P17
Characteristics
Pros
Cons
Build Own Operate
The district heating company buys the heat from a supplier. The license to explore and produce geothermal energy is most likely held 100 % by the supplier / professional industry partner. The supplier carries the exploration and operational risk. The supplier owns and operates the plant for 30 years. The district heating company buys a turnkey geothermal plant from a supplier. Option: operations agreement with supplier The license to explore and produce geothermal energy can be held 100 % by the supplier / professional industry partner or jointly by the district heating company and the supplier. The district heating company holds the license for exploration and production of geothermal energy. The district heating company manages the geothermal project from start to end and has the overall coordination of the project.
The supplier carries the exploration risk. The district heating company only has to pay for the heat – in principle everything is included. So, the district heating company signs a heat contract and pays an agreed price per MWh for 30 years (with some escalation built into the contract). The supplier carries the exploration risk. Turnkey gives a lower price to the consumers. The district heating company owns and finances the plant. The district heating company has to sign only one or two contracts for the whole project. In this case the district heating company has the most influence on the project. If the project is well managed, this can lead to attractive prices to the consumers.
The consumers pay too much for heat due to high interest rates on external financing. The district heating company does not own the plant. The district heating company may not be able to reduce the interest rate with an up-front payment. The district heating company has little influence on the execution of the project. A turnkey contract is very complex as it has to take into account all situations. The district heating company has little influence on the execution of the project.
Turnkey
Construction contracts
The district heating company carries the exploration risk. Requires that the district heating company has a high level of technical competence within several disciplines. The district heating company has to manage a large number of contracts for products and services which a typical district heating company is not familiar with. The district heating company has to coordinate activities between the different service companies.
Inhouse competences are required.
The district heating companies in Denmark will most likely not want to go this way – especially due to the complex technical tasks such as designing and drilling the wells.
RISK – REWARD The key question is who is willing to take the exploration risk. Geothermal projects are capital intensive in the exploration and development phases. The successful path to geothermal energy production for district heating is to involve a professional partner who is willing to carry, as a minimum, the exploration risk. Once the geothermal reservoir has been characterized and its geothermal production potential has been confirmed, the risk associated with a geothermal project has been greatly reduced. The most significant risks in a geothermal project are: • The exploration phase where the quality of the geothermal reservoir and its geothermal energy production potential have to be confirmed. The quality of the reservoir influences the number of wells to be drilled and the capital expense of the project. • The interest rate on the capital invested in all phases of the project. If the district heating companies contribute with low- cost financing (up-front payment) the heat price decreases significantly. • The consumers end up paying too high of a heat price due to improper risk management and expensive financing.
There is a significant financial reward for the consumers if the exploration risk is carried by a professional partner and the district heating company contributes with an up- front payment in the development phase. The project risk decreases significantly after the exploration phase, which makes it attractive for a district heating company to participate financially in the project starting in the development phase.
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