Drilling for Dollars: Notable Developments in Geothermal Finance
Geothermal capacity additions are on track to top 100 MW in 2012, making this year one of the best for geothermal deployment in the last decade [1,2]. This could be a tentative sign that conditions have been improving for geothermal finance (traditionally, finance has been one of the principal barriers to the technology's wider adoption). Projects coming online this year have demonstrated some creativity in leveraging financial opportunities. Here are some highlights.
Commercial Lenders may be Revisiting Geothermal Asset Finance
One particularly notable project for geothermal finance was the 49.9-MW John L. Featherstone plant (formerly Hudson Ranch I), which began commercial operation in the Salton Sea, California area in March. According to Project Finance magazine, Featherstone was the first utility-scale geothermal facility in the United States since the 1980s to secure debt for construction finance from commercial lenders, a class of investor that has typically shied away from geothermal project finance [3,4]. The debt deal featured a club of banks, and amounted to about $300 million, about 75% of project costs. It is structured as a five-year, mini-perm, which equity holders plan to refinance in the capital markets .
While it is noteworthy that EnergySource, the Featherstone project's developer, was able to secure commercial lenders for its construction, it is even more so that the firm was able to do so to finance exploration drilling. The Icelandic bank Glitnir (now Islandsbanki) issued the Featherstone project a $15-million "resource verification" loan to conduct test-well drilling. Typically, geothermal projects must finance the exploration stage through equity investments, as the risk of non-discovery has tended to make banks uncomfortable . That Glitnir decided to lend to developer EnergySource likely reflects the confidence the bank had in the resource potential, and in the strength of the development team. Little public information is available on the terms of the loan beyond the disclosure that it was a senior-secured, mezzanine vehicle that was made available to only one other developer (Nevada Geothermal) . No further "resource verification" loans have been made since Glitnir was taken over by the Icelandic government and rebranded as Islandsbanki in 2009 .
Debt, Equity, and Project Bonds
The John L. Featherstone project was financed on a debt-to-equity ratio of 75%, with the 25% balance comprised entirely of developer equity from EnergySource's parent companies . The newly operational 23-MW Neal Hot Springs project, developed by U.S. Geothermal, was originally financed with a similar ratio, though its debt came from the United States Federal Financing Bank and was backed by a 1705 Loan Guarantee . The Neal Hot Springs project was one of only five geothermal projects to secure a loan guarantee under the 1705 program . U.S. Geothermal financed the remaining portion of their project with an equity stake from the Canadian oil and gas company Enbridge. While originally a 20% position, that equity was bumped to 40% after U.S. Geothermal incurred additional drilling costs .
Commercial debt and equity are, however, not the only two sources of financing that geothermal has been using lately. Ormat, through its subsidiary organizations, has been issuing bonds collateralized by project assets to attract capital to its development portfolio. Bonds issued for the portfolio of projects which received a partial guarantee under the 1705 are 80% backed (principal and interest) by the federal government . In this respect Ormat could prove a bellwether for other renewable energy technologies seeking alternative financing arrangements—especially solar which is currently exploring methods for securitizing their cash flows through asset-backed instruments, project bonds, and other vehicles.
From commercial debt, to federal incentives, to project bonds, the geothermal development community has demonstrated some creativity in leveraging alternative financing options. However, as federal incentives expire, and as macroeconomic shifts in the debt markets play out over the next several years, developers will need to continue their search for progressive financing strategies if they want to expand on this year's uptick in capacity deployment. And with as much as 872 MW of confirmed geothermal projects in the early stages of development and looking for capital, there are gains to be had if developers can find novel ways of opening the taps .
 Geothermal Energy Association. (2012). Annual U.S. Geothermal Power Production and Development Report. GEA. http://geo-energy.org/reports/2012AnnualUSGeothermalPowerProductionandDevelopmentReport_Final.pdf
 Gelman, Rachel. (2011). 2010 Renewable Energy Databook. United States Department of Energy Office of Energy Efficiency and Renewable Energy. http://www.nrel.gov/analysis/pdfs/51680.pdf
 Project Finance Magazine. (May 2010). Analysis: How Hudson Ranch I Cleared the Bank Market. Project Finance Magazine.
 Project Finance Magainze (February 2011). "Hudson Ranch 1: Build then Bond. North American Geothermal Deal of the Year." Project Finance Magazine.
 Lowder, Travis et al. (2012). Renewable Energy Finance Tracking Initiative: Snapshot of Recent Geothermal Financing Terms, Fourth Quarter 2009 – Second Half 2011. http://nrelpubs.nrel.gov/Webtop/ws/nich/www/public/Record?rpp=25&upp=0&m=1&w=NATIVE%28%27KEYWORD2+ph+words+%27%27refti%27%27%27%29&order=native%28%27pubyear%2FDescend%27%29  IceNews. (May 2008). "Glitnir Makes Shortlist for Sustainable Energy Awards." http://www.icenews.is/2008/05/02/glitnir-makes-shortlist-for-geothermal-energy-award/
 Islandsbanki. (October 2008). "A New Glitnir Assumes Operations." https://www.islandsbanki.is/english/about-islandsbanki/news/news-item/?NewsID=543cc836-5064-40f8-b565-77939ef6cf35
 U.S .Geothermal Form 10-K for the fiscal year ending March 31, 2012. http://www.usgeothermal.com/FinancialReports/10-K%20Report%204Q11_Final.pdf
 U.S. Department of Energy Loan Programs Office. "Our Projects." https://lpo.energy.gov/our-projects/
 Rascoe, Ayesha and Rampton, Roberta. (October 2012). "Insight: Delays Dog U.S. Government Loans to Green Energy Projects." Reuters. http://www.reuters.com/article/2012/10/03/us-usa-energy-loans-idUSBRE89114X20121003
 Ormat Form 10-Q, August 2012. http://investor.ormat.com/phoenix.zhtml?c=181999&p=irol-sec