How to Prepare a Business Plan for a Geothermal Power Plant?
Before establishing a geothermal power plant, a detailed business plan should be prepared first. This way, you will have the whole picture of the project and study its every aspect. A detailed business plan should consider the market, technical, management, and financial aspect of the business.
We will discuss in this article the significant factors when preparing a business plan for a geothermal power plant.
1. Identifying the Target Market
Usually, the target market for electricity is utility companies that distribute the energy to the end-users. However, some private investors and companies can also be considered. Knowing and establishing your target market will help you better position your business and get a better agreement and price for electricity production.
2. Projecting Energy Prices
It is crucial to secure a Power Purchase Agreement (PPA) in any energy power plant. If not, you will be vulnerable to market prices fluctuations. PPA should be at least 20 years to secure the selling prices into the future.
3. Ensuring that there are existing Transmission Lines
It is essential to consider that there are already available transmission lines available. That’s why it should be established first when environmental scanning during the pre-operation stage. Talk to the local utility company about how it will work and what approval is needed.
4. Manpower to Perform the Drilling Process
You can either have your drilling team or hire a drilling company to do the job for you. You won’t need to invest much in the machinery and equipment by hiring a drilling company. They are probably experts in their field, especially if they have already existed for many years.
5. Estimating the Operating Expenses
Operating expenses include salaries & wages, professional fees, repairs & maintenance, security, legal fees, etc. Maintenance of your facilities, machinery, and equipment is better performed through preventive maintenance to ensure that expenses are minimal since issues are detected immediately.
6. Projecting Timeline of Operation
The first year of operation will be for exploration. The drillings will be in the first few years, and then the production will start once the drillings are almost at full capacity. The timeline should be aligned with your cash flow projection.
7. Initial Investment Needed to Start the Project
The initial investment needed will be land acquisition, building construction, and acquisition of machinery and equipment. The working capital will be needed during the first few years when there is still no cash inflow. Accurate cash flow projection is crucial to ensure that there is enough cash to run the day-to-day operation.
8. Considering Funding Options
Starting a geothermal power plant will require a significant investment on your part. You may need to source funds from banks and investors to set up and start your geothermal energy project. A financial plan, a representation in numbers of your business plan, will be helpful when presenting to banks. It will help you convince banks and investors to lend or invest in your company if they see the business potentials through the financial ratios and metrics.
9. Calculating the Financial Ratios and Metrics
You can now prepare the financial statements to derive the financial analysis and metrics to guide your business decisions upon considering all other aspects.
The financial ratios you can utilize are the leverage, profitability, efficiency, current, and growth ratios. The financial ratios helped interpret the financial statements and compared them to industry standards.
The financial metrics include Net Present Value, Internal Rate of Return, Payback Period, and Cash-on-Cash Yield. These metrics evaluate whether to pursue the project or not.
Financial planning is better prepared using a financial model template for geothermal energy. It is equipped with all the metrics needed when evaluating a geothermal power plant project.
Before starting a geothermal power plant project, you should be well-prepared and executed due diligence. A geothermal energy project is a risky venture, which should be accurately planned if you want to succeed. Preparing a business plan will help you evaluate all the aspects of the project and run through different business scenarios to assess every possible risk.
