Growth shackles

It’s important to understand some of the key issues and constraints impeding the development of the industry and dampening investor appetite. They include:

• Project technical risk and the capital investment burden
• Current and predicted medium-term price of geothermal
• Access to Power Purchase Agreements
• Transmission and infrastructure constraints
• Sporadic and inadequate government support
• Policy shortfalls and uncertainty
• Industry fragmentation
• Global competition for capital and resources
• Lack of global awareness of Australia’s geothermal industry.

While the industry has achieved an extraordinary level of progress in a very short period of time, it now faces a vicious cycle: finance is needed to overcome risk, but can’t be attracted sufficiently until risk is overcome. The technical viability of geothermal – both Engineered Geothermal Systems (EGS) and Hot Sedimentary Aquifers (HSA) – is uncertain, and until the resource is proven, conventional long-term financing is typically not available. Developers must therefore rely on venture capital and other sources of equity, which are generally insufficient to adequately progress projects.

What can be done to attract investment?

There are a range of practical steps that can be taken to strengthen the business case for investment.

1. Collaborate

What is most lacking in this industry is collaboration at the company and project level. There is increasing collaboration at the research level, but not at the corporate level. More effective collaboration – with the immediate objective of establishing one or two commercial demonstration projects to collectively mitigate project risk – may be the most effective action that can be taken.

This can be achieved by:

• Better and targeted sharing of technical and project information
• Establishing a rig sharing club
• Working closer with the broader energy industry to develop integrated renewables projects
• Consideration of different ways to partner with potential investors
• Pooling research and development resources to focus on solving the most pressing technical problems
• Selecting the two or three projects closer to development and collectively progressing them.

2. Rationalise and consolidate

The industry is characterised by a large number of very small players. Such fragmentation does not help in competing for already scarce capital, or dealing with governments who may be trying to understand what support mechanisms to provide. Project and/or corporate rationalisation is likely to create interest in the industry from equity investors.

3. Create an industry roadmap

A comprehensive development roadmap is needed that can evolve as the sector matures. This would include an industry-wide investment strategy highlighting appropriate funding models focusing on the broader industry and not specific project opportunities. It would also involve working closer and more collaboratively with the Federal and State Governments to demonstrate the potential of geothermal and how it can become a vital and viable component of the overall energy mix in Australia in the coming decades.

4. Improve investor relations

As an industry we need to better understand and engage with the full range of potential investors. These might include global geothermal organisations, oil and gas companies, energy utilities, operations and maintenance contractors, equipment manufacturers, superannuation funds, financial investors (including private equity and venture capital), and debt financiers.

For any energy project to obtain funding, investment professionals need to understand the numbers. This is where the geothermal industry can be proactive and think like the investor. Developers need to provide sound numbers to provide greater clarity around areas such as exploration drilling success, resource recovery and capital costs. If these numbers are well-researched and accurate, investors could make informed decisions and be comfortable in taking the risk.

5. Educate and communicate

Finally, we need to be visionary in how we educate and communicate with potential stakeholders. The business and wider community must be engaged in a structured research process that can map and strategise how geothermal can be tied to the future direction of the Australian nation. Geothermal should take its rightful place in the broader debates around climate, population, infrastructure, migration and technology.

The hurdles along the growth path of the geothermal industry are not insurmountable. How the business case is presented to investors will determine whether they come along for the ride.