region, SREP funding is expected to support the development finances only one geothermal project, which is of 285 MW of new geothermal capacity and in Nicaragua. SREP resources are channeled leverage up to €1.6 billion in future investments. through the IDB (US$6.75 million in contingent In December 2017, GDF called for expressions of recovery grant and US$750,000 in grants), which interest for its second round of financing and is financing geothermal exploration in the received 16 applications for seven different LAC Cosiguina field and transmission improve- countries. The Call for Proposals stage will be ment. The SREP Investment Plan for Nicaragua completed in July 2018, and it is expected that also allocates an additional US$15 million in GDF will select between six and eight new proj- concessional financing for geothermal develop- ects that could potentially add up to 600MW of ment to be channeled through the World Bank. additional generation capacity. The Green Climate Fund (GCF) that recently was The CTF is a funding window of the CIF that set up by the 194 countries that joined the United promotes concessional lending, guarantees, and Nations Framework Convention on Climate grants to both public and private entities glob- Change also seeks to promote low-emission tech- ally. This multi-donor fund is being utilized by nologies and climate resilient development by the World Bank, African Development Bank, leveraging public investments to mobilize private Asian Development Bank (ADB), European Bank finance. Current pledges to this fund exceed for Reconstruction and Development (EBRD), and US$10.3 billion. Funding applications to the GCF the IDB to fund clean energy projects in a number can be submitted directly to national and sub-na- of countries. It has US$5.8 billion in resources, tional organizations, reducing the necessity of Chapter 4: Mobilizing Financing for Geothermal Development 45 using international intermediaries. Projects in countries and administered by the World Bank, Least Developed Countries and SIDS have pref- that provides countries with finance and technical erence. So far, only one geothermal project in the assistance to meet international environmental LAC region has been awarded with GCF funds, conventions. One of its main programs in the LAC an US$80 million package to fund the develop- region that could be tapped by geothermal actors ment of up to 60 MW of geothermal power plants is the Multilateral Investment Fund-IDB PPP in the Eastern Caribbean that is being managed Platform for low carbon technology investment by the CDB and IDB. financing (US$15 million). The current replenish- ment period (GEF-6, 2014–2018) received pledges The Global Environmental Facility (GEF) is a of nearly US$4.5 billion, and set aside special allo- multi-donor trust fund, supported by 39 donor cations to fund programs with the private sector. 46 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC C H A P T E R 5 : P O L I C Y, L E G A L , & R E G U L AT O RY R E F O R M S T O I M P R O V E T H E I N V E S T M E N T C L I M AT E P olicies, laws, and regulations are key of the countries and territories with estimated factors that influence geothermal devel- and installed geothermal potential in the region opers’ investment decisions worldwide. have geothermal-specific legislation in place. The A country may have abundant geothermal term “geothermal-specific” refers to laws and resources of developable, commercial quantity regulations that are focused on reconciling and that can help meet the nation’s energy demand, harmonizing conflicting rules that can stand in but global experience has shown that this source the way of expeditious development of national of stable and clean energy consistently remains geothermal resources. underdeveloped when the country’s policymakers do not first address the policy, legislative, and Just because a country has not enacted a regulatory barriers that limit the development of geothermal-specific law does not mean that its geothermal energy production. A major barrier geothermal resources are undeveloped, ungov- in geothermal development worldwide has been erned, or unregulated. Only five of the eight the lack of a comprehensive framework. Such a jurisdictions in LAC with installed geothermal framework should: (i) put appropriate policy capacity have a geothermal-specific legislation mechanisms in place to spur and maintain signif- in place. For example, Guadalupe, which has icant levels of growth in the private market; neither a geothermal-specific law nor regulation (ii) provide clear direction for geothermal energy in effect, has still developed geothermal power development through the promulgation of laws generation capacity. El Salvador and Honduras and regulations; and (iii) address institutional also do not have geothermal-specific legislation constraints and build institutional structure to in place despite having installed geothermal support geothermal development. capacity. In LAC countries that do not have geothermal-specific laws, the laws that govern Geothermal legal regimes in the LAC region are geothermal are based on dramatically divergent a patchwork quilt of di f fer ing legal legal principles. Since geothermal resources are approaches—some that support and some that to some extent mineral commodities, some coun- inhibit geothermal resource development. In tries manage resources through mining or an effort to encourage the use of geothermal mineral laws (Bolivia and Argentina). Given that energy, a number of jurisdictions in the region geothermal energy is a sustainable resource, have enacted laws and promulgated regulations energy and electricity laws have been applied (El that specifically address geothermal resources Salvador, Guatemala, and Panama). Since as a discrete (sui generis) resource. There are geothermal fluids may impinge on groundwater thirteen LAC jurisdictions that have geother- reserves, laws governing underground drinking mal-specific legislation or regulations in place or water may also factor into the governance of in draft form, which means that only about half geothermal fluids in most LAC countries. In some C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l at o ry R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m at e 47 nations, LAC resources are also governed in part development runs the gambit from drilling for by common law (in common-law countries such the heat of the earth and extracting geothermal as Dominica, Grenada, and Montserrat) or by fluids from below its surface, to generating elec- French civil law (St. Lucia and Martinique). To tricity on the surface directly above the resource. further complicate the governance of geothermal Dozens of rules, regulations, licenses, and laws resource development, the awarding of electric are at play—and since many were originally concessions is often governed independently of designed without geothermal resource develop- geothermal resource legislation. Electricity gener- ment in mind, they are often applied in ways ating concessions and the right to sell to the grid contradictory to efficient development of the are crucial to successful geothermal development, resource. Countries throughout the region are since governmental geothermal policies in the therefore crafting laws designed to reconcile such LAC region generally focus on power generation, legal impediments to geothermal development, rather than on secondary uses such as agricul- as well as to facilitate private sector investment ture or geothermal heating and cooling. in generating electricity from this green, sustain- able, indigenous resource. Successful geothermal resource development requires the harmonizing of multiple rules at Policymakers in LAC should consider incorpo- every level of government. In some LAC coun- rating a number of critical elements into their tries, environmental protection statutes have policy and legislative framework to effectively been enacted without considering the unique govern development and operation of the characteristics of geothermal resources. At the geothermal sector. This chapter addresses the local level, zoning regulations and building framework in which geothermal resource policy- permits may apply that do not necessarily allow makers operate, and explores best practices from for the realities of geothermal drilling and gener- global and regional experience for establishing a ation. In some LAC countries, private landowners national strategic policy and deploying legislative may own the land and the resources, in other and regulatory tools to overcome geothermal countries private landowners may own the land policy hurdles. These approaches can be adapted but not the resources. for application in LAC countries to facilitate expanding the region’s geothermal capacity. Consistent with the overall trend in LAC, the geothermal sector has also been trying to encourage more private sector investment, as Establishing a National Strategic Policy illustrated by the actions of countries like Framework Mexico, Chile, and Argentina. For example, for Articulating National Goals in a National many years, the GoM funded geothermal green- Strategic Policy field development. However, as Mexico has The importance of a clearly stated national stra- shifted to a policy allowing private sector devel- tegic policy on geothermal resource development opment, it enacted a geothermal-specific law and cannot be overstated. Historically, when a country promulgated a geothermal-specific regulation, as fails to establish meaningful policy goals, well as complementary environmental protec- geothermal development flounders (such as in tion laws to provide greater clarity and certainty Chile, Eritrea, and Indonesia after the Asian crisis). to investors. Without clearly articulated strategic goals, the architecture of the implementing laws and regu- The interplay of laws and regulations that lations may well lead to suboptimal outcomes. impact geothermal development in LAC is For example, it may be counterproductive to ext raord i na r i ly c omplex. G e ot he r m a l promote the development of atomic energy, 48 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC hydropower, and geothermal resources without frustrated strategic policies in other nations and first harmonizing the interrelation of these sources that are likely to have a domestic impact. In this in the energy mix. From the perspective of any analysis, the policymaker identifies risks and potential investor in the geothermal energy hurdles and initiates measures to overcome them. sector—be it private sector investor, lender, or public sector donor—the direction, predictability, Among the hurdles that have been identified in and stability established by the policy framework various legal regimes are: determines the investment climate. • Constitutional barriers; Identification of Strategic Elements • Unreliable resource information; One of the first steps required to develop a national • Inability to finance a PPA or SSA; policy framework is the identification of strategic • Lack of local technical capacity; elements. In formulating a national energy policy, • Underdeveloped human resource capacity; the policymaker’s task is first to identify broad • Currency not convertible; national goals such as rural electrification, lower • Unwarranted favoritism for domestic energy costs, and carbon footprint reduction; developers; secondly, to analyze to what extent these goals • Unpredictable electrical supply and demand may compete; and, finally, to focus on how these market; competing goals may be harmonized in a context • Resources not commensurate with predictable of domestic political and economic priorities. Since national need; national goals often compete with one another, • Inadequate infrastructure; the policymaker’s priority is harmonizing these • Externalities not factored in to evaluations of competing goals with domestic political priorities. cost; For example, it is environmentally sound to reduce • Ownership conflicts; and carbon footprints both by preserving forest land • Gaps in legislative and regulatory framework. and by promoting clean, geothermal energy. However, in Indonesia, estimates suggest as much Adapt Best Practices to Local as three-quarters of the country’s geothermal Circumstances resources are under what is known as “Protected Identifying best practices from other countries and Conservation Forests.” Since the 1999 Forestry for overcoming barriers is a useful starting point, Law of Indonesia precluded the development of but the country-specific context must also be “mining activity” in the forests and since considered. Policy tools used in one country geothermal resources were until 2016 governed by could be difficult to replicate with the same the mining law, the national government needed results in another country. The best approach for to reconcile the legitimate goals of geothermal a policymaker is to adapt international best prac- development and forestry conservation—a process tices and solutions to a nation’s unique environ- that took almost a decade and a half. ment, resources, and politics. The check list set forth in Table 5.1 is intended Inventory of the National Energy Profile to serve as an aid to the policymaker to ensure Sound policy and effective laws and regulations that most relevant strategic issues are considered. for implementing a national geothermal policy regime should be formulated in the context of an Identify Potential Hurdles to Achieving accurate and up-to-date inventory of real-world National Geothermal Goals country conditions. When formulating policy and A meaningful strategic policy includes an anal- setting forth geothermal laws, a prudent policy- ysis of the hurdles or impediments that have maker may: C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 49 A Policymaker’s Checklist to Use in Formulating a National Geothermal Strategy TABLE 5.1:   Issue Strategic considerations Identify reason(s) to promote Describe and prioritize strategic geothermal resource development objectives. For example: geothermal development •• Reduce cost of electricity to rate payer •• Rural electrification •• Diversify energy mix (reduce dependence on fossil fuels and hydropower) •• Meet environmental clean-fuels goal—reduce carbon footprint •• Use domestic fuel sources (reduce dependence on imported fuels) •• Develop direct uses Obtain best investment in Establish speed of development required to meet goals. Determine concessionary measures and incentives geothermal development to meet all goals in time targeted: that is, the expenditure of government funds or the creation of incentives to ensure that the grid is augmented by new geothermal energy in the prescribed time. Obtain best financing for Determine the relative roles of donors, private sector investors, public sector and private sector lending geothermal development institutions, and governments at all levels. Most geothermal development by the private sector is project financed, meaning that the developer collateralizes the income stream from a PPA or Steam Sales Agreement (SSA) to obtain a loan. Will the central government issue guarantees or letters of comfort if the off-taker is parastatal or government-owned? Allocate costs between public Determine the requisite mix of public and private sector investment that is politically as well as financially and private sectors feasible. Evaluate the appropriate balance between the roles of the public and private sector with respect to developing the infrastructure and in controlling or owning the geothermal resource below both public and private lands. Allocate responsibilities Evaluate the relative roles of the central government, regional and local governments, and private persons among national & local in owning and leasing geothermal resources. Determine the appropriate jurisdiction to award the rights to governments develop geothermal resources, both for electrical use and direct use. Will all licenses in a single geothermal resources area be issued by the same jurisdiction? Allocate development benefits Determine the allocation of benefits among the stakeholders: among the stakeholders •• Will the public good be better served by a lowered cost of electricity or repayment in the form of royalties or taxes (or some mix of the approaches)? •• How will the national government recover the cost of preparatory development work and regulatory oversight expenses? •• How will local jurisdictions participate in economic development in their area? •• How will private landowners be compensated? •• What is the appropriate formula for determining private sector investor return on investment and loan repayments? Allocate development between Determine how to prioritize allocation of resources between generation and direct uses. Will a generation electricity and direct use concession also grant the concession holder the right to develop direct uses or will direct uses be subject to separate concessions (issued by whom)? Determine who bears the cost Who provides transmission? In an unbundled market, does the generator or the transmission authority bear of market access the cost of transmission, and how is this cost factored into the evaluation of geothermal as a least-cost energy source? Can an IPP sell (distribute) directly to an end customer or only to a monopoly distribution company? Will a consumer be allowed to self-generate? Identify and resolve other Will rural electrification be promoted? Is this a goal that will be subsidized? How significant a factor is significant national issues employment of nationals in the development equation? Source: World Bank. • Identify geothermal sites and determine what • Inventory and reconcile all existing laws statutes, policies, entities, or persons control and regulations that may affect geothermal the rights to access and to develop those sites. development. 