The impact of policy measures on profitability and risk in geothermal energy investments

Abstract

The development of geothermal energy is below the European National Renewable Energy Action Plans' anticipated trajectory. High upfront investment costs and multiple sources of uncertainty result in a major investment risk, hampering the mobilization of required capital. To evaluate different policy measures, we developed a geological economic Monte Carlo simulation model that integrates both market and geological uncertainty and a firms' option to abandon the geothermal project development after a first drilling is made. If the objective is to reduce the abandonment rate of geothermal projects, a heat premium comes forward as the most cost-efficient policy instrument. However, the risk that a project turns out unprofitable is not reduced and windfall profits do occur. In contrast, a recoverable loan reduces both the investment risk and the abandonment rate. An insurance scheme targets the investment risk as well. However, it also increases the abandonment rate and appears as the least cost-efficient policy measure. Considering the different policy performance indicators, a tax rebate is never preferred. Our results demonstrate the intricacies of choosing the correct policy measure, and the need to support such policy decisions with quantitative analyses.