Geothermal Energy Systems Assessment - A Strategic Assessment of Technical, Environmental, Institutional and Economic Potentials in Central and Eastern European Countries
3. The Prospective Analysis
3.1 Geothermal Energy in the CEECs - Towards a Renaissance
Today, indications are that GE for heating in the CEECs may be facing a renaissance. The reasons for this are many, and some of the central factors are listed below in Box 3.1-1.
Box 3.1-1
Factors In Favour of A Geothermal Energy Renaissance
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Below, a comparative assessment of the analysis of the five DANCEE focus countries is
presented. The analysis includes the capacity and potential for geothermal project
implementation and compares technical, environmental, institutional and economic
components related to geothermal energy development within these countries.
3.2 Geothermal Energy Potentials in the CEECs - A Comparative Analysis
3.2.1 Economic Potential
The main barrier for geothermal project implementation in all five focus countries is the lack of funds. However, the point of departure differs between countries. The Polish and Slovak economies are relatively more economically and politically "advanced", and these countries currently represent safer opportunities to potential investors than, say, Russia, Ukraine or Romania do.
Poland and Slovakia are soon facing EU accession and have through the last decade profited from strong economic support from EU countries and international financial institutions, which in turn has created advantageous conditions for economic growth and restructuring of the country. While full and final integration with the EU Energy & Environmental Chapter is still pending, major steps towards liberalization of energy pricing have brought price levels closer to EU levels.
GE development has now proven to be economically feasible under present conditions in both Poland and Slovakia. This has attracted more interest from municipalities as well as from private investors to take part in geothermal projects in these countries. Where new drillings are needed, obtaining funds to finance the first drilling remains a critical barrier though, since this is always related to certain risks regarding the quantity and quality of the geothermal water.
In view of this, it is crucial for future geothermal development that some kind of indemnity system is defined and implemented in order to attract required private and/or national project capital. The fact that financial support from IFIs and bilateral donors to Poland is now decreasing, as a consequence of the country's increasing economic ability to act independently, further strengthens the importance of this issue.
The economies of both Russia, Romania and Ukraine experienced serious difficulties throughout the 1990's and the transition process in these countries has been and, to some extent, still is a difficult task. The main challenges regard economic recovery and establishing transparent rules and regulations, also within the environmental and energy sector. The countries have now passed a great deal of critical hurdles though, and are receiving increasing financial support from the EU and the international financial institutions.
Energy prices in the CEECs have increased substantially over the last few years. Nonetheless are price subsidies, in-transparent mechanisms for price calculation and neglect of negative environmental externalities still characteristic for energy pricing within all countries in question. This, in turn, is greatly favouring some (polluting) energy sources over renewable, environmentally friendly energy sources such as geothermal. A particular sensitive issue in Ukraine and Romania, and to some extent also in Poland, is related to coal price subsidies: Coal has a particular socioeconomic importance in these countries, which makes it exceedingly difficult for the governments to eliminate existing coal subsidies.
While Russia, Ukraine, Slovakia and Romania do not have any efficient national funding mechanism in operation to support geothermal project development, in Poland there are two funds: Eco Fund and National Fund for Environmental Protection. These two funds have both contributed with significant funding for the geothermal projects implemented in Poland so far. Moreover, the contributions from the Polish national funds have become important factors in attracting international funding for the projects. It is therefore considered a strong positive attribute for Poland to have these funds in operation.
Ukraine has an "ecological tax" on electricity consumption, where the tax revenue is dedicated to wind power development. In case GE will be able to demonstrate its profitability in Ukraine, this eco-tax modality may well be extended to include geothermal industry. Russia is well advanced in making operational and - together with the Energy Carbon Fund - institutionalise the concepts of joint implementation and carbon credits. As for committing to renewable energy, noteworthy allocations have been made in the federal budget in august 2001 for renewable energy initiatives in South European Russia.
While in Poland, loans for geothermal projects can be provided with subsidized interest rates, this is not the case in any of the other four focus countries. High interest rates and short repayment terms therefore significantly impede large scale project implementation in these countries. This is, again, directly related to the fact that geothermal investments in these countries are still considered a highly risky business, which requires a high "risk premium".