50 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC • Identify all national and local government institutional capacity with the tactics or strategy institutions that may issue any authorization that that might best ensure that policy goals are in some way controls geothermal development, reached in an effective and timely manner. The including secondary authorizations such as following sections explore the implementation building permits issued by local jurisdictions. tools available to policymakers and the best prac- tices for legislation derived from the experiences Identification of the Stakeholders and Their of many countries. Respective Roles. Identification of all governmental and non-gov- Governance Tools ernmental stakeholders and their potential role Legislation is the preferred tool used to achieve in promoting or impeding geothermal develop- the predictability and stability in national-level ment is a critical part of executing a successful policy that is conducive to a favorable geothermal strategy. Early inclusion of decision makers, influ- investment climate. This may involve: encers of public opinion, and power brokers may help build consensus and prevent last minute • Legislative vehicles. In many countries, the and unanticipated obstructions from arising. laws governing geothermal resources (such as the mining law of Indonesia, the spa law of Japan, and the water laws of numerous U.S. Legislative Best Practices states) were enacted without contemplating The national strategic policy articulates national the possibility that geothermal resources goals, but legislation is needed to articulate and would be involved. Treating resources as apply these goals. A clear understanding and accep- unique and complex as geothermal energy tance of the government’s policy goals is essential resources as “water” or as a “mineral” usually to implement the legislation needed to reach those leads to legal confusion and unpredictable goals. Furthermore, the drafters of the legislation results. It is essential that a law designed must be able to identify and set the objectives (or to encourage the development of natural tactics) that are best suited to achieving those goals resources reflect the science and engineering in an expeditious and effective manner. needed to develop geothermal resources. • International precedent. As with policy, The legislation developed should seek to insti- the legislative practices in countries that tute these goals and remove any identified specific develop geothermal resources are instructive, barriers. When development of geothermal but wholesale transfer of the geothermal resources for the production of base-load power laws of one country to another is generally has been identified as a national priority, and not practical. Just as geothermal resources, investment in that development by the private electricity markets, and the geography of sector is desired, the drafters of geothermal legis- each country may differ, similarly the legal, lation should strive to remove any identifiable institutional, and cultural regimes differ. These legal barriers to investment in geothermal tech- variances must be factored into legislation in nologies. Laws striving to achieve such ends can each jurisdiction. provide a basic structure for the ownership and financing of sustainable geothermal resources Internationally, geothermal energy is explicitly and set forth incentives to encourage investment addressed in various legislative vehicles: by competent developers. • Specific legislation on geothermal energy The most effective legislation meshes market (Nicaragua, Kenya, the state of California in supply and demand, resource potential, and the U.S., and United States federal law), C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 51 • Mining/mineral law (Argentina, Germany, areas are to be auctioned, a transparent process and Philippines), that ensures maximum participation of techni- • Water law (the state of Idaho in the U.S.), cally and financially qualified geothermal devel- • Energy or electricity law (El Salvador, opment firms is also important. Guatemala, and Panama), • Other legislation (such as Japan’s spa law or Incorporate “Use-Or-Lose” Policy South Australia’s petroleum law), and It is also important to specify the time period in • Multiple laws (water, as well as sui generis which geothermal resource development or use specific legislation on geothermal energy, as must occur or the rights to these resources are in Iceland). lost. Best practice for granting any natural resource concession includes incorporation of a “use-or- An analysis of the pros and cons of each of these lose” policy encapsulated in a law, license, or approaches when drafting national legislation to concession that defines time limits for the various meet national policy goals is essential to produce stages of geothermal development. If not met, a sound result. Based on global experience, a these provisions mandate the return of the discussion of some of the most critical elements resources to government control. Such policy may to cover in legislature used to govern geothermal include incremental mechanisms or milestones sector development and operation follows. that will prevent geothermal resource areas from being held by speculators or under-funded devel- Address All Potential Uses and Applications of opers without meaningful development. Geothermal Resources Ideally, a geothermal law should address all present Provide for Sustainability and potential applications of the geothermal Legislation should guide use of geothermal in a resources, both for electricity and for direct use. The sustainable way or ensure that sustainability is the law should properly address the known, anticipate duty of the concession holder. Ensuring that the the obvious, and build in some mechanism for steam field is maintained at a “sustainable condi- course correction when the unanticipated occurs. tion” is key to long-term electricity production. Sustainability, in this instance, means long-term Address Geothermal Resource Ownership electricity production. Ideally sustainability is the It is essential to clarify ownership of a country’s policy goal, but it may not be a realistic legislative geothermal resources. National law may be option because the sustainable production capacity ambiguous as to whether and to what extent of geothermal systems is unknown beforehand. geothermal resources are owned by the state or Provide for Reclamation are part of the surface or mineral estate. Such uncertainty must be clarified and resolved for Legislation should anticipate the steps to be taken development to occur. when geothermal resources are no longer sustain- able, or when the economics of development result Address Transparency When Awarding in a developer withdrawing from a development Exploration, Drilling, and Exploitation Grants area. It should define how the geothermal resource Defining the award process for geothermal devel- area is to be returned to its original condition. opment and usage rights is also key. When the Address Coexistence of the Classes of Uses of private sector is engaged in the development process, best practice is to provide a clear and Geothermal Resources transparent process for the granting of permits, In a defined, discrete geothermal resource area, in licenses, and concessions. If geothermal resource which a variety of uses may be made of the same 52 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC geothermal resource, two approaches have been facilities. These rights must be reconciled undertaken: “prioritization” and “monopoly.” with the legal rights of the surface owners, whether on public or private lands. • Prioritization means that, within a discrete 2. The right to use the energy resource means geothermal resources area, multiple the right to extract, take, use, and apply concessions, licenses, and permits may be geothermal resources on or under any land issued to multiple parties. For example, one that is the subject of a geothermal resources concession may be for electricity production concession. Any questions regarding the title and another may be for a spa; however, laws to the geothermal resources will need to be and regulations prioritize the uses to which resolved and the owners’ relative geothermal, geothermal resources may be put. mineral, water, and surface rights will need • Monopoly within a discrete geothermal to be addressed. resources area means that all concessions, 3. The right to sell electricity simply means the licenses, and the ability to sub-license are right to generate, transmit, and sell electricity. awarded exclusively to the winning bidder Before beginning a project, geothermal for the electricity concession. In other words, energy developers need to be confident that one party receives a monopoly. they can make a return on their investment. The developers need rules to ensure that Ensure that Requisite Rights of Use are they will be able to sell the electricity they Incorporated in a Geothermal Resources produce at a reasonable price. Concession Implied (secondary) rights There are rights that are prerequisite to geothermal The explicit right to access and develop the site development, rights that are implied or secondary, implies several indirect (secondary) rights. The and other rights that incentivize the private sector, following are examples of indirect rights from but are not prerequisite. These rights should be multiple geothermal laws: incorporated into any concession or omitted only after due consideration. The following sections • Transmit, use, supply, and sell electricity; address prerequisite, implied, and incentive rights. • Erect, construct, and maintain temporary housing and buildings for the concessionaire’s Prerequisite rights own use and for use by the employees of the Geothermal resource concessions must provide concessionaire; the concessionaire with the rights to enter the • Erect, construct, and maintain the plant and geothermal resources area for the purpose of buildings; generating and transmitting electrical power from • Erect, construct, provide, and use such geothermal resources. The prerequisite rights that works, machinery, and appliances as may a concessionaire must have on a geothermal be necessary for the purpose of generating resource site are threefold and include: electricity and in connection with the reclamation, utilization, and reinjection of 1. The right to access and develop the site, geothermal fluids, including water; meaning the right to occupy and use land. • Utilize spent fluids exiting from a power A concessionaire who secures the rights to plant for non-electrical purposes; geothermal resources also needs to secure • Construct and maintain roads and other means the right to enter and exit the surface land of communications and conveniences; and overlying the geothermal resource in order • Reclaim and utilize any geothermal by- to situate drilling wells and generation products. C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 53 Incentivization rights compensation defined by legal terms (such as When national policy seeks to encourage private cadastral values, frequently not aligned with sector investment, a variety of legislated incen- market conditions). Whether this step-in right is tives may be authorized, such as a tax holiday, used is a political decision. repatriation of income in the form of hard currency, and facilitation of work visas for foreign Reconcile the Rights of Multiple Concessionaires workers, among other possible incentives. Who May Be Tapping into the Same Reservoir More than one person may have concessional Establish How Surface and Sub-Surface Land is rights to a single geothermal field or resource. to be Awarded While sole ownership is not necessary, a clear understanding of state ownership rights and In many countries, access on state-owned lands processes could reduce this potential barrier to is provided by concession grants, but in others development, which complicates project financing the private sector developer will need to nego- as well as utilization rights and issuance of conces- tiate and to reach agreements with private prop- sions. An extreme example is when a geothermal erty owners. The open issue is whether and to field extends across a national border, as is the what extent the government assists the developer case with the Tufiño-Chiles prospect that lies in gaining such access, especially over private across the border between Colombia and lands. In the event that a private property owner Ecuador.72 The majority of international geothermal suddenly inflates the price of the land because, legislation that considers the issue of multiple for example, it is changing from an agricultural concessionaires tapping into the same resource farm to a geothermal production site or if the relies on the concept of sustainable exploitation land owner simply refuses to grant access to the of the resource as a unitized operation. The terms land, most governments have the ability to step “unitized operations” or “unitization” refers to in and moderate the price of the property. reservoir-wide development and the concept that development and production of geothermal One name for this step-in right is “eminent resources will be under coordinated management. domain”, which means the right of a government The objective of unitization is to coordinate the to take private property for public use, with development and operation of an entire producing payment of compensation. Certain geothermal-spe- reservoir so that exploration, drilling, and produc- cific laws in Latin America (Nicaragua, Peru, and tion can proceed in the most efficient and econom- Mexico) imply that the concessionaire will reach ical manner and that avoids overexploitation and agreement with landowners, but geothermal depletion of the field due to multiple users. activity is deemed to be “used by the public” under the law, a designation that gives the government Follow Best Practices in Establishing the Length considerable reserve power to step in. of Time a Geothermal Resource Concession May Be Held The step-in power of the government is gener- ally a strong tool for the developer in negotiation The length of time granted for a geothermal with private landowners, who understands that resource concession must, of necessity, account not reaching a reasonable agreement with the for the time required to explore for a commercial geothermal developer means forced access under quality resource, to drill and to establish a steam 72 In this case, the governments of Colombia and Ecuador have signed a bilateral agreement on the development of the resource. (Haraldsson 2012). 54 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC field, to construct a generating facility, and to of geothermal exploitation concessions in connect with the transmission network. All of Nicaragua has been increased from 25 years these activities should occur within the timeframe to 30 years to align the resource exploitation authorized in one or multiple government autho- concession and generation licenses. This extra rizations and must occur within the regulatory time allotment avoids situations in which a framework of the host country. Time to obtain the geothermal operator might be committed to equity and debt financing must be factored in. continue delivery of energy to the grid after Recalling that the majority of geothermal gener- the operator’s resource exploitation right has ating facilities are project financed, this additional expired. period of time must be sufficient to allow repay- ment of debts. In addition, after commercializa- Address definitions in the legislation tion of the resource, there must be a period of Definitions are the heart of any legislative or time built-in for cost recovery. regulatory document. By addressing fundamen- tals, legal ambiguities may be addressed, and • Timeframe of the concession. Preparatory downstream legal conflicts may be avoided. work (from reconnaissance and exploration There are a number of essential definitions that to resource confirmation) generally lasts are required in any law addressing geothermal from two to five years and an exploration resources, and they may determine whether a concession is often used during this period. In specific legal regime succeeds. The most funda- various countries, the exploration concession mental definitions are those for “geothermal period can be extended. The time frame for resources” and “geothermal resources area.” an initial exploitation concession typically ranges from 20 years to 35 years.73 Five to 20-year renewal periods have been used. For example, the new Indonesian geothermal Best Legislative Practices Designed law provides that the maximum exploration to Facilitate Private/Public Sector period (including the period for a feasibility Development Facilitating Private-Sector Investment study) is five years, which can be extended twice for one year each time. The maximum If the government determines that geothermal term of a geothermal exploitation license in resources will be developed by the private sector, Indonesia is 37 years, and extensions can be with the private party either serving as an IPP granted for a maximum of 20 years for each or participating in a PPP, the private sector devel- extension. opers must secure two fundamental legal rights • Timeframe for generation and exploitation. as a pre-condition to obtaining financing: When a generation license that is separate from a steam production license is required for • The exclusive right to explore for geothermal geothermal operations, alignment between resources in a defined geothermal resources the timeframes for electricity generation area and to extract the geothermal resources and resource exploitation will be needed in that area; and to avoid legal gaps. For example, at the • The right to generate and sell electricity to a request of geothermal developers, the length legitimate buyer. 