Long term future good for geothermal - Part two

To read the first part of this report click here

By Paula Wallace

Water Gerardi of McLennan Magasanik Associates, provided a comprehensive market overview and insight into opportunities for geothermal producers as Australia embraces more renewable energy and heads towards introduction of emissions trading.
Discussing financing issues for geothermal projects, Simon Schwarz, director at Investec Bank (Australia), used a depth of knowledge about other alternative energy sources, particularly wind, to make some astute observations.

Critical issues in financing
“What we’ve seen in the last 24 months is that all the usual rules don’t apply,” said Simon Schwarz, “…perfectly viable businesses have been choked of capital whether it’s equity or debt capital.”
This has seen many existing businesses hit the wall if they have been unable to raise finance, and new projects or businesses have been unable to get off the starting blocks.
Whereas banks would traditionally underwrite up to $500 million of debt for a single project and then later sell it down in the market, they are now not prepared to take this upfront risk.
“You could take your pick between bond and bank financing and there was competition between those two financing sectors and so it was really a borrower’s market,” he said.
What did this mean for renewable energy projects? According to Schwarz it meant there was not shortage of loan finance for wind projects, “there was as much as you liked, cheap as you liked, from a range of thirty banks and twenty bond underwriting firms who would compete for the business.”
How things have changed – although banks probably would like to finance wind projects says Schwarz, there simply isn’t the loan capital.
“…you might find that there are only five or six banks open for business altogether in your particular sector…with an aggregate lending capacity of $300 million.”
The other factor that speaks specifically to renewable energy projects, is that risk appetite has been significantly reduced.
“Particularly for geothermal banks are unwilling to take any form of technology risk at the moment,” said Schwarz.
“If the technology in the project is not tried, proven and tested banks are looking for any excuse to rate this project with another project where there is an established technology, a proven technology.”
However, Schwarz said that many banks have favoured sectors and fortunately renewable energy is still one of them because the fundamental drivers behind that sector are strong for the foreseeable future.
The good news is that banks here are still lending, which he believes is a “pretty strong statement” given that this is not the case in most markets around the world.
“Australia’s top four banks…are now in the top twenty largest banks in the world by market capitalisation. It’s a very scary thing because traditionally Australia’s banks have been amongst the smallest in the world. They haven’t grown in size, it’s just the other banks have either contracted or disappeared,” Schwarz said.
Power and particularly renewable power are generally well favoured sectors and good projects under that threshold of how much capital is available, that is around $300 million, will still get financed even in the current market.
He suggested, although it was disputed by some conference delegates, that geothermal currently cannot ‘tick all the boxes’ in the same way as wind powered energy – that is, technological maturity, history of operating statistics, yield guarantees, maturity of competition, known lifetime costs.
“While all of this might sound like gloom and doom it’s probably more gloom and doom for other technologies such as solar thermal which might be two or three years ahead of geothermal, they will face these issues head on,” said Schwarz, “…apart from trying to get their projects up and running in a technical sense they’ll be facing an absence of capital for all those reasons and with any luck by the time geothermal becomes technically viable the finance markets will have unclogged.”
In the next two to three years, Schwarz does not see any recovery in bond financing and that availability of financing will be low, it will be expensive and its terms and conditions will be restrictive.
“Look to credit export agencies if you must, they are an available source of finance at the moment.
“We do see a recovery, it might take two to three years and that will line up well with the maturity path for geothermal,” he said.

To read the first part of this report click here