Another element to be considered is the variation in socioeconomic conditions between countries and regions. Even within the same country, socio-economic conditions may differ considerably and may present very distinctive contexts for implementation of geothermal projects. In Poland, for instance, it is obvious that the richer, southern part of the country represents a different GE outlook than other regions. The same picture was also seen in Russia and Ukraine, countries which both contain varied, dispersed regions with high geothermal potentials.
3.2.2 Institutional and Policy Potential
A general feature of all five focus countries is that responsibility for geothermal energy development is divided between different ministries and public institutions, thereby making it difficult to identify a coherent, national approach. Although different support programmes exist, mostly related to scientific work, it is also characteristic that none of the five focus countries have a clear and operational policy on renewable energy, including geothermal.
Even though comprehensive reforms have been undertaken within the energy sectors during the transition period, GE has to a large extent been neglected in this process. Most countries have developed medium and long term "strategies" for renewable energy, indicating goals and potentials. These strategies, however, do in general not include much description on how to achieve these goals and little concrete, crucial information on how to finance related activities and projects.
In order to pave the road for future geothermal development in these countries, it will therefore be necessary to complement these very general strategies with concrete, realistic and operational action plans with particular focus on GE. The development of such plans ("Business Plans") should address issues of institutional, financial and socio-economic character, all elements that are of utmost importance to project sustainability and impact. Such issues are often omitted from existing technical geothermal (feasibility) studies. The existence of comprehensive plans would be a major tool for future, sustainable advance within the geothermal field and would naturally integrate the need for stronger coordination of donor funding and loans.
Another important and related feature identified within the institutional context is the division of responsibility between the national (governmental) level and the regional/local level. The current tendency in all countries is to delegate more autonomy to decentralized levels, including issues of energy and environmental concern. However, these political intentions are generally not followed by sufficient increases in transfer of resources (human and/or economic) from the state. Moreover, it does seem to be the case particularly within the energy sector that the state wants to maintain influence and consequently only delegate limited responsibility and autonomy. These circumstances add to paint a picture of a very complex institutional environment within these CEECs. Geothermal energy development is certainly affected by this situation and it must therefore be considered a high priority to clarify and map these issues, including ownership rights, as part of a general approach to improve the institutional environment for geothermal investments.
In Romania, Ukraine and, to some extent, in Russia, GE projects still need to prove their profitability before it can be expected that significant national (private/public) capital will be allocated to such projects. This is mainly due to two factors: Firstly, due to scarce resources in the national budgets, not much funding is channelled to environmental/renewable energy purposes unless there is a very clear indication of "good business". Secondly, even though much reforming has already taken place within the political environments in these countries, real transparency and sound political decision making is still gradually being built up in some areas. This is the case for the energy sector, where the oil and gas business (import/export) traditionally has been considered an attractive business for some politically influential groups in these countries. It is therefore difficult to change the existing energy structures over night. Again, what will be of crucial importance to geothermal energy development in these countries is to show good demonstration projects governed by realistic business plans.
Although no particular geothermal legislation exists, laws on concession rights for underground resources are now applicable for geothermal resources in all countries. In Romania, the Mineral Law from 1997 represents a major progress in this field, since it opened up the possibility of obtaining license for up to 20 years. Earlier it was only one year and thereby a serious problem in relation to attracting private investment capital for geothermal projects. Ukraine has also recently modified their legislation regarding concession rights, which makes it more attractive for private companies to invest in GE projects.
From a Western perspective though, institutional shortcomings in the countries in question, like legal enforcement gabs, lack of information sharing and market institutions (enforceable contracting and property rights) represent an important barrier for large scale foreign investment. This does particularly apply for Russia, Ukraine and Romania. Joint ventures may in this context be an attractive way for prospective investors to overcome such institutional insufficiencies.
3.2.3 Technical Potential
Data material and significant research work on GE already exists in all focus countries. Moreover, relevant human resource capacity is available to support future geothermal development. Within all countries there are small scientific groups of geothermal specialists with several years of experience, but it is also characteristic that young geothermal scientists are currently being educated through special courses on the universities and practical work experience.
In Russia, Ukraine and Slovakia the scientific capacity and the centre for geothermal research are placed in the capitals, far from the most potential project sites. All three countries are characterized by having not only one, but several very promising geothermal regions. In Romania by contrast, the geothermal research centre is placed in the city of Oradea in the area, which is by far the most promising from a GE point of view. The geothermal research centre in Poland is in the Podhale region (Southern Poland), where the main GE project activities also are ongoing. The presence of geothermal scientific expertise and activities close to project sites is a positive factor in relation to project sustainability and local support.
