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Geothermal Energy Systems Assessment - A Strategic Assessment of Technical, Environmental, Institutional and Economic Potentials in Central and Eastern European Countries

8. Towards Strategic Development of Geothermal Energy Potentials in the CEECs

This report has so far identified barriers and risks, as well as opportunities and drivers, for promoting geothermal energy projects in CEECs. It has also identified the need to focus on characteristics, advantages and disadvantages of politics and funding sources, donors and investors, within the CEECs.

From the Retrospective Analysis (Chapter 6), and from the geothermal projects visited during this study, it has been clearly demonstrated that geothermal energy systems indeed represent an interesting and promising opportunity for future energy supply to Central and Eastern European countries and regions. A list of valuable lessons has been learned from the geothermal projects implemented so far. This experience has been mapped out through this study and represents an efficient guiding tool for future selection of geothermal projects for financing.

From the Prospective Analysis (Chapter 7) it was concluded, that all five DANCEE focus countries (Poland, Russia, Romania, Slovakia and Ukraine) have strong geothermal potentials. The technical and environmental potentials were deemed to be high in all countries in question. With respect to socioeconomic and institutional/policy issues, however, the point of departure differed more between countries and regions. Since these latter issues are of crucial importance in order to attract investors and demonstrate project sustainability, it is considered essential that future geothermal project implementation in the CEECs will be based on not only technical and financial parameters, but also on thorough analysis of socio-economic and institutional conditions of relevance to the project.

Inputs from Danish sector experts have been an important factor in achieving successful geothermal project results so far. Moreover, DEPA (DANCEE), and the Danish experts contracted, is well regarded in the CEECs as well as among local stakeholders and other international geothermal players. It is of paramount importance to acknowledge that the reason why Denmark and the Danish Ministry of Environment has a high international comparative advantage in achieving sustainable (environmental) results in the renewable energy sector, is the system character of the Danish energy related products. It is systemic in the sense that the institutional underpinning and context, is often exported along with the products, thus contributing to create positive institutional change and more conducive environments for renewable energy in the recipient countries. An example of this, is when a geothermal project introduces not only components that improve the insulation of the district piping network, but the institutional components of the project also help to create institutional improvements at regional and national level.

From this assessment, questions may be raised on how international donors, bilateral agencies and international finance organisations may best help to promote Geothermal Energy in the CEECs, in cooperation with the national and regional partners and institutions. A range of different international players are today involved in geothermal project activities in the CEECs and others might have both interest in and potential to get involved. In the past DEPA, through the DANCEE programme, has worked with international financial institutions as well as with Nordic and national lending institutions. Most of the support from the international society has however so far been given on an individual and uncoordinated basis, thus leaving a clear need for more coordination and cooperation within the field of geothermal energy development.

8.1 International Players

In the following, some of the main international players, currently involved in geothermal project activities in the CEECs, are presented briefly.

8.1.1 The European Investment Bank (EIB)

With a subscribed capital of EUR 100 billion, the European Union's major financing institution, the European Investment Bank, was able to sign loan signatures at EURO 127 billion in the EU from 1996 to 2000. About 60 per cent of these were issued for infrastructure projects, but the energy sector has now been added as eligible for loans in the future. The EIB has lately been active in identifying the characteristics and requirements of geothermal energy, with a view to make geothermal energy "bankable"¹².

While in the past the EIB has funded as much as 10 geothermal projects totalling 253 430 000 EURO, almost all of these projects have been located in one particular region of Italy.

8.1.2 EBRD

The environmental priorities of the Bank's financing in the energy sector includes a goal of minimizing atmospheric emissions and effluents by switching to less polluting fuels. Elaborating on this strategy and the related instruments, the Bank announces that it will seek to blend financing with grants, such as those available form the GEF, for projects that reduce greenhouse gas emissions. Further, the bank stress that direct lending and mobilization of co-financing with Export Credit Agencies and commercial banks through senior loans will "continue" to be the main component of the Bank's financing strategy for the energy sector. EBRD also has an Energy Operations Policy committing the bank to a strategic assessment of the potential for renewable energy utilization in its countries of operation ("COO").

With a USD 100 million loan to the Russian company "Geotherm", the EBRD currently supports one geothermal project in the CEECs. The project is located in Russia's far eastern region of Kamchatka. The same project is preparing a phase II, for which the Global Environment Facility (GEF) has granted funds for preparation of a business plan.

8.1.3 The World Bank Group

During the last two decades, the World Bank Group (IBRD, IDA, IFC, MIGA, ICSID) has supported 12 geothermal projects, totalling 1.4 billion EURO.

In the CEECs, the World Bank has so far provided co-financing (loans) for the geothermal projects in Zakopane (Podhale, Poland) and Klaipéda (Lithuania). Another Polish project (Stargard) is currently on the brink of receiving financial support from the World Bank.

The World Bank has expressed its satisfaction with the results obtained so far from the geothermal energy projects in the CEECs, implemented and cofunded with the DANCEE programme.

