Executive Summary

Geothermal energy holds significant promise for the development of low-carbon energy systems. One of the lowest cost sources of renewable electricity, it also has the ability to meet baseload power demand and backstop fluctuating supply from other renewable sources. Geothermal could be a vital component of low carbon electricity systems – where resources allow.

In many countries, early stage exploration and development risks are the main barriers preventing geothermal energy from making a bigger contribution to meeting energy demand. Public finance can help to address these barriers.

Globally, the costs and risks associated with the exploration and development phases of geothermal projects make finding early-stages financing a challenge. Costs related to exploration can reach up to 15% of the overall capital cost of the project, success rates for wells drilled in this phase are estimated at 50-59% (IFC, 2013b), and it takes 2-3 years on average to confirm that a geothermal resource is suitable for generating electricity. Despite this concentration of risk in the exploration phase, 90% of multilateral public finance at the global level has focused on the later stages of the geothermal projects by offering concessional finance to build power plants once the major resource risks have been reduced. Public resources could be more effective when targeting support at geothermal’s early-stage development risks and improving developers’ access to finance.

Turkey is a major growth market for geothermal but could benefit from more private sector involvement in exploration to harness the technology’s full potential.

In recent years, installed capacity of geothermal power plants grew faster in Turkey than anywhere else in the world. The sector went from 30MW in 2008 to 405MW at the end of 2014 – a compound annual growth rate of 54% compared to 4.5% globally – and is well on the way of fulfilling the Turkish government’s deployment targets of 1GW by 2023.

Turkey’s geothermal potential is far higher than its current policy target. Harnessing its full geothermal potential – an estimated 4.5GW of installed capacity – would allow the country to meet 8% of overall demand in 2030 rather than the 1.3% currently envisaged by the government.

Despite this growth, Turkey faces similar issues to other countries seeking to develop geothermal – specifically the ability of the private sector to take on the high risks associated with the exploration and development of geothermal resources. Until 2013, 11 out of the 12 projects developed in Turkey were on sites where the government had already demonstrated that the resource was suitable for generating electricity and then put it out for tender.

While this public-private development model has worked up to now, Turkey is now pushing for more private investment in the energy sector and the government has reduced drilling activity for geothermal exploration. More ambitious policy targets and a transition to a more private-sector led development model could help the sector realize its potential and would fit well with the country’s current policy priorities.

Private sector exploration and public finance in the Gümüşköy Geothermal Power Plant

This case study analyses the Gümüsköy Geothermal Power Plant (GPP) to help policymakers and donors understand which financing instruments and public private financing packages can enable fast and cost-effective deployment of geothermal energy. It is one of a series of studies carried out on behalf of the Climate Investment Funds (CIF) looking at the role of public finance in driving geothermal deployment.

The Gümüşköy GPP is the first case where the private sector financed exploration of an unproven field in Turkey. The 13.2MW project developed by BM Holding, a Turkish infrastructure company, was commissioned in 2013. The company demonstrated significant risk appetite in undertaking early-stage exploration. BM Holding invested up to USD 12m (24% of the total investment costs) in exploration and development prior to financial close, when debt financing of up to USD 34.5m (70% of the total costs) was secured from Yapikredi, a local commercial bank. Yapikredi sourced USD 24.9m of this debt from the Medium Size Sustainable Energy Finance Facility (MidSEFF), an on-lending facility managed by the European Bank for Reconstruction and Development (EBRD). The Government of Turkey’s provision of a ten-year feed-in tariff ensured the project was financially viable.


The above figure indicates how key stakeholders allowed the project to be successfully implemented.

Key findings for policymakers

The project provides insights for policy makers related to cost-effectiveness and providing an adequate enabling environment for the private sector.