In all five focus countries, several boreholes already exist, drilled in the past for gas and oil purposes. These wells may be used for GE purposes also, and one such project has successfully been implemented in Poland (Mszczonów, see case study, Volume II). More such projects building on existing drillings are anticipated in Poland and this concept could potentially also be developed further in Romania, Slovakia, Ukraine and Russia. However, in some areas it does seem to be more problematic to include existing wells for GE purposes, since many of them are not placed close to towns with heating networks. It is an important economic and logistic advantage if district heating networks already exist, but as the existing district heating infrastructure is often in very bad condition, requiring new investments, this matter is not straight-forward.
3.2.4 Environmental Potential
Even though some improvements have taken place with regard to environmental legislation and energy policy, as well as in CO2 emission levels, all five focus countries continue to have serious environmental problems directly related to the use of polluting energy sources.
The district heating sector emits a significant part of CO2 emissions, and the sector is stuck in a vicious circle: Despite price increases, which were meant to increase income for the owners, the existing networks are often in such poor condition that the owners (often municipalities) still do not have sufficient economic funds to improve the systems. Consequently, there is a tendency for frustrated consumers to disconnect from the district heating systems, since they are not getting better service, but are expected to pay more. Such disconnections lead to higher prices for the remaining costumers - thus the vicious circle. The increasing inefficiency of the heating systems is reflected in falling energy efficiency throughout the 1990's in all focus countries, except from Poland.
Geothermal heating plants represent an opportunity to break this vicious circle. GE is an attractive vehicle for improvements in the energy system, because each project brings with it opportunities to take a holistic or system view of the district heating system, in which the project is to be integrated. In this process, new technologies, insulation materials and standards can be introduced, potentially leading to systemic change, saving energy and increasing efficiency beyond the geothermal unit.
As a positive remark, it should be noted that all countries in question now require assessments of the environmental impact of geothermal projects, as well as for other energy projects, prior to project approval.
3.2.5 Overall Assessment
To sum up the comparative analysis, Table 3.2-1 gives an overview of the potentials for each of the five focus countries within different categories. It should be noted that each category contains a range of factors. Technical potential, for instance, includes geothermal resources as well as human capacity, and is as such a weighted mix of all these factors.
As it can be seen from Table 3.2-1, the technical potential is considered to be very high for all countries in this study. This is an important point of departure since the technical potential will be the first thing to look for in order to consider geothermal project implementation within the CEECs.
It should also be noted that the environmental potential is considered to be high in all countries, with some variation in scale between the countries. Based on the current situation and future outlook, Ukraine is considered to present a case of significant potential environmental benefits while Slovakia already has a much more energy efficient structure in place and therefore, at the aggregated level, presents less environmental potential.
The economic potential varies more between the countries and does in a certain degree reflect the countries' current capacity to present an attractive climate for geothermal project investments, including through national funding mechanisms and programmes.
The institutional/policy potential refers to central issues such as the degree to which countries are currently institutionally organized and structured to support national geothermal development. As it is the case with economic potential, the institutional/policy conditions also vary considerably, reflecting mostly different stages of the transition and EU approximation process.
Table 3.2-1
Geothermal Potentials
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Economic Potential |
Institutional/policy Potential |
Technical Potential |
Environmental Potential |
Poland |
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|
|
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Russia |
|
|
|
|
Romania |
|
|
|
|
Slovakia |
|
|
|
|
Ukrania |
|
|
|
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(
= Maximum
score; = Minimum score)
In conclusion, it shall be emphasized that all five countries represent interesting cases for geothermal project implementation. From a technical and environmental point of view, it is evident that all countries have clear potentials. The general lower scores on the economic and institutional/policy components should be interpreted in the way that the five countries, at this point of time, need additional support on these issues in order to make geothermal project development sustainable. Moreover, even though the four components have been treated separately here, they should in practice always be integrated in order to obtain a holistic judgment of project effectiveness, impact and sustainability.
Finally, an important factor, which is not integrated into the above assessment, is the demonstration effect of geothermal projects. In Poland and Slovakia, and to some extent in Russia, GE plants and their potentials are now well-known. Conversely, in countries such as Ukraine and Romania, the demonstration effect from GE projects is a crucial parameter that should be taken into consideration when assessing potential project proposals.