8.1.4 The Nordic Finance Group

The Nordic group of geothermal investors includes the Nordic Investment Bank (NIB), the Nordic Development Fund (NDF), the Nordic Environment Finance Corporation (NEFCO) and the Nordic Project Fund (NOPEF), all of which contributed to the development of geothermal projects in the past.

During the last decade the Nordic Investment Bank (NIB) has supported 4 geothermal projects, totalling 1.4 million EURO. The projects focused on direct use and had minor R&D components. One project was in China, another is in Slovakia (a loan in 1994 to the gas company SPP) and yet a new Slovakian project await a decision by NIB. In the same period, the Nordic Development Fund (NDF) has supported 2 geothermal projects, totalling 0.7 million EURO. These projects focused on "direct use", with minor R&D components. The Nordic Environment Finance Corporation (NEFCO) has supported 3 geothermal projects, focused on direct use, totalling 0.4 MEURO. Finally, the Nordic Project Fund (NOPEF) supported 6 geothermal projects, totalling 0.2 million EURO. These projects focused on "combined uses".

8.1.5 UNEP and GEF

GEF funding (grants) have so far been provided for the geothermal projects in Podhale and Klaipéda. Further geothermal projects in Poland are currently under consideration for GEF funding, including the Stargard and Kolo projects.

The UNEP-GEF Sustainable Alternatives Network (SAnet)¹³ is based on GEF's knowledge and communication engine to cultivate growing momentum in emerging markets for cleaner technologies. The operational goal of SAnet is to facilitate consideration of cleaner "win-win" technology alternatives and related market opportunities by executives, who make critical business and policy decisions.

Within the geothermal energy field, SAnet intends to bring together interested public and private players to discuss the best ways to level the playing field in specific markets and countries. SAnet wants to facilitate join market visions that can form the basis for market development coalitions.

8.1.6 The IEA (GAI)

Under the auspices of the International Energy Agency, the Geothermal Implementing Agreement (GIA) was recently been prolonged intil 2006. Initiated in 1997 and bringing together national programmes, the GIA presents an important framework for international cooperation in geothermal research.

Fostering collaboration on R&D and technologies and improving understanding of the benefits of GE are the main mandate of the GIA. The GIA is expected to develop a set of future "guidelines for market acceleration" addressing issues such as legislation, risk management, green power production credits and development of geothermal energy. To this end, GAI recently administered a survey covering a broad range of countries (from Albania to Yugoslavia) and issues, including national acceptance, energy policies, licensing, promotional issues educational, media and marketing issues¹⁴.

8.1.7 The European Union

Even though no EU directives today seems to aim explicitly at regulating or promoting geothermal energy development, the EU should be considered a main strategic player, as far as the future of geothermic energy in the CEECs is concerned. Several recent strategic documents from the EU focus on and stress the strategic importance of renewable energy sources (White Paper 1997 and Green Paper 1996). One strategic EU document deals explicitly with the potential of geothermal resources (Blue Book 1999).

The Commission of the European Communities has appointed the Italian Geothermal Association (and member of the European Geothermal Council EGEC), to issue a "European Geothermal Directory". The Directory will provide a comprehensive overview of companies, consultants and organisations supplying equipment or services for the geothermal sector, as well as plant operators. Research and cultural institutions and media involved in the field will also be included. Geographically, the directory will cover all European countries, both inside and outside the European Union, including part of the Russian Federation and Turkey. The directory will be a tool for disseminating names and scope of interested parties, with a view to facilitate contacts and favouring inter-relations between European entities.

8.2 DEPA as an International Player Promoting Geothermal Energy

Owing to the experiences from the DANCEE programme, The Danish Ministry of Environment is in a good position to continue and intensify its pivotal role as a promoter and disseminator of renewable energy sources like GE, in CEECs.

By commissioning a strategic study on geothermal energy, hosting an international workshop on the future of geothermal energy in the CEECs and finally preparing a strategic action plan, DEPA has contributed to achieving a high level of international coordination and collaboration in promoting geothermal energy in the CEECs.

The strategic study provides DEPA with an instrument by which to steer, govern and channel future investments and selection of geothermal projects. Consequently, future geothermal projects to be supported by DEPA through the DANCEE programme should be selected according to a set of economic, institutional, technical and environmental criteria (see box 6.7-1 - 6.7-4). These criteria will be based on prevailing political, institutional and regulatory conditions in the sense of policy initiatives and programmes to promote geothermal energy.

This study confirms that a new market is indeed developing, offering commercial opportunities for pioneer companies. This market, however, is by nature dependent on governments and international organizations cooperating to establish a stable and solid framework for private investments. The involvement of industrialised countries in the GE sector in CEECs is both necessary and desirable for this sector to develop its full potential.

Based on this experience, it is strongly recommended that future geothermal projects in the CEECs are not carried out in isolation, but integrated into "packages", where the geothermal components are complemented both on institutional, policy and financial issues, as well as at the technical level, with other renewable energy technologies including energy saving technologies.

8.3 Towards Concerted Action - Actions To Be Taken by DEPA

Through this study it has been documented that a range of issues will need to be addressed in order to create conditions for a real "take off" for future development of geothermal energy potentials in the CEECs. Core challenges include the following issues:

Strengthening of mechanisms and fora for international collaboration on support to geothermal energy development in the CEECs.

