Economic, Financial Analysis & Modelling Of Geothermal Energy

This 3-day course will address a variety of contract and loan structuring issues associated with geothermal energy projects as well as comparison with solar, wind and battery storage.

The course is designed to investigate how various project finance techniques and contract structures can be used to achieve a competitive power prices while maintaining a satisfactory equity return. Distinctive project finance features of power facilities that depend on geothermal, wind, hydro or solar resources will be evaluated with financial models.

The course will cover economic analysis of exploration and development of geothermal facilities and how to incorporate probability of failure and success into an IRR framework. Subsequent sessions will address the theory underlying liquidated damages for delay, and performance as well as design of other incentives that is inherent in different contract structures.

Nuanced project finance issues associated with structuring debt for renewable projects will be discussed including under what conditions the DSCR drives debt capacity and when the debt to capital ratio is instrumental.

The course will be taught with a combination of theoretical discussions, term sheet review and focused financial models.

Learning Objectives:

• Evaluate the economic risks that arise from uncertainty associated with drilling exploration wells and development wells for geothermal projects.
• Analyse the theoretical issues with computing LCOE for geothermal projects compared to other renewable and non-renewable resources and the importance of cost of capital for renewable projects.
• Understand differences in contract structures for renewable projects and dispatchable projects and how a single price structure can distort incentives for efficient construction and operation.
• Understand components of financing that influence the bid price required to meet a required rate of return on equity and can result in relatively low prices with reasonable returns.
• Understand the importance of debt sizing constraints and what strategies are relevant when the debt to capital constraint applies relative to when the debt service coverage ratio drives the debt size.
• Understand how to compute P50, P90 and P99 for different projects driven by resource risk.
• Understand the difference between mean reverting resource variation and estimation mistakes that do not correct as the basis for 1-year P90 and 10-year P90.
• Understand under what conditions debt sculpting can affect returns and how synthetic sculpting can be used to increase returns when the DSCR constraint applies.
• Understand the theory of credit spreads, variable rate debt and interest rates in different currencies and compute the implied probability of default that in inherent in credit spreads.
• Understand how to evaluate the costs to equity investors and the benefits to lenders for various credit enhancements including DSRA accounts, cash flow sweeps and covenants.

Target Audience:

• Geothermal energy developers – Project managers, financial analysts, procurement managers at companies developing geothermal power plants need these financial modelling skills.
• Geothermal investors – Analysts and fund managers at infrastructure funds, private equity firms, and banks that invest in and finance geothermal projects.
• Energy sector consultants – Consultants working in geothermal energy, such as on project feasibility studies, require financial analysis and modelling abilities.
• Energy investment bankers – Investment bankers that work on geothermal energy M&A, project financing deals need modelling expertise.
• Energy market regulators – Regulators that oversee geothermal power markets and set tariffs/incentives need cost analysis capabilities.
• Energy policy analysts – At government agencies, think tanks and NGOs analyzing and making policy recommendations around geothermal energy.
• Accountants & auditors – Involved in assurance and advisory services for geothermal power companies.
• Insurance professionals – Underwriters and risk analysts for geothermal project insurance products need modelling skills.
• Legal professionals – Lawyers working on geothermal project contracts, financing, regulation require some financial analysis abilities.