73 To illustrate the typical exploitation concession period granted in various countries includes 20 years (Romania), 25 years (Poland), 30 years (Italy, Kenya, France, Slovakia, Nicaragua, Peru, and Mexico), 32 years (Nevis, Dominica), 35 years (Bulgaria), and 37 years (Indonesia). C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 55 Ensure a Financeable PPA monitor exploration, drilling, and exploitation Lack of a bankable PPA has been a major imped- activities. iment to geothermal development worldwide. A • Determine whether third-party transaction bankable PPA or SSA are essentially long-term advisory services are desirable to augment agreements, signed with a creditworthy off-taker, the domestic cadre. that enables repayment of debt by providing an • Avoid inherent conflict of interest by ensuring adequate and predictable revenue stream. Loan that the agency promoting development is financing requires an off-take agreement by a not the agency regulating it. solvent buyer—usually in the form of either a • Organize the internal operations of the PPA or an SSA. The creditworthiness of the responsible government entity to ensure that the off-taker is key to obtaining finance, and govern- ministry, department, or agency responsible for ment guarantees are often required for projects geothermal resource development can perform in which state-owned enterprises are parties. The its promotional or compliance function. government should thus consider actions to • Ensure that there is inter-institutional ensure bankable PPAs and SSAs. coordination, so government entities talk to each other on a regular basis. Establish Institutional Capacity Institutionalize Fiscal and Non-Fiscal Incentives To ensure institutional capacity, a government Policymakers should consider institutionalizing focused on developing geothermal capacity on fiscal and non-fiscal incentives designed to allow any large scale should appoint a lead agency and the country to be competitive with other coun- ensure that the agency has the legislative mandate tries in attracting geothermal investment. to manage its responsibilities. Other govern- mental actions that can be taken include: Balance Competing National Interests • Expedite all steps of the geothermal process, Ensure that there is a balance between the devel- from tender through authorization to electricity oper’s needs, the legal rights that government production. Delays in the development process must grant the developer to fill those needs, and add to the cost of electricity generated—a cost the accompanying legal duties that the govern- which is usually paid by end users. ment should impose on the developer. Competing • Minimize the number of agencies and interests that often need to be reconciled include: institutions involved in regulation and issuing government authorizations, or create a single • The need to ensure that national resources are agency to manage geothermal development. held for the benefit of the people and are not • Provide the lead agency with the capacity exploited without adequate compensation and authority to design appropriate policies, against the need to ensure that the electricity negotiate agreements, and monitor and charges to the end user consumer (the general facilitate investor activities. public) are both low and stable. • Explore whether creation of a geothermal • The need to ensure a bankable project development state-owned enterprise to that allows the project to proceed through produce steam and/or to generate electricity mobilizing private finance, for both the will advance national policy goals. exploration and exploitation stages against the • Establish a legislative basis for PPPs, if such need to comply with government objectives to does not exist and is warranted. reduce returns to minimize electricity prices. • Provide domestically trained personnel with • The need for additional electricity generation the expertise to effectively implement and capacity against the need for responsible 56 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC protection of the environment, local • Establish objective criteria. Establish communities, and landholders’ rights. objective criteria for granting government authorizations for surface reconnaissance, Regulatory Best Practices exploration drilling, production drilling, power The general purpose of regulatory regimes glob- plant construction, and the different phases of ally is to detail the steps required to implement geothermal development and operations. the policy goals and objectives set forth in laws. • Institute a rational concession system for After identifying goals through the national investors to proceed from one development energy policy and then establishing them through phase to the next. Rights for exploration and legislation, policymakers must articulate in regu- exploitation of geothermal resources may be lations the best way to ensure the execution of awarded to private developers through a single those goals. Regulatory rules should be success- or multiple stage concession system. The fully communicated both within the government single concession system grants a developer and to the stakeholder community and enforced an all-in-one right for the complete geothermal in a consistent manner. exploration-development-exploitation process. The multiple stage concession system generally Inventory Regulatory Tools separates the exploration and exploitation The principal regulatory tools that the govern- phases. In both the single and multiple stage ment may use to enforce the national policies systems, exploration and exploitation are and legislation are government authorizations regulated as milestones or phases of a legal and penalties if infractions occur. Such authori- and administrative permission procedure. zations will vary from country to country and The major difference between single and may be issued in various ways, such as licenses, multiple stage concessions is that in a single permits, clearances, company incorporation stage concession the concessionaire proceeds documents, environmental impact assessments, automatically from one stage to another, contracts (such as PPAs and SSAs), or other unless it fails to perform according to the measures that require investors, developers, or terms of the concession. In a multiple stage government agencies to prepare documents and concession, the concessionaire proceeds to receive a government clearance before the appli- a subsequent stage only if it can show that cant can proceed. For example, such documents it has achieved the specific milestone(s) set include land-related clearances, which usually in regulations. The difference is subtle but must be obtained from local governments, or significant, as it shifts the burden of proof to sometimes from regional and national govern- the developer in multiple phase systems. ments. Almost every investor has to acquire land and construction rights as a pre-condition to To illustrate, in Mexico, Nicaragua, Peru, and Chile, constructing a power plant. In smaller markets where geothermal-specific laws have been enacted, where there may be only one or two geothermal a multiple step concession system is applied. Single projects, the policymakers may also self-regulate concession systems are more commonly used or regulate by contract. The larger and more where geothermal is regulated within other energy sophisticated markets (such as the United States) or mineral resource laws. Worldwide, both single typically use a larger number of regulations. (for example, in Indonesia) and multiple (for example, in British Columbia, Indonesia, Italy, Best Practices in Regulatory Regimes Kenya, and some states in Australia) concession Various best practices from regulatory regimes systems are linked to geothermal-specific regula- in different jurisdictions that LAC countries may tions. The multiple concession system is more consider include: common than the single one. C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 57 Safeguard Against Speculation time, it is good practice for regulators to try to avoid In any geothermal concession system, the govern- micromanagement of an undeveloped resource. ment, as both policymaker and owner of the geothermal resource, can use regulatory mech- Avoid Burdening Projects with Expenses anisms to prevent speculation in geothermal Ideally, regulatory compliance avoids future resource areas by introducing specific safeguards: expenses that might arise due to noncompliance, which might make projects ultimately very expen- • To prevent non-productive developers freezing sive or lead to a developer or other entity effectively out other, potentially productive developers; being barred from undertaking further development. • To ensure optimization of resource exploitation, applying industry standard procedures and Draft Regulations to Follow Real-World Scientific, development schemes; and Engineering, Financial, and Operational Practices • To provide sufficient legal certainty that a concessionaire that invests in development Most geothermal concession systems incorporate will have a right to obtain permission to the science, engineering, technology, and produce electricity if a commercial geothermal financing issues inherent in geothermal resource well field is developed. development into their regulatory licensing scheme. Table 5.2 illustrates how these concepts Establish a Rational Fee Structure are utilized in the government approval processes, although other steps also may be included. Fees tied to the acreage of a geothermal resource concession site may be used by the government Draft Regulations to Include Developer to enforce a use-or-lose policy. Fees may be used Requirements to fund government regulation of a project, but if such fees are too large, they can increase the Most countries that have advanced geothermal cost of electricity to the end user. programs have promulgated legal and regulatory systems requiring that prospective concession- Establish Bonding Requirements aires seeking a geothermal concession first must prove that they possess the technical and finan- Bonds tied to abandonment of drilling sites may be cial capabilities to develop the resources. When used to assure reclamation of a geothermal resource a concession is tendered, and a bidder previously area. Bonds may also be linked to well safety. has obtained a concession—either in another location in the host country or in another Establish Model Negotiating Documents country—it is also common to require a recom- Model documents such as licenses, concessions, mendation letter from the governing authority PPAs, and pre-drafted and government-approved on the bidder’s performance. This helps to ensure negotiating language (such as force majeure) may that the developer’s profile and experience is expedite the development process. adequate for successful development. Institute Legitimate Regulatory Purposes, but Determine How to Ensure Local Participation Avoid Bottlenecks for Development In many countries, a foreign bidder must bid as The process of applying for regulatory authoriza- an incorporated local subsidiary. Often a speci- tions can present bottlenecks to faster development; fied percentage of the subsidiary’s ownership however, regulatory licensing processes have proven must be held by citizens of the jurisdiction, thus necessary to take advantage of the safeguards that making the likelihood of foreign bidders who are are established in such regulations. At the same successful more politically palatable. 58 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC TABLE 5.2:  Phases of Geothermal Project Development and Regulation Phase of development Description Regulatory purpose Surface Consists of observing surface geological features and Allows access for observations and sampling and sets forth reconnaissance commonly taking geochemical samples from surface the requirements to be met before a developer is granted manifestations (for example, hot springs or fumaroles). exploration and drilling rights. Exploratory drilling Consists of minimum land disturbance, including Allows conducting of surface investigations and shallow geoscientific exploration; geological, geochemical and drilling. In general, exploration permits are issued for geophysical surveys; and drilling shallow temperature exploration that does not disturb the land. Establishes criteria gradient wells.a for proceeding to drilling and steam field development.b Production drilling Consists of exploration and appraisal drilling (slim Allows drilling operations and provides requirements holes and full-size deep wells) to confirm existence and precedent to the stages leading to electricity production. characteristics of geothermal resources that can be used to generate electricity. SAGS and power Consists of development of steamfields by drilling Allows the development of steam field and generating plant construction of production and reinjection wells, installation of facilities. Steam field production may be provided to an the steam gathering system, and construction of the unrelated party that generates electricity. geothermal generation facility. Operations and Consists of the commercial operation and exploitation Allows generation of electricity (may include transmission maintenance of the geothermal field and generation of electricity. and distribution). In most countries, the authority to generate electricity is by statute and not tied to resource development (necessary in geothermal development). Source: World Bank. a Some governments license developers to drill full-size, deep wells during the exploration stage. If deep wells are permitted in the exploration stage, the license needs to address reclamation needs, should such drilling does not produce commercially usable resources. b Many geothermal laws in Latin America include an “exploration concession” phase (meaning surface exploration and exploratory drilling up to resource confirmation). Ensure a Developer Can Comply with Technical to avoid speculation and the possibility that Requirements geothermal field development might be stalled Ensuring potential geothermal developers have due to insufficient funding. adequate technical capacity is paramount to successful development. This could include Risk Allocation and Mitigation in the Context demonstration of experience developing geothermal of Policy, Laws, and Regulations or power projects in the past or provision of infor- Historically, development of natural resources by mation on the technical qualifications of the devel- the private sector in any country has been directly oper in the bid documents for a concession or correlated to the degree of institutional stability license, among other requirements. In a tendered and the predictability of the country’s policy, legis- concession, bidders also could be required to lative, regulatory, and judicial framework. The submit a work program that covers the plan and degree of stability and predictability may collec- schedule for exploration and exploitation. tively be labeled “legal risk.” Legal risk contains two primary sub-components: “stability risks” and “predictability risks.” From the perspective of a Ensure That a Prospective Developer Provides potential investor in the geothermal energy sector, Proof of Financial Capability the direction, predictability, and stability estab- If governments wish to secure qualified lished by the national policy framework deter- geothermal developers, another critical provision mines the investment climate and the likelihood is to require proof of financial capacity, in order of success for geothermal development. Mitigation C h a p t e r 5 : P o l i c y, L e g a l , & R e g u l a t o r y R e f o r m s t o I m p r o v e t h e I n v e s t m e n t C l i m a t e 59 of these risk factors is critical in instituting a international precedent in other legal regimes national legal regime designed to develop domestic and adapt these precedents to domestic circum- geothermal resources. stances. When a government makes a strategic decision to leverage private investments to free up its own economic resources, the legal regime Conclusions will need to address the challenges faced by As LAC policymakers assess the key areas of private developers in mobilizing future risk reforms needed to scale up geothermal devel- capital. Legislation implementing the national opment, a first step is to establish a strategic policy will need to encourage developers, while policy that sets forth the objectives of the simultaneously ensuring resource sustainability, geothermal and power sector. A national policy environmental integrity, and low-cost electricity will, of necessity, identify the scale and timeframe prices to the consumer—in all cases a delicate for development, the available domestic technical balancing act. Likewise, when government or capacity, the parties responsible for administra- government-backed entities develop or operate tion and oversight of development, and the finan- geothermal facilities and when government or cial implications, as well as other national government-owned entities pair with a private stakeholder considerations. Once a national policy entity to form a PPP, the legal regime needs to comes into being, the tools available to imple- be tailored to mitigate risk. ment the policy and overcome obstacles that poli- cymakers have identified include legislation, To move geothermal energy development regulations, and government approvals (permits, forward, policymakers will need to strive to licenses, and concessions). In deploying these reduce legal and regulatory ambiguity and to tools to implement the national geothermal frame- demonstrate strong political will to overcome work, policymakers can draw on global experi- institutional constraints. Policymakers may need ence and proven best practices to establish a legal to reevaluate the laws and regulations governing regime that is most likely to promote successfully geothermal development domestically—particu- geothermal development for power generation. larly those related to impacts on and engagement of local communities, government participation The global experience highlighted in this in financing or guaranteeing projects, and the chapter is designed to assist policymakers in concession system. The timeline and requirements making informed decisions regarding the most for obtaining the requisite permits, licenses, and suitable policies and policy implementation concessions, including the requirements and approaches for geothermal development in their timing for environmental impact studies, also need own countries. A policymaker shaping a to be examined. The policymaker who is deter- geothermal resource development strategy can mined to promote the development of domestic undertake a four-step analysis: geothermal resources should strive to develop a legal regime that is both predictable and stable. 