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brInGInG down bArrIErS to GEothErmAL To better understand the barriers that are hindering geothermal development in Chile, NRDC interviewed key representatives from industry, government, and academia. NRDC first presented the findings of this survey in April 2013 at a seminar titled “The Future of Geothermal in Chile: Barriers and Proposals for Development,” which it cohosted with the Andean Geothermal Center of Excellence (CEGA), a Fondap/CONICYT project. This seminar brought together participants from academia, government, industry, indigenous communities, as well as international experts. This current issue brief is the result of insight gathered from the sector interviews and the seminar, as well as consultations with international geothermal experts at Bloomberg New Energy Finance. The research conducted as part of this process revealed the varying perceptions held by stakeholders regarding the intensity of barriers and the desirability of specific solutions. The research also indicates that to replicate the geothermal energy development seen in other parts of the world, Chile should consider concerted actions to help reduce the costs and decrease the risks of investing in geothermal energy in the country. It should also reduce lingering legal and regulatory ambiguity and strengthen institutional support for the resource. 1. Attracting investment that leads to development The actors in industry, government, and academia whom NRDC consulted on barriers related to high initial costs and financing risks generally agreed that essentially all risk is currently assumed by developers.23 Without appropriate policy mechanisms in place, the initial costs of exploration could remain too high to spur and maintain significant levels of growth in the private market. Yet Chile has not implemented some of the financial mechanisms that have been used to drive geothermal development in other countries. Unlike in many other markets, there is no guaranteed revenue stream for geothermal projects through a feed-in tariff. Additionally, there are no tax incentives provided by the government to encourage energy developers to pursue geothermal projects or for large consumers of energy (i.e., industrial offtakers) to purchase geothermal energy. Nearly every other country in the world that has developed geothermal fields has found it necessary to pursue such strategies, to varying degrees, to attract investment. Despite the shared recognition among actors that costs and risks are a strong barrier in Chile, there is less agreement on solutions to this issue. Chile has, however, recently begun to investigate an exploration risk insurance model in conjunction with the Inter-American Development Bank and the World Bank. The government is also soliciting between $30 and $35 million in funding from the Clean Technology Fund to help cover the costs of the program. If the program successfully moves forward it may help reduce the risk associated with geothermal development.24 n Price tariffs Other nations attempting to spur geothermal development, including Japan and Indonesia, have implemented feed-in tariffs (price guarantees) for geothermal energy.25 Such price guarantees are meant to enable investors to make a more specific estimate of a project’s return on investment, thus reducing uncertainty. Moreover, price guarantees can ensure that price fluctuations in other energy sources (such as fossil fuels) do not jeopardize an existing or proposed project’s viability. In Chile, for example, if gas imports from abroad increase, it is important to ensure geothermal development does not become unhinged by such an influx.26 On average, individuals in industry and in academia felt feed-in tariffs could be a strong incentive in Chile. In contrast, government representatives, on average, did not feel a tariff would be as beneficial.27 It is important to note that feed-in tariffs alone, even if generously priced, may not spur the desired level of development. Such is the case in Japan, where, despite high tariffs, development has remained slow due to other hurdles, including a difficult project approval process and issues with grid interconnection.28 Indonesia is considering revamping its tariff policy and considering instead raising the ceiling price developers receive for geothermal power. This revised approach aims to avoid a situation in which developers make artificially low bids for concessions and then try to renegotiate tariffs, as well as outright speculation, two factors that have contributed to paralyzing projects.29 A feed-in tariff of $200 to $300/MWh in Chile has been considered, but this would likely have no impact on geothermal development, according to experts at Bloomberg New Energy Finance, unless it is a piece of a larger policy package that considers institutional and legal elements as well.30 n Incentives for offtakers Considering that obtaining a Power Purchase Agreement (PPA) is one of the most critical elements needed by a developer to begin a project, incentives for offtakers (those who purchase the energy) to enter into PPAs should be carefully considered. These incentives could largely come in the form of tax breaks provided by the government. That is, large consumers of energy that sign PPAs with geothermal companies could be eligible to receive additional benefits in the form of tax relief for making this purchase. Such tax relief could give these offtakers greater incentive to sign contracts with geothermal developers before projects come online. It would then be easier for geothermal developers to attract investment because there would be a more willing pool of potential buyers to sign PPAs. On average, individuals consulted in industry and in academia felt tax incentives for offtakers would be a moderately strong incentive in Chile, PAGE 5 | Geothermal Energy: Unleashing the Earth’s Power to Fuel Chile’s FuturePDF Image | Geothermal Energy 2013
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