Ensuring that future GE demonstration projects in the CEECs will be based on not only technical but also thorough economic, institutional and policy analysis in order to ensure sustainability of these project activities.

Creation of attractive economic conditions and climate for GE investments in the CEECs, - also for smaller projects - , for national as well as for potential international investors.

Better linking and coordination of geothermal projects with other energy and environmentally related projects within the CEEC regions.

Improvement of institutional and regulatory support mechanisms within the CEECs for GE project development.

Stronger involvement and commitment from CEECs in GE project development, involving both national and regional levels.

Improvement of promotion, advocacy and information systems for geothermal project development in, and between, the CEECs.

Based on the analysis and experience provided by this study, a list of concrete and strategic DEPA action proposals has been developed, taking into consideration comparative advantages and the complementary role of the DANCEE programme. The initiatives proposed should be considered with a view to common action involving international as well as national key players related to geothermal energy development in the CEECs.

It is recommended that DEPA, through the DANCEE programme, will:

Take active part in, and collaborate more closely with, relevant international (European) fora promoting geothermal energy development. For instance, does the GIA represent a good opportunity for Denmark to be on the forefront with, and influence the future development within the field of geothermal energy.

Consider taking a supportive role in the creation of an insurance system for GE in all CEECs. Whether on a commercial basis, - in the form of a revolving fund or a consortium model - , overcoming the barrier of "first step risk" remains a key to expansion of the geothermal sector. Creating an institution to cope with this risk is paramount in creating a take-off situation for GE.

Contribute to the creation of European consortia and joint ventures, by giving priority to projects including co-financing from European industrial partners, e.g. through the use of (advance/reimbursable) project identification and pre-feasibility studies.

Seek closer collaboration between bilateral donors and international finance institutions (including Nordic and Danish lending institutions) providing low interest loans for GE, based on thorough analysis of the comparative advantages and complementary roles of the different agencies involved in financing and supporting development of geothermal energy.

Coordinate geothermal project activities more thoroughly with other relevant (Danish) energy/environmental projects/programmes in the CEEC in question. This should be done both in order to achieve maximal environmental/energy effects from the (Danish) funds, but also in order to involve other potential (Danish) investors and funds, which may have an interest within the geothermal field.

In policy dialogues with partner countries, promote the idea of creating a favourable investment climate for GE through tax reductions for renewable energy products, tax incentives for GE investments, soft loans and financial incentives for end users of RE/GE sources.

Concentrate future attention more on management, institutional, policy and financial issues in relation to geothermal project implementation. Neglect of these issues have in the past created unsustainable situations, even for projects with significant technical potentials.

Consider how decentralizing and regional development could be better linked to geothermal projects, since geothermal potentials often are more of regional than of national concern in the CEECs. This could create the basis for large scale geothermal development at regional levels through development of comprehensive and coherent regional Business Plans, addressing relevant issues of technical, institutional/political, environmental as well as of financial character.

Support development of mechanisms that could ensure transfer of "best practices" from geothermal development activities in one CEEC to other countries in the region. Best practice could be either project specific or related to national/regional policy issues. It could also be in the form of project visits and workshops, seminars etc.

Intend to link implementation of geothermal projects closely to solving other energy related problems in the CEEC regions, such as energy efficiency, optimisation etc. Of particular importance is the fact that geothermal plants will not be dimensioned in accordance with current heat consumption, but based on realistic expectations of future heat demand.

Continue technical and financial support for GE demonstration projects in countries where geothermal potentials are significant, but undeveloped. Project implementation, however, should be based on comprehensive analysis of not only technical but also economic, institutional and policy issues in order to minimize risks and ensure sustainability of project activities.

Consider how to create efficient funding mechanisms to support implementation of smaller geothermal investments projects. This could be in the shape of institutional support to regional authorities in regions with significant geothermal potentials and where multiple geothermal project implementation are feasible.

Support the CEECs in creating adequate institutional and regulatory infrastructure for geothermal project development (national level) and in implementing plans and projects (regional and local level).

Support creation of a Central and Eastern European GEOHeat information centre, located on a geothermal heated campus. Such a centre has been in operation for 25 years in the US, providing information, data, publications, tours, lectures, training and user guides and could indeed be a useful platform for further promotion of GE in the CEECs.

Support advocacy and media presentations in the CEECs on GE in general and its potential for replacing coal and other hydrocarbons in particular.

Support an annual update of "Best Practice" to be distributed and used worldwide to improve conditions and the platform for geothermal project implementation. (The best practice from this GESA study could serve as a point of departure for such updates.)

In general, ensure that the enthusiasm and optimism for the future of geothermal energy development that this study has awaken in the CEECs as with international geothermal players, will be followed up by appropriate initiatives and action.

It should be emphasized that although the above mentioned action proposals focus on DEPAs complementary role and advantages within the international context, DEPA should not await actions to be taken by IFIs and/or other donors, but should be willing to act on their own and take action to support the future development of geothermal energy in the CEECs.

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