1. State the goal for geothermal development; 2. Identify potentially competing national goals; In sum, successful geothermal resource devel- 3. Harmonize and prioritize goals; and opment can be facilitated by the predictability 4. Establish the mechanisms to best implement and stability established by the policy frame- the national goal for geothermal development. work and the legal regime. Policy, law, and regu- lations determine the national investment In each of these steps, the policymaker may climate, and thus influence the likelihood of draw on strategic decisions that have success of national geothermal development. 60 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC C H A P T E R 6 : E N V I R O N M E N TA L A N D SOCIAL SAFEGUARDS E nvironmental and social risk manage- Because international financing is needed for ment is a critical element of successful most geothermal development, if a project does geothermal development, starting from not follow international best practices and stan- the earliest stages of planning and continuing dards from the outset, it may be ineligible for through exploration, construction, operation, international financing altogether or later may and decommissioning. All geothermal projects have to invest in costly mitigation to become present environmental and social impacts and eligible, delaying development of the project and risks of varying intensity and magnitude. The increasing the project cost. degree of these impacts and risks depends on the location and terrain, the nature of the geothermal Both globally and in LAC, some governments resource, and land use and ownership, as well have adopted international standards and miti- as the population in the area of the geothermal gation requirements, while others have not. This field. With adequate assessment, planning, moni- has been done in different ways for different coun- toring, and timely, information-based deci- tries, through such methods as: including require- sion-making, the impacts and risks can be ments for geothermal developments in a country’s managed effectively. national environmental laws and regulations; passing specific geothermal legislation that This chapter discusses the range of environ- includes environmental, social, and health and mental and social risks and impacts in devel- safety standards or requirements; and, in some oping geothermal energy for power production smaller countries where there is less capacity, and ways to mitigate these through design and through the use of contracts or self-regulation by application of international best practices, as the developers. Only a few LAC countries with well as through adherence to the safeguard geothermal potential or installed capacity have standards and policies of International Financial environmental laws that specifically address Institutions (IFIs).74 Environmental and social geothermal aspects. Costa Rica, Honduras, Mexico, impacts and risks should be identified and and Grenada have environmental laws that addressed from the earliest stages of geothermal mention the geothermal sector, but most of the development and international best practice remaining countries deal with geothermal in the measures should be adopted during all stages. same way as any other large infrastructure project. This can be done, in large part, through compli- Regardless of national and local requirements, ance with international standards and policies. however, both public and private sector supporters 74 An IFI is a financial institution that has been established by more than one country, and hence is subject to international law (for instance, World Bank, IFC, the Multilateral Investment Guarantee Agency, IDB, EIB, and so on). C h a p t e r 6 : E n v i r o n m e n ta l a n d S o c i a l Sa f e g u a r d s 61 of geothermal development should become safety; economic and social disruption; and social familiar with associated environmental and social vulnerability and exclusion. Local opposition, which impacts and risks. International best practices can significantly delay projects, may be precipitated should be incorporated in planning and operation by either environmental or social impacts and risks. from the outset to avoid mistakes, mitigate impacts successfully and in a timely manner, and mini- International best practices in geothermal mize delays, thereby reaping the benefits of inter- development and other energy investments are national experience and funding. Moreover, it is articulated in different documents, primarily equally important to have an effective monitoring developed by IFIs, including the World Bank program in place to be able to maintain standards. Group. Private financial institutions have also developed similar principles. The most recog- The most common environmental impacts and nized principles and guidance for environmental risks of geothermal development fall into the and social risk assessment and management are following categories: physical environment (that listed in Table 6.1 below: is, water, air, and soil); ecology and biodiversity; physical and visual landscape; worker health and The most widely accepted practices that are typi- safety; cultural heritage; and cumulative impacts. cally applied are the Equator Principles and the Social impacts and risks are generally related to IFC/World Bank Performance Standards which land ownership and use; community health and are explained in more detail below. Recognized Principles and Guidance on Environmental and Social Impacts and Risks TABLE 6.1:   International environmental/ social standards and guidance Links with additional information 1 The Equator Principles http://www.equator-principles.com 2 IFC Performance Standards www.ifc.org/performancestandards 3 World Bank Group Safeguard Policies a http://www.worldbank.org/en/programs/environmental-and-social-policies- for-projects/brief/environmental-and-social-safeguards-policies 4 World Bank Group OP 4.03 https://policies.worldbank.org/sites/ppf3/ PPFDocuments/090224b0822f7442.pdf 5 World Bank Group Environmental, Health, and Safety www.ifc.org/ehsguidelines (EHS) Guidelines 6 IFC/World Bank Environmental, Health and Safety http://www.ifc.org/wps/wcm/connect/329e1c80488557dabe1cfe6a6515bb18/ Guidelines for Geothermal Power Generation Final%2B-%2BGeothermal%2BPower%2BGeneration. pdf?MOD=AJPERES&id=132316197516 7 IFC/World Bank Environmental, Health and Safety http://www.ifc.org/wps/wcm/connect/66b56e00488657eeb36af36a6515bb18/ Guidelines for Electric Power Transmission and Final%2B-%2BElectric%2BTransmission%2Band%2BDistribution. Distribution pdf?MOD=AJPERES&id=1323162154847 8 Core conventions and instruments of the International http://www.un.org/documents/instruments/docs_en.asp Labor Organization and the United Nations 9 Convention on Biological Diversity https://www.cbd.int/intro/ 10 Good international industry practice www.ifc.org/ehsguidelines Source: World Bank. a In 2016, the World Bank adopted a new Environmental and Social Framework, which is being more fully developed for roll-out. See http://www. worldbank.org/en/news/feature/2016/08/05/the-new-environmental-and-social-framework. 62 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Equator Principles. The Equator Principles the ESIA. These Performance Standards are Association is a voluntary association of 91 finan- almost universally accepted by other IFIs, such cial institutions in 37 countries. The association as the Inter-American Investment Corporation of describes the principles as “a financial industry the IAD, ADB, EBRD, and EIB. More details about benchmark for determining, assessing, and the IFC and World Bank’s eight Performance managing environmental and social impacts and Standards and the objectives of each one can be risks in projects.” A brief review of the principles found in Annex 3. demonstrates an analytical and action framework that basically parallels the IFIs in approach, with The following sections provide information on a strong emphasis on transparency and account- how the PSs are applied in practice for geothermal ability. The ten Equator Principles address: projects. 1. Review and Categorization; 2. Environmental and Social Assessment; Environmental and Social Impacts and 3. Applicable Environmental and Social Risks in Geothermal Development Standards; Like other infrastructure projects, the range of 4. Environmental and Social Management System environmental and social impacts and risks (ESMS) and Equator Principles Action Plan; associated with geothermal energy development 5. Stakeholder Engagement; are well defined and thus relatively easy to 6. Grievance Mechanism; anticipate. However, specific impacts and risks 7. Independent Review; and their scale vary from one site to another, and 8. Covenants (in financing documentation); some risks emerge only as the geothermal 9. Independent Monitoring and Reporting; and resource is explored and the final design is 10. Reporting and Transparency. completed. Many of the impacts and risks can be mitigated by decisions related to siting and IFC/World Bank Performance Standards. There design. The iterative process of geothermal devel- are eight IFC/World Bank Performance Standards opment offers opportunities to introduce mitiga- (PS) that were developed largely based on the tion at appropriate times and include additional Equator Principles. The first standard (PS1) mitigation measures, as needed, as geothermal defines the ESIA framework. It identifies and development progresses and site-specific impacts assesses the nature and magnitude of a spectrum and risks are identified. This section discusses of environmental and social impacts and risks, the principal environmental and social impacts including those referred to in the other seven PSs, and risks and highlights the different stages of which elaborate objectives and procedures to geothermal development at which these impacts assess and manage different topics. The other and risks might occur. PSs are used to strengthen the analytical and mitigation content of the ESIA and their value is The relative importance of different risks reflected in the ESIA or operational documents, depends not only on a particular investment, such a s E mergenc y P repa red ness a nd but also on the presence or anticipated devel- Management Plans. All PSs relevant to an invest- opment of additional geothermal investments ment either provide the framework for addressing in the area. Any risk assessment must take into respective issues in the ESIA or, in the case of consideration the cumulative risks of existing, Resettlement and Indigenous Peoples, identify new, and anticipated geothermal investments. specialized studies and management frameworks The most obvious cumulative impacts are on and action plans that must be prepared with the water demand, air quality, environmental degra- participation of affected peoples, in addition to dation, and livelihood assets. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 63 Environmental Impacts and Risks which can leak into the environment if not Geothermal environmental risks and impacts managed and disposed of properly. Holding may be grouped into seven principal catego- ponds constitute a public hazard if not protected ries, which are described below. from unauthorized access. Land and habitat loss. Many new developments Gas emissions. The principal non-condensable occur in fairly remote areas with volcanic char- gases (NCG) encountered in geothermal devel- acteristics, yet can take place in areas that are opment are carbon dioxide (CO2) and hydrogen already in use and populated. The implications sulfide (H 2S). In some cases, mercury (Hg) can of remoteness include: (1) small local popula- be present in low, but significant, amounts in tions, (2) the need for promoting access by the NCG. NCG are released at well sites in site constructing new or improved roads leading to development and afterwards. During operation, and around the site, and (3) an increased likeli- the NCG is carried with the steam from the well, hood of being either near or within critical habi- passes through the steam turbine, where the tats or protected areas. Despite having a limited water vapor is condensed, and is released footprint, a new facility can disrupt local use and through venting. NCGs can be captured and livelihood patterns that are dependent on crop treated for commercial purposes or injected back or animal production—especially when the land into the sub-surface, but injection of NCGs is is used by indigenous peoples. In some areas, not a common practice. H 2S, in particular, has local concerns about perceived risks (not always an obnoxious smell even at low concentrations real or founded) that geothermal development and poses a health hazard if concentrations are may cause landslides, seismicity, and distur- high. Some jurisdictions require that H 2S and bances from natural hydrothermal manifesta- Hg be removed from the geothermal NCG tions, may lead to resistance to geothermal through chemical treatment. See Box 6.1 for development in local populations. more details. Water risks. This category includes water use Dust and noise. Noise pollution from geothermal and quality. Well drilling, stimulation, and is especially prominent during well drilling, stim- testing require surface and underground water ulation, and testing phases and during construc- that could pick up dissolved minerals and can tion of the powerhouse and related facilities. The pollute surface and ground waters if not managed operation of the transformer, power house, and carefully. Similarly, water used to clean the facil- cooling towers add noise to the environment, ities may add contaminants, and leaks from depending on design. Construction machinery breaks in well casings can contaminate ground- and trucks for the facilities also increase noise water. Surface and underground water require- and dust in the project area. ments vary at different stages of development and operation, from drilling to managing the Occupational health and safety. Employees at geothermal resource and cooling. The relative geothermal drilling and operation facilities face abundance of nearby water sources and the various occupational risks to their safety, ranging amount of competition for their use determines from well blowouts to pipeline failure and seis- the level of risk. micity issues and impacts. Some of the impacts and risks can be mitigated by having a robust Solid discharges and waste. Drilling muds are regulatory framework that includes health and generally recycled and reused, but the cuttings safety standards or requirements (for example, can contain hazardous materials such as sulfides, one that requires geothermal companies to put arsenic, mercury, nickel, and other heavy metals, in place and adopt standard industrial safety 64 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC BOX 6.1 Geothermal Gas Emissions Gases are naturally present in all geothermal fluids. CO2 is usually the most abundant geothermal gas, with the second most common geothermal gas being hydrogen sulfide (H 2S). Other gases that typically are found are nitrogen (N2), hydrogen (H2), methane (CH4), ammonia (NH 3) and argon (Ar). A host of other gases may occur in trace concentrations, including mercury (Hg). The most environmentally sensitive gases in geothermal fluids are H2S and the GHGs CO2 and CH4. Harmful levels of Hg emissions have been observed in only a very few systems. The range of the environmental effects of these gases is very different: the effects of the GHG emission are global, whereas the effects of H2S and Hg (if present) are much more local- ized. Both CO2 and H 2S represent potential hazards for workers in power plants. H 2S can cause death at moderate concentrations. Around geothermal power plants the concentrations of this gas are low, but this gas has an obnoxious odor and a detrimental effect on electronic equipment. In rare cases, GHG emis- sions from geothermal power plants can be much higher, on par with coal fired power plants. Unusually high GHG emissions occur where carbonate rocks are present in the geothermal reservoirs, which is a rare occurrence. The geothermal gas present in geothermal fluids is typically emitted into the atmosphere at geothermal power plants. Technologies for capturing the geothermal gas or removing certain gases from the gas stream are commercially available. If there is a market for the gas, such as in Turkey, where geothermal CO2 is captured and purified to beverage grade, gas capture facilities can be commercially viable. In California and Italy, installation of facilities for H 2S removal is mandatory. In Iceland, the amount of H 2S that can be emitted is curtailed to prevent atmospheric concentrations of the gas from exceeding a threshold level in inhabited areas near power plants. A range of technologies for the removal of H 2S from geothermal gas are commercially available. For more details, see ESMAP Report “Greenhouse Gases from Geothermal Power Production” at http://hdl.handle.net/10986/24691. practices in the field). Other risks that are specific Consequently, it is important to anticipate and to geothermal, such as the risk of encountering manage social impacts and risks from the outset. toxic fumes in a closed area, can be addressed This section addresses five types of real and by requiring companies to adopt standard indus- perceived social impacts and risks. trial health and safety practices, such as manage- ment plans to mitigate this risk that include Livelihood and ecosystem services. Land acqui- emergency response measures. sition or loss of access to land due to geothermal development can impact the livelihoods and Social Impacts and Risks everyday lives of local people. Regardless of Geothermal development can impose impacts whether the land is owned by individuals, and risks on the population in the