76108 CASE STUDY 10: HUNGARY - GeoFund Barriers High upfront investment and high geological risk Instrument Resource contingent finance Application Guarantee to pay 85% of costs of unsuccessful geothermal exploration wells Amount US$3.3 million (final payout) PROJECT BACKGROUND AND OBJECTIVES sector had been unwilling to pursue the targeted project. GeoFund (the Geothermal Energy Development Program) is funded by a GEF trust fund and The project site was north of the village of Iklodbordoce, implemented jointly with IFC. The aim of GeoFund is to in the county of Zala, in southwest Hungary, with three remove the barriers to geothermal energy use in Europe existing hydrocarbon exploration wells. A fourth and Central Asia, and thereby reduce greenhouse gas production well was to be drilled there. The planned emissions. power plant was to have been connected to the regional system of North Transdanubian Electric Service GeoFund was designed to provide assistance and Company. Total estimated project costs were HUF 3.9 funding to geothermal developers and institutions that billion (US$18.6 million), which were to be financed by promote the use of geothermal energy. It was MOL Hungarian Oil and Gas plc. comprised of three instruments: INSTRUMENTS USED - Direct investment funding window to provide low cost loans, contingent grants and outright grants to project The GeoFund package for Hungary included a technical developers; assistance grant of US$810,000 and a geological risk insurance (GRI) grant of US$3.72 million. The GRI - Geological risk insurance (GRI) window to partially covered the risk that after drilling and testing the insure project investors and developers against the risks geothermal resource would be found to be inadequate involved in geological exploration (short-term cover) for development as an energy source. The GRI grant and operation (medium-term cover). The geological risk covered 85% of the eligible drilling expenses, with the was seen as the most difficult barrier to overcome for remaining 15% provided by the counterparty company the development of geothermal energy; and (MOL). - Technical assistance window to improve access to In addition, MOL also financed all of the pre-drilling information and expertise on geothermal energy. expenses (geological surveys, prefeasibility studies, staff A GeoFund package, covering the first two of eight salaries, as well as the post drilling expenses to return GeoFund sub-projects, was made available to Hungary the land to its pre-drilling state), which are estimated at in 2006. Hungary has a high quality geothermal resource about US$2-3 million. It also paid up-front to the but relatively low utilisation. Barriers to utilisation are GeoFund a processing fee of US$10,000 and a 3 percent high upfront investment costs and geological risks in the fee on the insured amount (US$131,254). The Grant drilling phase. In the face of these barriers the private Agreement specified parameters for success/failure under which the GRI could be drawn on. 1 | R E F I N e www.worldbank.org/energy/refine INSTITUTIONAL ARRANGEMENTS The Geological Risk Insurance worked as designed when the drilling was unsuccessful and played a key role in GeoFund receives its funds from GEF and the reducing the risk of drilling for the first geothermal pilot International Geothermal Association (IGA), and power plant in Hungary. administered by the World Bank GeoFund coordination team. The IGA funds were used for a region wide Technical Assistance program. MOL signed a Grant Agreement with the World Bank to access the GeoFund in the form of the GRI, with the Government of Hungary’s endorsement. OUTCOMES The results of the drilling and testing activities of the Hungarian subproject indicated that the two wells would not produce adequate geothermal flow rates for any geothermal-based operation. This was verified in the technical report produced by MOL, and further verified by independent experts hired by the Bank. Eligible financial expenses were verified by an international auditing firm. After verification in accordance with the Grant Agreement, a payment of US$3.3 million was made to MOL on December 17, 2007. Further reading World Bank, Innovative “Geofund� Program Supports the International Geothermal Association And Hungarian Oil And Gas Company to Promote Geothermal Energy Development, 2007 – click here 2 | R E F I N e www.worldbank.org/energy/refine