  • The government feed-in tariff (FiT) ensured that the return expectations were met, even with the inclusion of exploration costs. The 10.5 USD¢/ kWh FiT provides certainty over a ten-year period that revenues will be 28% higher than current market rates and allows the project to achieve payback of all investment costs within eight years. Expected returns of 16% on the project equity and 12% on the project investment as a whole are similar to other geothermal projects in Turkey where returns range from 11-14%. Without the feed-in tariff, the internal rate of return (IRR) on equity would drop to 10%, which is very likely below the return expectations of the developer. The FiT in Turkey has a smart design: it is limited to 10 years and is denominated in USD, reducing currency risks for private investors and lenders.
  • This private-led project development model can deliver power at similar costs to public-private models in Turkey. The costs of an exploration program – including surveying, tests and exploration drilling of an unproven field as well as the acquisition of new equipment and in-house knowledge capacity – compare well with the traditional development model of winning tender contracts for proven fields from the government. Gümüşköy GPP is 12-17% cheaper than comparable geothermal plants globally and other power projects in Turkey (see figure ES2). With loans at current market rates, the lifetime cost of power would be 10.6 USD¢ / kWh, close to the current FiT rate.
  • A private-led project development model is likely to deliver more cost savings in the future if accompanied by appropriate policy measures and development of industry capacity. For now, coal power in Turkey remains 12% cheaper if the costs of emitting carbon and the health impacts are omitted. However, with experience gained in this project, the developer expects to halve the time and costs spent on exploration and drilling in the future. Through three subsidiaries, the developer has shared lessons and knowledge through the contracting of drilling equipment and consulting on 17 new projects in Turkey. A dedicated geothermal services market has begun to emerge. Policy measures to scale up the sector and reduce development costs further include improved datasharing and centralized permitting procedures.


Key findings for public finance providers
  • Access to long-term, low-cost debt through the EBRD-funded Mid-size Sustainable Energy Finance Facility (MidSEFF) facilitated the project by decreasing its financing costs. Yapikredi was able to pass on the lower borrowing costs of the EBRD credit line to BM Holding boosting return (IRR) on equity from 15% to 16%. Receiving the finance at this point allowed the project developer to refinance the USD 12 million in equity it had invested, build the first 6MW power plant, and carry out drilling for the second 6MW plant while applying the lessons it had learnt.
  • Channeling long-term, low-cost debt through a local bank proved to be an effective way of building the capacity of a local private lender in geothermal project finance. EBRD’s provision of the credit line through the MidSEFF facility ensured the loan was economically attractive for Yapikredi and drove the Turkish bank to lend to a geothermal project for the first time. Participation in this and other projects is building the local bank’s capacity to assess the environmental and technical risk of geothermal and other sustainable energy projects.
  • In markets where local banks already finance construction of geothermal power plants, public finance is more beneficial if it addresses early-stage risks. Similarly to other projects in Turkey, Gümüşköy GPP was able to secure debt finance once the resource was proven as feasible for electricity generation. Early exploration and development depended on the project developer’s ability and willingness to assume resource and drilling risks through a USD12m outlay. This private development model may not be replicable for many project developers as they may not have the resources and risk appetite to spend approximately 24% of total investment costs in equity financing in the exploration and development phases before reaching financial close. In countries like Turkey where local banks have signaled willingness to fund construction stages of geothermal power plants, public finance should target exploration and drilling stages directly to bridge these funding gaps. Multilateral Development Banks (MDBs) are exploring several models of providing contingent grants or soft loans for exploration costs, as well as insurance and guarantee mechanisms (EBRD 2014).

With the right tools, public finance providers and national policymakers can address the financing challenges of geothermal scale-up in Turkey but they also need to meet challenges of managing carbon emissions. Many of Turkey’s existing geothermal plants are situated on reservoirs where the carbon content of non-condensable gases (NCGs) in the geothermal fluids are high. Without capture and sequestration, the potential greenhouse gas emissions impact of a scale up of the sector would be significant (Aksoy et al 2015). Public finance providers can help address this by mandating certain technology choices and facilitating development of offshoot markets for carbon as a byproduct. Through the use of heat exchangers, binary systems have the potential to re-inject geothermal fluids directly, thereby minimizing the possibility of carbon leakage. In addition, as in Gümüşköy GPP, carbon may be captured and produced as a byproduct for use in greenhouses and industrial sites. If these non-financial issues can be addressed, and policy and public finance support is appropriate, then the Turkish geothermal sector can reach its potential.


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