immediate communities, or even the state, if people are area and sometimes well beyond. This may dependent on it for livelihoods or resources that cause local opposition due to real as well as they use consistently, the loss can be difficult to perceived risks, which can significantly affect overcome, even if the users are compensated by the viability and schedule of an investment. relocation, cash, or land swaps. The severity of C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 65 the risk varies, with vulnerable and indigenous Impacts and Risks by Development Phases peoples75 most at risk. The types of impacts and risks and their rela- tive intensity vary at different phases of Disruption. Drilling, testing, construction, oper- geothermal development, according to the char- ation, and decommissioning can disrupt family acteristics of both the site and the investment.76 and community life with increased traffic, influx Table 6.2 shows the environmental and social of labor, and damage to assets and resources. impacts and risks that may appear and those that This can have consequences for health and safety, are most prevalent at each geothermal develop- as well as peace of mind. ment phase. The most risks and impacts are present starting at the exploration phase, which Conflict . New facilities and investments, includes drilling of exploratory wells, and they including land purchases, bring new opportuni- intensify during the resource development phase, ties to communities, but also disruptions and when major production and injection well are competition over access to employment, commer- drilled, and the resource is stimulated and tested. cial opportunities, and ownership of new If the field has been developed properly, many of resources. Such changes can renew long-standing the potential environmental risks decline during kinship or clan conflicts or create new ones based power plant development. They may reappear on gender, generation, or other factors. during operations, when old wells deplete, and new ones are drilled. Social risks remain and Cultural heritage. New geothermal developments may intensify and diversify if they are not antic- can take place in or near sites that are protected ipated and managed well from the outset. or prized for cultural significance or aesthetic Consequently, the timing of risk assessment and aspects, threatening or compromising the phys- mitigation is critical. ical or visual status of the site. Nationally or inter- nationally recognized cultural assets generate Virtually all geothermal environmental and much interest, but even sites of local importance social impacts and risks can be minimized or require special attention. mitigated with timely and adequate assessment, including monitoring, and by the adoption of Apprehension and opposition. In addition to the international best practices. Timing is essential social impacts and risks caused by the objective because new information about the geothermal factors described above, geothermal investments can resource is generated in each stage of develop- cause local people to be apprehensive or suspicious, ment, and some mitigation decisions may have based on real information about poorly-managed to wait for specific information. For example, the developments in other areas, rumors, misunder- amount and type of NCG emissions become standings, or fear of the unknown. Such apprehen- evident from well drilling and testing. Mitigation sion can generate local opposition, which may be approaches are developed once the composition nurtured and amplified by external interests. of the gases is understood, but other mitigation 75 In PS7, the term “indigenous peoples” is used in a generic sense to refer to a distinct social and cultural group possessing the following characteristics in varying degrees: i) self-identification as members of a distinct indigenous cultural group and recognition of this identity by others; ii) collective attachment to geographically distinct habitats or ancestral territories in the project area and to the natural resources in these habitats and territories; iii) customary cultural, economic, social, or political institutions that are separate from those of the mainstream society or culture; or iv) a distinct language or dialect, often different from the official language or languages of the country or region in which they reside. 76 This point highlights the importance of conducting serious and thorough environmental and social assessments as early as possible to ensure proper analysis of the situation and clarification and adoption of appropriate design and mitigation measures. 66 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC TABLE 6.2:  Environmental and Social Impacts and Risks by Development Phases Exploratory Production SAGS and Operation and Impact or Risk drilling drilling power plant maintenance Land acquisition X XX XX Land and resource access X XX XX Surface pollution X XX X X Sub-surface pollution X XX X Surface/groundwater extractions and use X XX X XX Solid discharges—muds, drilling fluids, cuttings X XX X Solid waste X X XX XX H2S emissions X XX XX CO2 emissions X XX X Other emissions X X X Noise X XX XX X Dust X XX XX Occupational health/safety X XX XX X Direct livelihood loss X XX XX Indirect livelihood loss XX XX Indigenous vulnerability XX XX XX XX Traffic X XX XX X Labor influx X XX XX Community asset vulnerability X XX XX Conflict over investment, location X XX XX Conflict over opportunities XX XX Physical cultural resource impacts X XX XX Visual impacts X XX XX XX Tourism effects XX XX X Rumors, fears XX XX X Organized opposition XX XX XX X Source: World Bank. Notes: X = low impact and risk; XX = high impact and risk, without mitigation. measures need not be delayed. For instance, On the social side, well-informed neighbors are procedures to manage solid emissions to avoid good neighbors. Any geothermal development surface and sub-surface pollution are relatively should start with a serious stakeholder engage- simple and straightforward. The mineral compo- ment plan to initiate two-way communication sition of the cuttings and buds that result from between developers and the local population. the initial slim-hole drilling can be used to fore- If successful, the engagement process will ally cast the mineral composition of the production fears and misunderstandings and bring out local wells and to specify measures. concerns, priorities, and expectations that can C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 67 inform project siting decisions. For example, generally entails carrying out retrospective due project siting can be designed to minimize the diligence and implementing remedial measures physical and visual impact of facilities and to meet the standards. Annex 3 illustrates how services such as roads and power lines. Land to manage many of the geothermal risks and requirements, which may not be known in early impacts mentioned previously, either through stages of the investment, will emerge as detailed compliance with international standards or decisions are made regarding the location of through the domestic legal framework. drilling platforms, above-ground pipes, the power house, and related facilities. To prepare project staff, owners, and other land users for eventual Environmental and Social Risk Assessment negotiations and acquisition, the project should and Management develop and disseminate a land acquisition and The predominant international standard mech- compensation framework by the time exploratory anism used to identify and manage environ- wells are drilled, if not before. These and other mental and social impacts and risks is the ESIA. issues will be discussed in more detail in the The developer sponsors the ESIA, but it is gener- section on risk assessment. ally carried out by an independent party with appropriate expertise. Most countries require Impact and Risk Mitigation only an EIA be prepared for infrastructure invest- As indicated previously, most environmental ments. A more in-depth ESIA usually meets and social impacts and risks of geothermal national requirements, but the scope and breadth development can be adequately mitigated. This of the ESIA is wider and deeper than most can be done through a combination of judicious national EIA requirements. In particular, an ESIA planning and the use of geothermal industry best also identifies the extent and complexity of poten- practices. The information derived from the ESIA, tial social impacts and the socio-economic char- actions included in the Environmental and Social acteristics of people in the project area. It Mitigation Plan (ESMP), a proactive stakeholder comprises the normal contents required by a engagement program, and other necessary plans national EIA, in addition to four additional and compliance documents are also important. components that have gained traction over the Some countries have a robust legal framework last two decades through the convergence of the that assists with managing geothermal risks and policy requirements of various international impacts, and the extent to which the laws and agencies: i) ESMP, ii) Stakeholder Engagement regulations fully cover geothermal development Plan (SEP), iii) grievance mechanism, and iv) vary from one country to another. In some coun- community health and safety plan. If the ESIA tries, there are general laws that apply to all infra- is carried out to supplement or update a previous structure investments; in others, a more specific EIA/ESIA, it will include an Environmental and regulatory regime will govern the geothermal Social Action Plan (ESAP) that assesses the sector. However, the laws and regulations in content and implementation of previous efforts many countries do not cover the full spectrum taken to identify deficiencies and to plan actions of issues that are addressed in the international to bring the process up to international standards. environmental and social standards. Investors Finally, standalone land acquisition and resettle- often need to carry out Environmental Impact ment documents and/or an indigenous peoples’ Assessments (EIAs), ESIAs, land acquisition, and development framework or plan may also be some construction activities before international required, as appropriate. funding is secured. If international funding is involved, the IFIs and Equator Principle members As geothermal development is carried out in will insist that these standards are met, which stages, ESIA preparation is normally an 68 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC iterative process. This means that the level of ESIA team conducts a second consultation in the detail in the initial ESIA during the exploration target area to discuss findings and recommen- phase may be limited—focused on drilling and dations, and to solicit feedback from people in access. The second stage would be carried out the affected area. The framework for the consul- after there is more understanding about the tation rounds is clarified in the SEP and the geothermal resource and the conceptual outlines results of the feedback consultation are reported of the full project. At this point, a full-blown ESIA in the final document. would result, establishing baselines, addressing cumulative impacts, and focusing on mitigation There is a wide range of information that feeds and monitoring. As project parameters further into the ESIA, including geothermal-specific evolve, supplemental ESIAs would be undertaken information that is collected and assessed as to address the impacts of new drilling platforms, part of the process. After the scoping exercise, above-ground structures, and other changes that a multi-disciplinary team undertakes the field are made. The next section focuses on three crit- work for the ESIA. The work articulates the base- ical components of a full ESIA for geothermal line situation, including local characteristics, development—the ESIA Report, the ESMP, and anticipated impacts, institutional responsibilities, the SEP—in addition to the standalone safeguards information on the local population and economy, documents that may be required. and so on. In addition, field work should focus on issues specific to geothermal development. ESIA Components The main topics that should be covered in an ESIA report. ESIAs prepared according to inter- internationally accepted ESIA for a geothermal national standards usually have similar tables of investment can be found in Annex 3.79 contents.77 However, the actual detailed contents of an ESIA varies considerably, according to the ESMP. ESIAs establish a detailed implementation type of investment and the specific physical and framework to address environmental and social institutional context in which it is carried out. impacts and risks. The ESMP80 is a simple, clear Each investment needs a tailored ESIA, the matrix that distills the critical elements of the ESIA expected content of which is described in the into a detailed action plan. It lists all required ESIA’s terms of reference. The content is subse- actions, including both one-time and periodic quently developed further through the initial monitoring, and a timetable for execution. The consultation and scoping session in the target plan assigns responsibility for each action, from area, which is the first field exercise of a higher monitoring to remediation, and estimates the risk (Category A)78 investment, which is often the resources needed to implement that action. category into which geothermal projects fall. Finally, the ESMP sets requirements for oversight, Following the preparation of a draft report, the reporting, and information dissemination to 77 Outlines are readily available. See IFC Guidance Note 1, pages 39 and 40 for a cursory outline. This document is perhaps the most useful reference for the preparation and execution of an ESIA. The Equator Principles also include a useful list of topics to be included in an ESIA. 78 Category A projects are those likely to have significant adverse environmental impacts that are sensitive, diverse, or unprecedented. These impacts may affect an area broader than the sites or facilities subject to physical works. 79 In addition to resources cited in the Introduction to this report, see also OPIC 2012; Landsvirkjun 2017; Kagel et al. 2007; Barclays Bank PLC, 2015; World Business Council for Sustainable Development 2005); and Idaho National Laboratory 2006. 80 Not to be confused with an ESMS, which is the Equator Principles’ reference to a corporate system; the Asian Development Bank’s policy statement required of private sector borrowers; or the proposed Environmental and Social Commitment Plan that the World Bank will introduce in its new Environmental and Social Framework. These documents are institutional commitments, rather than specific project documents. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 69 project and other authorities, as well as to affected and application of performance standards to populations. ensure that the disadvantaged, minorities, indig- enous peoples, women, and older persons are SEP. If geothermal development is successful, the engaged. It also includes mechanisms to measure facility will ultimately be in the community for implementation and effectiveness. As an example, many years. An investor has a practical need to see Box 6.2 on ways in which gender matters are develop good community relations at the begin- can be addressed. ning of the project and to maintain them to the end. All geothermal developments should estab- Standalone Safeguards Documents lish an effective SEP from the earliest stages of There may also be a need for additional, stand- site investigation and maintain it to the final alone safeguards documentation if specific PS stages of decommissioning. The SEP establishes or safeguards policies are triggered. If the the conceptual background for the identification geothermal project requires land acquisition or BOX 6.2 Incorporating Gender in Geothermal Projects There is growing recognition about the importance of gender equality for economic growth and poverty reduc- tion. As part of its broader gender strategy, the World Bank is committed to addressing this in energy infra- structure development. Geothermal projects should be responsive to gender issues not only to promote equity, but also because of the risk of undermining project effectiveness, efficiency, and, ultimately, sustainability if the gender-differentiated impacts of projects are overlooked. The World Bank’s Global Geothermal Development Plan, an initiative to scale up the use of geothermal power in 12 countries, includes a provision to identify and incorporate gender considerations across the geothermal value chain (exploration, siting, drilling, comple- tion, and production). ESMAP is taking the lead by researching the gender aspects of geothermal development and identifying actionable entry points for the incorporation of gender equality and social inclusion into geothermal projects. A first step in this process was the formulation of a Guidance Note on Gender and Geothermal to provide guidelines for World Bank staff, project developers, and investors on how to incorporate gender concerns into the preparation and implementation of geothermal projects. Inclusive approaches are highlighted that ensure that women’s voices are heard and respected, that women can become agents of change within their communities, and that women’s skills and knowledge are brought in to create better managed and more successful projects. In a review of the Latin America geothermal portfolio, a common issue identified was how to create a gender balance in the project workforce, as well as create ancillary jobs for women. Mitigating actions that were iden- tified include i) ensuring that women are encouraged to apply for on-site jobs and supported in their careers; ii) including gender-focused civil society organizations or government staff in the planning process to bring attention to the need for (and needs of) women in the workforce; and iii) training and employing women on the use of geothermal resources (for example, condensates for drip irrigation, mechanical power, or process heat) for income generation. 