The discovery risk

The biggest obstacle to investment in geothermal energy production so far has been the discovery risk: will the borehole bring sufficient hot water to the surface – or indeed any at all – and therefore will the project be an economic success? After all, a deep geothermal borehole costs between €3m and €5m depending on its depth and its size.

Until a borehole has been sunk and completed, however, it remains unclear whether and how much geothermal water can be extracted. To date, investors have had to bear this enormous risk alone, with the result that many projects have remained on the drawing board. The Risk-Hedging Working Party of the project called Geothermal Power Generation – Networking and Evaluation of Activities in the Area of Geothermal Power Generation set up by the Federal Ministry for the Environment in Berlin has discussed various possible ways of covering the financial risks associated with geothermal exploratory boreholes.

The unanimous opinion is that, without such cover, only a small number of geothermal projects are likely to be started in the foreseeable future. According to the experts, however, only the discovery risk should be covered, this being defined by the parameters of mass flow, temperature, and sustainability or duration of use. They say that geological and technical risks should be borne by the project and drilling companies themselves. Insurance would therefore have to cover the loss arising if the anticipated success is not achieved – in other words if, despite stimulation measures, a borehole brings such poor results that extracting the geothermal water would not be worthwhile.

The maximum loss amount would then be the drilling costs plus the cost of stimulation measures. In order to determine the loss if a borehole were only a partial success, it would be necessary to have a forecast showing what revenue could have been expected if it had been a total success. In order to calculate and/or check a forecast and the actual revenue, it would be necessary to create an independent expert body.

Not much data available to calculate risks

As only a few geothermal energy projects have been launched to date, there is not much data available, making it difficult for insurers to calculate the risks. The possibility of a fund being set up by the government has therefore also been discussed. Such a fund would be privatised as soon as the number of projects has increased and there is more data at hand. But even such a government-sponsored insurance fund would still have to be able to calculate risks reliably. In this respect, it would help to have a publicly accessible pool of information including geological and hydraulic data, or to establish geographical or geological regions that would allow a better assessment of risks.

The Unterhaching geothermal energy project also features another model: a pilot underwriting project, within the framework of which Munich Re has arranged Europe’s first private-sector discovery insurance for a deep geothermal borehole. Extensive technical and specialist know-how was required to develop a tailor-made insurance concept for this new type of risk in conjunction with Munich Re’s specialists, including geologists and drilling engineers, and with the support of independent expert reports. For this individual project, it was necessary to bring together a great deal of information in order to make an essentially incalculable risk calculable.

The existence of a few geothermal projects in the region meant that certain data and experience was already available, making it possible to apply probability methods in the development of this insurance solution. The extent to which this risk is considered insurable in the future will depend upon how successful this unique experiment turns out to be.

This new chapter in the promotion of renewable energies in Germany will mean that investors will no longer have to bear the risk on their own. Discovery insurance is a pilot project, and how it performs will decide how risks are apportioned between investors and other interested parties in the future. At the end of the day, this pilot project will also determine how quickly the production of environmentally friendly geothermal power establishes itself.

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