How to Plan for Financial Success of your Geothermal Power Plant

Geothermal energy is one of the renewable energy sources along with solar, wind, hydropower, and biogas. Geothermal energy is derived beneath the earth's surface, accumulating for thousands of years.

When planning to start a geothermal power plant, you should perform due diligence and conduct in-depth industry research and know the in and out of the operation.

Starting a geothermal plant is a risky venture, so you should start fully prepared and have enough resources since it will require a significant investment on your part.

We will discuss in this article what to know first before starting your project and plan for financial success.

1.  Be prepared that the exploration can be a hit or miss project

Exploration will require a lot of investment, but there is no assurance that there will be enough geothermal energy in the area where you are operating. You should be prepared for the risks if you engage in geothermal energy exploration. There might be geothermal energy but not enough for commercial production or dry up in the next few years.

2.  Requires large capital investment

The initial investment needed is for the exploration, drilling, land, power plant, machinery, and equipment. Do proper financial planning in computing the needed capital when starting the project. Then compute how many years you will recover your investment.

3.  How to Source Funds

It won't be easy to finance the project on your own. Or you want to share the risks with investors. After the financial feasibility analysis and the number make sense, you can present your financial plan to banks and investors. Give them assurance that you know what you are doing and are familiar with the overall operation of your business. Then can convince them to put funds into your business.

4.  Secure Power Purchase Agreement

A power purchase agreement (PPA) should be secured to get a stable price of the energy you will produce. Energy prices are volatile, and relying on market prices and selling in the open market will put your business at too many risks. Getting at least 20 years of PPA will help you secure the prices.

Also, the quality of the agreement will depend on the party you have a contract with. Do some background checks to know if your buyer has a good reputation in their industry. This way, you can ensure that you can trust that the other party will acknowledge the terms in your contract.

5.  The projection period should be within a reasonable time frame

The projection period should be between 20 to 30 years. Beyond that, it will be too risky. Projecting into the future is risky enough. How much more if you do it for the next 40 years and expect to recover your investment with that period.

It is best to make your projection under 40 years and make the numbers work so that you can recover your investment within that time.

6.  The Developer's business economics should be appropriately evaluated before exit

As a developer, you may sell the company after a few years. But you should first analyze the business economics and evaluate what year is the best timing to exit. The financial projections will show how much the return is for the project's duration until the exit.

Financial metrics such as the EV/EBITDA, Internal Rate of Return, Net Present Value, Payback Period, and the Cash-on-Cash Yield are some of the metrics you can evaluate before deciding to exit.

In a Nutshell:

Starting geothermal energy exploration and drilling is a risky venture. Due diligence is expected on your part, and study every possible event that may happen in the future and get prepared. You should evaluate the risks, the investment needed, know where to source funds, secure an agreement, and assess if the financial metrics and analysis show profitable results.

Using a financial model template in your financial planning is an option you can choose. This way, you can save time and resources compared to starting from scratch. eFinancialModels specifically prepared a financial model template for a geothermal project.