70 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC is situated in an area inhabited by indigenous entitlements for compensation or additional peoples, PS5 and PS7 apply. If the project will support. If land acquisition is anticipated but not adversely affect biodiversity, PS6 applies. Both defined, the land acquisition and compensation IFIs and members of the Equator Principles framework guides operations related to land Association will require borrowers to prepare acquisition. A social audit also is conducted to standalone documents if specific PS’s are trig- assess prior land acquisition related to the project gered. The principal standalone safeguards docu- and to determine if the outcome is consistent ments that may be needed include: with the objectives of the framework. If not, a mitigation plan should be developed and imple- Land acquisition and livelihoods frameworks mented. If relocation is required, a resettlement and plans (related to PS5). The loss of land for action plan is prepared to cover the entire process, infrastructure development can adversely affect from the census to alternative site selection, enti- people by restricting livelihood opportunities, tlement definition, livelihood restoration, and even if the owners or users are compensated. If implementation monitoring and assessment. land is acquired through a market-based “willing Given the limited footprint of geothermal devel- buyer-willing seller” arrangement, in which opment, as well as flexibility in siting facilities, either party can refuse to conclude the transac- projects usually do not require resettlement. tion, PS5 does not apply. In most countries, Moreover, livelihood impacts may be minimal, however, energy investments are considered to especially if alternative land is available for be of national interest, and thus land acquisition purchase or swap. is subject to eminent domain, which may be trig- gered when the buyer and seller fail to reach Biodiversity action plan/biodiversity manage- agreement. In many countries, people who do ment plan or offset (related to PS6). In areas of not own the land they use are not compensated high biodiversity value, the investor must develop when they lose access to it. PS5 is designed to a robust, long-term, biodiversity monitoring and apply international standards to the land acqui- evaluation program, with clearly defined objec- sition process. The objectives of the standard are tives and mechanisms to assess outcomes. In to avoid or minimize land acquisition and reset- particular, the plan should assess if the develop- tlement impact if acquisition proves to be ment leaves the biodiversity for which the area unavoidable. The standard is to compensate the is noted in a better state than before the project loss at full replacement value and to restore live- was implemented (net gains). To protect and lihoods to pre-project levels or higher. The stan- measure those values over time, the plan may dard applies to all affected persons,81 whether require set-asides nearby or in other areas with landowners or others, including squatters. similar biodiversity values and mechanisms. If a project is expected to have adverse effects on If the location and amount of needed land is not biodiversity or critical habitats, a biodiversity known, as is typically the case in geothermal action plan, biodiversity management plan, or a development, the first step is to prepare a land critical habitat offset may be required before acquisition and compensation framework that project development proceeds (IFC/World Bank describes the steps in the land acquisition, deci- PS6). Each of these activities requires significant sion-making, and negotiation processes; identi- investigation and preparation and significant fies types of affected persons; and clarifies expert inputs. Moreover, there may be little 81 Any person or persons, household, firms, or public or private institutions who, on account of a development project, would have their standard of living, livelihoods, or assets affected. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 71 institutional support to oversee the studies, introduction to the standards, and if development manage the plans, or decide and execute the activities are already underway in the field, the offsets. This process can significantly delay proj- first step in the SEP process may consist of begin- ects and increase direct and indirect costs. ning to completely re-align existing relationships with the surrounding population. It is also good Indigenous peoples plans (related to PS7). A practice to develop and institute grievance mech- likely scenario in some LAC countries is that indig- anisms, which are procedures to receive formal enous people will be affected by geothermal devel- notification of local issues and to facilitate reso- opment. In such cases, the investor is expected lution of affected communities’ concerns and to conduct systematic field investigations and grievances about the project’s environmental, and extensive consultations to prepare a plan that social performance. The SEP and grievance mech- ensures that adverse impact on indigenous peoples anisms should be developed during ESIA prepa- is avoided or minimized. The plan—which should ration, in close consultation with project be developed jointly, treating indigenous people management, local residents, and affected with respect and dignity and giving them authority persons. over the process—should enable indigenous communities to receive sustainable development benefits and opportunities from the project. The Legislative and Regulatory Management objectives and mechanisms are outlined in PS7 of Environmental and Social Impacts and and Guidance Note 7. As indicated previously, the Risks requirement for consultation and free, prior, and Many of the industrialized nations that are informed consent of indigenous peoples is unique developing their geothermal resources have to this PS and potentially a challenge to authori- instituted multi-layered, domestic regulatory ties and developers, since complying with the PS regimes to manage natural resources and to has serious implications for many aspects of the regulate pollution. Such environmental regimes project, from site design to field operations. At are generally designed to be consistent with inter- the earliest exploratory phase, specialists should national environmental governance systems determine if there are indigenous peoples in the (such as the Paris Climate Agreement). When a area and, if so, mobilize appropriate expertise and jurisdiction focuses on geothermal development, develop the knowledge and relationships that can policymakers may need to re-think national envi- result in a legitimate indigenous-peoples plan. ronmental and public welfare development guide- lines. Using a geothermal development filter, Stakeholder engagement and grievances mech- national public welfare and environmental rules anisms. Few countries have adopted systematic can be re-oriented toward geothermal resource stakeholder engagement practices and associated development goals. For example, the state of transparent grievance procedures. Few private Colorado in the U.S. has robust environmental sector developers have adopted them, except regulations, but after enacting a Geothermal perhaps those dependent on financing from IFIs Resources Act in 2003,82 the state promulgated and Equator Principles institutions. Consequently, geothermal-specific rules designed to protect these international standards are new to most “public health, safety, welfare, and the environ- agencies and firms developing geothermal energy ment, and preventing the waste of geothermal and require institutional adjustments to be effec- resources that may result from the construction tive. If the ESIA process is the developer’s first and use of geothermal wells.” 82 Colorado Department of Natural Resources 2004. 72 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC On the other end of the continuum, some Equator Principles and IFC PSs discussed earlier nations have limited regulatory regimes and in this chapter. capacity to govern environmental, social, and health and safety practices. These countries, • General rules address the responsibilities of including the Caribbean island nations and some the well owner, operator, and constructor for of the Latin America states, frequently do not have maintaining the safety of geothermal wells, a robust legal and regulatory regime in place. as well as the authority of the state to enter Many smaller countries do not have sufficient and inspect well and facilities, and enforce human capacity or the financial wherewithal to laws, regulations, and contracts. These manage a complex regulatory regime. Often poli- general rules address vertical and directional cymakers in these countries create a legal, regu- drilling, as well as recovering geothermal latory, and contractual environment that is resources from multiple reservoirs, especially self-regulating and that does not require the if there are multiple users of a reservoir. The country to invest in creating a government-funded IFC Environmental and Health and Safety regulatory body. These policymakers place the Guidelines for Geothermal Power Generation burden of ensuring safety and protecting the envi- can inform regulations in countries in ronment on the private sector developer. which few regulatory guidelines have been promulgated. Creating a Geothermal Framework • Governance rules providing for interagency The past century of geothermal energy devel- coordination generally include establishment opment worldwide has taught lessons about the of a coordinating council, an interagency minimum government oversight needed to organization that facilitates the coordination manage environmental, safety, and social risks. of physical, field-based services as well as the Although not intended to be comprehensive, the authorizations and permitting requirements following, brief checklist is a baseline for poli- provided to or by a country’s state-owned cymakers to consider.83 Such guidelines, at a enterprises and agencies that are stakeholders. minimum, establish the general rules of opera- Such an interagency group would not have tion as well as the standards for developing a super-administrative authority. Instead, it geothermal field. When there is sufficient geologic would have the authority to compel interagency and engineering data available from previous dialogue, after which it would set forth drilling operations—for example, as in Kenya, evaluated alternatives to the decision maker Turkey, and Indonesia, where a state parastatal for final resolution. These governance rules has developed the field—guidelines may supple- may include allocating agency participation ment more broadly applicable statutory and regu- in or responsibility for the preparation latory requirements. Standalone guidelines, and monitoring of the ESIA and the SEP, a drawing on global experience, also can be drafted grievance mechanism, a community health to apply in a greenfield situation. The following and safety plan, and an ESMP. guidelines highlight areas in which experience • Community interface guidelines support a indicates that the state needs to exercise some country’s stakeholder state-owned enterprises regulatory oversight. These guidelines should be and agencies and the private sector in interpreted as being complementary to the coordinating early interactions with the 83 In addition to the adequacy of domestic human resources, other considerations include political and social traditions. For example, a country with a strong laissez faire economic tradition (such as Chile) may be more prone to favor private sector self-regulation. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 73 community that hosts a geothermal project, • Drafting geothermal-specific rules that a process critical to long-term success. address the public health, safety, and welfare • Minimum standards for different types environment that is best monitored by the of wells establish standards for deep wells state; and (equal to or over 750 meters) as compared to • Creating an intra-governmental body that shallow wells. They also establish standards encourages government agencies to work for geothermal fluid above and below 100° together to facilitate integration of geothermal Celsius, since preventing high temperature energy development and environmental well blowouts is a paramount safety concern. and public welfare tools in a coordinated Moreover, these rules set minimum standards manner, mindful of host communities near for reinjection wells. The use and operation geothermal projects. of a geothermal reinjection well, especially at higher flow rates and pressures, has Environmental and Social Risk the potential to contaminate aquifers and Management—Illustrative Cases ground water. Since the failure to inject may This section illustrates how environmental and undermine field sustainability, it is prudent to social impacts and risks have been managed establish guidelines for mandatory reinjection. in some existing and planned geothermal • Independent engineering certification of investments. Five cases are described briefly to compliance with state-established standards demonstrate how environmental and social issues and procedures by a state-recognized engineer may be identified and managed in the prepara- ensures that resource development occurs in tion and implementation of geothermal projects. a manner that safeguards life, public health, The cases include projects both under prepara- safety, welfare, property, and the environment. tion and implementation, focusing on actions • Restoration procedures, such as well taken to meet international standards, and one plugging, are important since unused or case that demonstrates a missed opportunity to inoperable geothermal wells are potentially apply and then comply with the standards. hazardous to public health, ground water resources, and the environment. Government Armenia—Geothermal Exploratory Drilling enforcement of a well owner’s responsibility Project to ensure that an unused geothermal well is A project that was prepared in Armenia in properly plugged according to best practices 2014–2015 is a good example of a typical has proven prudent. Likewise, returning geothermal exploration project financed by IFIs unused well fields to pre-project condition and shows how environmental and social impacts may require a government mandate. and risks were assessed and managed. The ideal of a national holistic melding of policy, The project finances exploration infrastructure and law, and regulation to integrate geothermal exploratory well drilling in two stages. The first resource development and environmental and stage consists of building an access road, water social considerations may be challenging for many pipeline, and small rig pads; the drilling of one or reasons—including lack of national capacity. two slim wells; and provision of technical assis- International practice has taught that there is value tance to assess the drilling results. If the results in governments exercising oversight by: are positive, the second stage includes construc- tion of larger rig pads, water supply and produc- • Focusing on how existing laws and regulations tion-size exploratory wells, as well as technical may be recast to apply in a geothermal resource assistance for well testing and analysis, a feasi- development environment; bility study for the power plant, and transaction 74 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC advisory support. In a remote part of Armenia, is a loan facility for resource development, the drilling site is a large, open, communal pasture executed by both TKB and TKSB. The objective used by three villages. The local economy is based is to stimulate private sector geothermal devel- on animal husbandry and has a high level of opment by sharing the financial costs and risks female-headed households, the result of out-mi- of both exploration and resource validation and gration. A traditional road reaches the area and by providing long-term loans to develop the needs to be upgraded before drilling can begin. resource. Component II is available to borrowers who have reached the production drilling stage, An ESIA was prepared for the drilling program with or without the support of Component I. that identified the potential adverse environmental impacts, including water extraction, generation As financial intermediaries (FIs), the banks are of waste materials from drilling and earth works, responsible for ensuring that their clients comply and a small amount of hazardous waste and toxic with the environmental and social safeguard poli- emissions, all of which can be mitigated cies of the World Bank, as well as local policies. adequately. The ESIA also confirmed that the In practice, implementing banks often find it diffi- project area was community property, with some cult to manage the compliance process, as their plots rented to individuals. Near the road were internal resources are limited, and points of scattered private plots. The ESMP prepared leverage are restricted. TKB and TSKB have a included environmental and social monitoring and proven record of success and extensive experi- follow-up activities throughout the project life. A ence working with the World Bank. They also resettlement policy framework was also prepared, have undertaken major efforts to develop their as the road alignment and location of project facil- internal environmental and social safeguard ities was not known at appraisal. This document management capacity. This project was selected provides the institutional blueprint to access the to highlight the quality of the project materials land needed, outlining procedures, entitlements, that the banks prepared to provide information and management. and guidance to their prospective clients. Of note are the environmental and social management See project link for more information: http:// framework, with an executive summary; the projects.worldbank.org/P152039?lang=en. resettlement policy framework for each compo- nent; and an environmental and social guidance Turkey—Geothermal Development Program note for geothermal power projects. With these This project is an example of a financial vehicle documents in hand, as well as the IFC to support private sector investment in geothermal Performance Standards, TKB and TKSB clients development through financial intermediaries. will be in a strong position to understand inter- The project was approved in November 2016 and national standards for environmental and social is under implementation. risk assessment and management and will be able to decide in advance if they can meet them. The Industrial Development Bank of Turkey (TKSB) and the Development Bank of Turkey The first two projects under each of the credit (TKB), both of which have long-standing collab- lines (one with TKB and another one with TSKB) oration with the World Bank, are executing this were subject to ex-ante due diligence (including project as financial intermediaries. The project on safeguards) and a “no objection” from the has two components. Component I is a risk World Bank. All Category A projects require a sharing mechanism for resource validation “no objection” from the World Bank. This serves executed by TKB, and also provides technical as a mitigation measure, as it ensures that both assistance for capacity building. Component II FIs keep building their internal capacity (with C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 75 the World Bank’s guidance) and it gives the World study is completed, another ESIA and ESMP will Bank a direct role in riskier projects. be prepared for the remaining stages, which will inform the client’s decision to move forward. For more information, see http://projects. worldbank.org/P151739?lang=en. Land acquisition and livelihoods. Current land requirements were secured through easement agree- Nicaragua—Geothermal Resource Risk ments with five landowners. The easements do not Mitigation Project adversely affect local access to water or other This case demonstrates what may be required to resources, nor do they cause any physical or fill gaps in an EIA prepared to meet both the economic displacement. Nonetheless, a completion national and international standards required to audit was carried out to ascertain if compensation secure IFI financing. for the easements complies with PS5. A few correc- tive actions were identified and included in the ESAP The project will support the development of that is being implemented. To anticipate possible geothermal exploration drilling. Prior to World future land acquisition for the project, a resettle- Bank engagement, the geothermal concessionaire ment policy framework was also prepared. This will already had carried out the reconnaissance and be updated alongside the ESIA, if needed, should drilling of an initial slim-hole well. The first stage field development proceed to the production drilling of the project is to be financed by the World Bank and SAGs/power plant development stages. and consists of exploration drilling of three to five wells and preparation of a feasibility study and For more information, see http://projects.world- an ESIA that meets international and IFC/World bank.org/P155197?lang=en Bank standards. If the resource is confirmed and other conditions are met, the second stage of the Indonesia—Geothermal Clean Energy field development will include production and Investment Project injection wells, and construction of the SAGS and This case from Indonesia illustrates how an ESIA power plant, which is expected to be financed by can improve the overall project design. the private sector and other multilaterals. The site is located on the slopes of the Casitas Volcano, The project supports the development of northwest of Managua, bordering and partially geothermal units in Bengkulu (140 MW) and within the Casita San Cristobal Natural Reserve. North Sulawesi (40 MW) by Pertamina Geothermal Energy. In Bengkulu, production drilling already Environment. To meet local requirements, EIAs was underway for one power plant, to be were carried out for both the exploration and constructed and operated by the energy utility exploitation phases. The environment permit was (ADB funding). The project would develop the granted by the Government for the exploitation wells, above-ground system, and a second power phase. A new ESIA was then was prepared to meet plant, drawing on the same geothermal resource. IFC/World Bank Performance Standards and World In North Sulawesi, the project would fund produc- Bank Safeguards Standards. The ESIA includes a tion and injection wells, above-ground systems, substantive social assessment, a SEP, and an ESMP, and a power plant in the general vicinity of as well as an ESAP that specifies actions to be existing geothermal development. Both areas are taken to bring the ESIA and management practices populated, with economies based on coffee and in line with IFC/World Bank performance stan- rice production in Bengkulu and mixed agricul- dards. The client is also preparing an ESMS to ture in North Sulawesi. The population is clus- operationalize the environmental and social activ- tered in villages, and the project requires land ities. Once the exploration drilling and feasibility acquisition but no resettlement. In both places, 76 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC much of the access infrastructure is in place. A Because expropriation was possible, however, full ESIA was conducted in each area and, ulti- Pertamina prepared and disseminated a land mately, a resettlement action plan, as well. acquisition and resettlement policy framework to guide the process according to international Environment. During the preparation of the standards. ESIA, modeling of the results from some wells showed that the concentration of H2S could For more information, see http://projects.world- exceed tolerable levels in nearby communities bank.org/P113078?lang=en. and that the cumulative effects of two power plants would increase the likelihood of excessive Kenya—Electricity Expansion Project emissions. This signaled the possible need to This final case illustrates how one aspect of the install scrubbers at the power plants to remove project can demonstrate international best prac- the H2S, and the ADB was contacted. They had tices in a challenging environment, while, at the not commissioned similar modeling but agreed same time, another aspect illustrates weaknesses that if further well tests obtained consistent that required special attention during implemen- results, scrubbers would be installed in the power tation. The project demonstrates the value of plant they support. Subsequent tests indicated ongoing supervision and monitoring and also high- lower H2S concentrations and the decision lights the importance of heeding lessons learned. regarding scrubber installation was postponed pending further developments, as it did not affect The project is part of a major electricity expansion the design of the power plant. Meanwhile, the program supported by several IFIs, including EBRD, ESIA has been updated several times, as new EIB, AFD, JICA, and KfW. The World Bank financed drilling sites were identified and explored. components are 280 MW of geothermal capacity at Olkaria IV and I, with associated infrastructure; Land acquisition and livelihoods. Pertamina transmission lines and substations; slum electrifi- acquired land as needed through a “willing cation; and sector institutional development. The buyer-willing seller” process, negotiating collec- geothermal site is located within Hell’s Gate tively with owners of the target plots. The National Park in the Rift Valley, northwest of process will be repeated for each drilling plat- Nairobi. For health reasons, about 1,000 people form and successive land requirements. Review were resettled, mostly Maasai pastoralists who were of prior acquisitions revealed that owners were moved from a 4,200-hectare tract to a 1,700-hectare satisfied, as the compensation was above market tract that was largely unsuitable for grazing. prices and enabled them to purchase alterna- tive land.84 Over time, local land prices increased Environment. The Hell’s Gate National Park was but the above market margin paid by Pertamina created after the first geothermal power facility decreased and negotiations became more diffi- was already installed. The land is characterized cult. The willing buyer-willing seller approach by rugged terrain, volcanic hills, valleys, gorges, continued and was confirmed by instances in boulders, and highly weather-altered rocks. which negotiations failed and the proposed site Vegetation is mainly shrubs and short trees. Over was substituted by another. As the project is of 100 bird species can be found at the park, national interest, Pertamina can exercise including notable populations of vultures that eminent domain, but refuses to do so as it risks roost on the park’s high cliffs, and the park also hurting relationships with the communities. contains many important amphibian species. 84 Given current standards, this cursory review of past experience would not be an adequate substitute for a real social audit. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 77 Various land animals are native, as well as over available in a timely manner and in an acces- 100 bird species. Located nearby is Lake Naivasha, sible language. a well-known freshwater lake. The park and lake attract local and international tourism, educa- Residents claimed that some vulnerable people tion, and research activities. The Kenya Wildlife were excluded from resettlement benefits; the Service and the Kenya Electricity Generating resettlement site was far from traditional areas Company (KenGen) have a memorandum of and was unsuitable for grazing and inadequate understanding that governs geothermal opera- for the population; land titles were not issued, as tions in the park. To minimize adverse impacts, promised; housing design and materials were studies were undertaken to establish animal undesirable; and little attention was paid to live- migratory routes, breeding grounds, bird flying lihoods. In addition, the resettlement occurred as routes, tourist circuits, and protected plants and soon as houses were constructed but before the wildlife species, and facilities were adjusted rest of the community infrastructure was accordingly. For example, steam pipelines on completed. The Inspection Panel reviewed the major animal routes were looped to enable easy complaints and determined that had the Maasai animal movement and game proof fencing was been treated as indigenous people, many of the installed to keep animals away from brine pools. issues would have been avoided. The lead inter- Conservation operations maintain the unique national agency, the EIB, proposed an arbitration scenic features and wildlife species within the process that followed its complaint mechanism, park, and the geothermal plants have not altered with the World Bank as an observer. Mediation its ecology significantly. started in August 2015 and ended in May 2016. The results were presented to the community and Social safeguards. The Maasai were resettled in the mediation agreement was signed by KenGen August and September 2014. In July through and the community a month later. Meanwhile, September 2014, residents used the EBRD’s additional funding was made available to cover complaint mechanism to express dissatisfaction the costs of implementing the agreement.85 The with the plan and potential impacts. In October mediation agreement that followed the inspection 2014, the World Bank Inspection Panel received panel investigation of the Kenya Electricity complaints about resettlement. A joint investi- Expansion Project resulted in additional World gation was undertaken in late March and early Bank actions to alleviate harms suffered by April 2015 and the Inspection Panel issued its affected residents. It also led to measures to report in July 2015. The residents claimed that improve identification of affected individuals who they should have been treated as indigenous had been left out of the resettlement process, to people according to the Bank’s Indigenous improve the physical infrastructure of the reset- Peoples Policy, under which they would have tlement site, and to support livelihood restoration. had much more active and inclusive involvement The lessons learned from this and other inspec- in decisions on the design, planning, and imple- tion panel cases on the importance of consulta- mentation of the resettlement program. Instead, tion, participation, and information have also been they held that their inputs were not adequately included in a recent inspection panel publication.86 sought, elders were sidelined, communications were ineffective and not in the local language, For more information, see http://projects.world- and essential documentation was not made bank.org/P103037?lang=en. 85 A summary of the request is available at: http://ewebapps.worldbank.org/apps/ip/Lists/CaseInformation/ ViewPanelCase.aspx? ID=102&ContentTypeId=0x01009B45ABCD870B07438938BCBF4A34C2E3. 86 The Inspection Panel 2017. 78 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Conclusions requires international financial support, which Proper environmental and social risk manage- carries obligations to meet international standards ment is an essential element for successful on financial, technical, environmental, and social geothermal development and operations. This attributes of the investment. Developers have two chapter highlights two key points: i) geothermal options in this regard. First, to become familiar development poses clear environmental and social with the international standards and adopt them risks, but these can be managed successfully from the outset, or, second, to instead adhere to through the timely application of sound design only local requirements at the start and face the and mitigation principles; and ii) as international prospect of needing to upgrade environmental and funding is usually required for geothermal devel- social investigations and practices later. The latter opment, this provides further rational for adopting choice risks adding both additional cost and delays and adhering to international standards, from the to the development timetable, as well as the possi- earliest conceptual stages through to final devel- bility of additional costs for mitigation to reverse opment and decommissioning. The Equator negative impacts already in place. Moreover, if Principles, IFC/World Bank Performance the full ESIA is undertaken late in the geothermal Standards, and IFC/World Bank EHS Guidelines development process, and if environmental and constitute the core international standards that social concerns are not fully integrated in the ESIA are acknowledged by international lenders in the and the ESMP, it is unlikely that project manage- public and private sectors. ment will take ownership of the results or fully fund and implement the ESMP and associated For effective management of social and envi- plans. Serious, early attention to environmental ronmental risks, good planning and timeliness and social issues can create the framework for are critical. Most geothermal development harmonious geothermal development. C h a p t e r 6 : E n v i r o n m e n t a l a n d S o c i a l Sa f e g u a r d s 79 San Jacinto-Tizate Geothermal Plant. Photo courtesy of Polaris Energy Nicaragua S.A. ANNEXES ANNEX 1: LAC Countries with Geothermal Laws and Regulations Table A1.1 below, which was developed from publicly available materials, identifies the LAC jurisdic- tions that have geothermal-specific legislation or regulations in place or in draft form. Geothermal Laws and Regulations in LAC Countries with Geothermal Potential/Capacity TABLE A1.1:   Geothermal law Geothermal bill Geothermal regulation Installed capacity Country in force in draft promulgated (MW) Costa Rica ü ü 207 El Salvador ü 204 Guatemala ü 49 Honduras 35 Mexico ü ü 957 Nicaragua ü 150 Panama Cuba Dominica ü ü Dominican Republic Grenada ü ü Guadeloupe 15 Martinique Montserrat Saba St. Kitts and Nevis ü (Nevis) ü ü (Nevis) St. Lucia ü ü St. Vincent and the Grenadines ü ü Argentina Bolivia Chile ü 48 Colombia Ecuador ü ü Peru ü Venezuela Annexes 81 ANNEX 2: World Bank Group Performance Standards The World Bank’s Performance Standards and • Ensure that safeguarding of personnel and the objectives of each of these standards are the property is in accord with relevant human following: rights principles and in a manner that avoids or minimizes impacts and risks to affected PS1: Assessment and Management of communities. Environmental and Social Impacts and Risks and Impacts PS5: Land Acquisition and Involuntary • Identify and evaluate environmental and Resettlement social risks and impacts; • Avoid displacement; when unavoidable, • Adopt a mitigation hierarchy to anticipate minimize displacement by exploring and avoid risks and impacts on workers, alternative project designs; affected communities, and the environment; • Avoid forced eviction; where impacts and risks remain, offset and • Anticipate and avoid adverse social and compensate; economic impacts from land acquisition • Promote the use of environmental and social or restrictions on land use; if unavoidable, management systems; minimize and compensate for loss of assets • Establish plans for stakeholder engagement and ensure that resettlement activities are and community grievance mechanisms and implemented with appropriate disclosure, ensure that relevant environmental and social consultation, and informed participation of information is disclosed and disseminated. those affected; • Improve or restore the livelihoods and PS2: Labor and Working Conditions standards of living of displaced persons; • Promote the fair treatment, non-discrimination, • Improve living conditions among physically and equal opportunity of workers; displaced persons through provision of • Establish, maintain, and improve the worker- adequate housing with security of tenure at management relationship; resettlement sites. • Promote compliance with national employment and labor laws; PS6: Biodiversity Conservation and • Protect workers, including different vulnerable Sustainable Management of Living Resources groups; • Protect and conserve biodiversity; • Implement high standards of health and safety. • Maintain the benefits of ecosystem services; • Promote the sustainable management of PS3: Resource Efficiency and Pollution living natural resources by adopting practices Prevention that integrate conservation needs and • Avoid or minimize pollution from project development priorities. activities; • Promote more sustainable use of resources, PS7: Indigenous Peoples including energy and water; • Ensure the development process fosters respect • Reduce projected-related GHG emissions. for the human rights, dignity, aspirations, culture, and livelihoods of indigenous peoples; PS4: Community Health, Safety, and Security • Anticipate and avoid adverse impacts on • Anticipate and avoid adverse impacts on the indigenous peoples; if unavoidable, minimize affected communities, from both routine and and compensate; non-routine circumstances, throughout the • Promote sustainable development benefits life of the project; and opportunities for indigenous peoples; 82 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC • Establish and maintain an ongoing from the adverse impacts of project activities relationship based on informed consultation and support its preservation; and participation; • Promote the equitable sharing of benefits • Ensure free, prior, and informed consent of from the use of cultural heritage through indigenous peoples; informed consultation and participation; • Respect and preserve the culture of indigenous • Implement chance-find procedures. peoples. More information on the World Bank’s PS8: Cultural Heritage Performance Standards can be found at the • Protect cultural heritage (paleontological, following website: www.ifc.org/performance- archaeological, living, and architectural) standards. Annexes 83 ANNEX 3: Environmental and Social Risk Mitigation Measures Environmental and Social Risk Mitigation TABLE A3.1:   Impacts and risks Examples of risk mitigation measures (including legal or regulatory) Land acquisition Minimize land use by judicious site planning to avoid settlements, critical habitats, and high value and intensive land-use areas, and minimize new roads and interruption of population movements. Acquire land on a voluntary basis, avoiding eminent domain, based on a land acquisition and compensation framework that is well disseminated, and a resettlement action plan if relocation is involved (International Finance Corporation/World Bank Performance Standard 5--IFC PS5). If indigenous people are affected, prepare an Indigenous Peoples Plan based on free, prior, and informed consent of the affected people (IFC PS7). If critical habitats affected, prepare a biodiversity action/management plan (IFC PS6). Legal framework: Acquisition may be provided by grants of concessions on state-owned lands (by law, regulation, or contract) and on private land by negotiation or “eminent domain,” the constitutional or legislated right of a government to take private property for public use with payment of compensation. Projects that need land acquisition and resettlement of communities to allow for project development typically include a resettlement action plan. Since the expenditure of funds will be required, plans are normally established by law. Plans outline actions for replacement of housing, infrastructure, services, and utilities and the restoration of livelihoods of displaced households. Land access Protect wells and facilities from unwarranted access by safety fencing and other barriers, following IFC/World Bank EHS Guidelines for Geothermal Power Generation. Legal framework: Ingress and egress for developers is usually dictated by law, but requires the issuance of permits, licenses, and concessions for specific geothermal resources. Best practice for granting of any natural resource concession includes incorporation of a “use-or-lose” policy encapsulated in law, license, or the concession that defines limits for the various stages of geothermal development areas. Surface pollution Test and monitor water resources periodically; adopt toxic and non-toxic waste disposal system that meets local and international industry standards, such as the IFC EHS Guidelines for Geothermal Power Generation. Legal framework: In most countries, environmental and natural resources law describe the network of treaties, statutes, regulations and common and customary laws relating to environmental pollution. Nationwide laws establish a legal and institutional framework for the management of the environment. A distinct set of regulatory regimes focuses on the management of specific natural resources, such as geothermal resources. Dismantling and restoration is usually assured by mandating bonding requirements. Sub-surface pollution Test and monitor groundwater periodically; adopt industry standard drilling operations—proper casings, drilling fluids, and drilling muds—to reduce the likelihood of polluting groundwater sources. Follow IFC/ World Bank EHS Guidelines for Geothermal Power Generation. Legal framework: Covered by regulations under environmental and natural resources law and national (or provincial) water law. Extractions Measure water availability and use, and monitor resources periodically; follow water-use limits set by local or national authorities; adjust requirements for drilling, housing, and facility cooling to meet limits; recycle and reuse water to the maximum extent possible. Legal framework: Implementation of “field rules” as regulation or directive, establishing standards for drilling practices (for example, casing and cementing of cooler groundwater zone) and requisite government inspections. Solid discharges—muds or Adopt industry standards for waste disposal according to IFC/World Bank EHS General Guidelines and drilling fluids IFC EHS Guidelines for Geothermal Power Generation, using impervious storage tanks and settling ponds, reusing drilling fluid if feasible. Legal framework: Covered by regulations under environmental and natural resources law. Solid discharges—cuttings Adopt industry standards for waste disposal by disposing in boreholes or depositing on appropriate landfill sites, following IFC/World Bank EHS General Guidelines and IFC EHS Guidelines for Geothermal Power Generation. Legal framework: Covered by regulations under environmental and natural resources law. (continued on next page) 84 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC Environmental and Social Risk Mitigation (continued) TABLE A3.1:   Impacts and risks Examples of risk mitigation measures (including legal or regulatory) H2S emissions Conduct baseline air quality tests and set up sensors to monitor air quality periodically, concentrating on facilities and settlements. Well-test results establish the level of H2S risk anticipated. If IFC/World Bank EHS Guidelines are exceeded, removal technologies may be required in the power plant. Continuous monitoring should occur in all plants and drilling sites. Legal framework: Regulations under environmental and natural resources law establish requirement for monitoring the concentration of the acidic gases, H2S and CO2, in the ambient air to ensure concentrations do not go beyond the recommended limits for workplace exposure and for disposal into the atmosphere at specific points. CO2 emissions The most common geothermal gas, CO2 is usually released in the air. Measurements are taken at all drilling sites; sensors should be put in place in working areas and closed spaces. If there is high volume, CO2 can be utilized in commercial operations, as in Turkey. Legal framework: Covered by regulations under environmental and natural resources law. Other emissions If mercury is significant, it may be removed chemically, but this is rare. Legal framework: Covered by regulations under environmental and natural resources law. Noise For residents, noise is mitigated most effectively by placing geothermal facilities away from settlements and habitations and minimizing nighttime activities. The most acute noise, well testing, can be reduced by using buffers. All industrial noises should meet IFC/World Bank EHS General Guidelines. Legal framework: Regulations establish acceptable the decibel range in excess of which energy dissipaters or silencers to mitigate noise are required. Dust Dust impacts can be mitigated by wetting exposed areas and graveling or paving roads; to reduce impact on residents, truck traffic should be restricted in the evening and nighttime. Legal framework: Covered by regulations under environmental and natural resources law. Occupational health and Employees should be given clear codes of conduct regarding health and safety, on and off the job; emergency safety preparedness and response plans should be developed and used to train employees. Living facilities and job sites should comply with IFC/World Bank EHS General Standards and IFC EHS Standards for Geothermal Power Generation, as well as IFC PS2. OHS incidents and accidents should be reported continuously and subject to periodic review. Legal framework: In common-law jurisdictions, employers have a common-law duty to take reasonable care of the safety of their employees. Statute law may impose other general duties and create government bodies with powers to regulate workplace safety issues; details vary from jurisdiction to jurisdiction. Direct livelihood loss Issue should be highlighted in the ESIA. Private and communal land lost to the project should be substituted, if possible, or compensated at replacement value. If land replacement is adopted, the amount and quality of replacement land should be assessed to ensure that it will yield similar results. The most adversely affected should be given priority for employment and other measures adopted to offset for losses through the development of a livelihood restoration plan or RAP (IFC PS5). Indirect livelihood loss Loss of livelihood due to the reduction of communal land or other resources should be anticipated through the ESIA and addressed in a livelihood restoration plan or RAP (IFC PS5). Indigenous vulnerability Indigenous people should be identified in the ESIA or early social assessment. The project should establish an ongoing relationship with indigenous people to ensure their informed consultation and participation, and they should participate in the preparation of an Indigenous Peoples Plan that is based on their “free, prior, and informed consent” (IFC PS7). Legal framework: Domestic laws that deal specifically with social regulations related to geothermal development can be based on IFC PS7 or World Bank OP 4.10 Indigenous Peoples. Traffic Anticipated traffic should be discussed, and rules set through the SEP to minimize disruption to communities and ensure safety.  (continued on next page) Annexes 85 Environmental and Social Risk Mitigation (continued) TABLE A3.1:   Impacts and risks Examples of risk mitigation measures (including legal or regulatory) Labor influx Anticipated influx information disseminated and discussed through consultations, according to the SEP and assessed in the ESIA. Temporary workers subject to clear rules of conduct signed at hiring; infractions reported through grievance procedures.a Legal framework: National investment laws that facilitate private sector investment generally allow foreign labor with geothermal expertise work visas for the project duration. Community asset Siting of new facilities subject to consultation (SEP); access and use of community assets protected by rules vulnerability of conduct. Compensation for reduced assets through a livelihood restoration plan (IFC PS5). Legal framework: Domestic laws that deal specifically with social regulations related to geothermal development can be based on IFC PS 5 or World Bank OP 4.12 Involuntary Resettlement. Conflict over investment, Siting of new facilities and revision of facility sites subject to prior notification and open discussions (SEP), location focusing on transparency and accountability. Legal framework: Establish “unitization” regulations so development and production of geothermal resources will be under coordinated management to avoid multiple users of the same field tapping into the resource and overexploiting and depleting it. Conflict over opportunities Employment and facility service opportunities subject to transparent procedures established through the SEP to minimize conflict and suspicion.  Physical cultural resource Cultural resources identified in ESIA, with provision to protect them, and “chance-find” requirements impacts embedded in all contracts (IFC PS8). Legal framework: Covered by regulations under environmental and natural resources law, plus international agreements such as Convention Concerning the Protection of World Cultural and Natural Heritage that was adopted by the General Conference of UNESCO in 1972. Visual impacts Facility siting and design subject to transparent notification and consultation (SEP) and adjusted to avoid or minimize visual disturbances. Legal framework: Covered by regulations under environmental and natural resources law. Tourism effects ESIA identifies anticipated impacts and includes provisions in ESMP to mitigate and measure impacts, utilizing SEP as a dissemination and consultation mechanism.  Rumors, fears SEP developed, disseminated, and discussed at earliest stages of project development. It identifies significant stakeholders, including affected persons, establishes ongoing mechanisms to assure transparency in decisions related to siting and changes to the facility, and sets a clear consultation and information sharing program, including the dissemination of information through national and local press and informal networks. If similar facilities are accessible, affected people should be transported to see them. The ESIA also identifies local issues and apprehensions and proposes steps to address them through consultation, experience sharing, or other means. Organized opposition The SEP and ESIA identify all stakeholder issues, organized and individual, and proposes mechanisms to engage opposition continually and openly, transparently responding to concerns and demonstrating an inclusive project approach, adjusting to reduce or resolve opposition issues.  a The World Bank’s Environmental and Social Safeguards Advisory Team recently issued guidance on this issue, “Managing the Risks of Adverse Impacts on Communities from Temporary Project Induced Labor Influx” in December 2016. 86 OPPORTUNITIES AND CHALLENGES FOR SCALING UP GEOTHERMAL DEVELOPMENT IN LAC ANNEX 4: Environmental & Social Impact Assessment Topics for Geothermal projects The following are the main topics that should be • Labor requirements and labor sourcing, covered in an internationally accepted ESIA for including anticipated labor influx, living a geothermal investment: facilities, health services, and management of labor population on and off the job, • Air emissions including H2S, Hg and, to a including such issues as poaching risks;88 certain extent, CO2 (present in the steam), • Occupational health and safety of the during the drilling stages as well as from workers with respect to geothermal gases, power plant operation; confined spaces, potential impacts from • Effluents, including drilling fluids and cuttings unrelated seismic activities, heat, noise, and associated with exploration, development, blowout risks, during all phases of project and operational activities and dust emissions; development, as well as disaster planning • Spent geothermal fluids associated with activities; rejection water from steam separators during • Stakeholder participation and consultation drilling and operational phases; with affected communities and wider interested • Water consumption and extraction associated parties to gather information about the baseline with the geothermal power generation conditions in the area and to communicate activities, well drilling (exploration and project intentions to the community, while production phase), and provision of make-up ensuring that communications do not limit water in cooling systems; participation based on gender or age; • Emergency preparedness and response for all • Social aspects, including population, phases, including the risk of well blowouts, socio-economic status, livelihood choices, pipeline failures, and exposure to excessive employment, ethnic and social composition, levels of H2S; vulnerability, local administration and informal • Local ecology and biodiversity, land use, authority, landowning and land use, social landscape characteristics, and potential services, gender, cultural heritage, indigenous impacts; peoples, and local opposition, organized or not; • Proximity to recognized habitats (protected • Plans and procedures to protect workers and or not), anticipated impacts, and existing those involved in the project (according to restrictions; International Labour Organization conventions • Assessment of proposed or actual location and UN conventions) and to reduce negative of facilities relative to population, human impacts on local populations; activities, recreation, or cultural heritage; • The establishment of an approach to land • Construction impacts, especially roads, acquisition and compensation, including pipelines, and site preparation; resettlement planning, if necessary; • Associated facilities, such as transmission • Analysis of alternatives; and, lines and substations; • The assessment of cumulative impacts that • Community health and safety impacts are likely to result from the proposed project (including infrastructure safety, noise, water if expansion of the facility is planned, resources, and traffic), primarily during additional projects are anticipated, or other development phases, but can also be significant geothermal facilities are in the area of during operations; influence of the project. 87 World Bank, “Managing the Risks of Adverse Impacts on Communities from Temporary Project Induced Labor Influx” (Washington DC: World Bank Environmental and Social Safeguards Advisory Team, 2016.) 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