| Title | Assessing Geothermal Tariffs in the Face of Uncertainty, a Probabilistic Approach |
|---|---|
| Authors | Paul QUINLIVAN, Alex BATTEN, Martin WIBOWO, Stephen HINCHLIFFE, Dirgo RAHAYU, Indria DORIA, Anang YAHMADI, Hendra Yu Tonsa TONDANG |
| Year | 2015 |
| Conference | World Geothermal Congress |
| Keywords | geothermal tariff probabilistic uncertainty cost feasibility investment return |
| Abstract | The majority of geothermal projects worldwide produce electricity for sale. Depending on the local electricity market, the price may be determined dynamically by the market, or pre-determined by contract (eg via a Power Purchase Agreement (PPA)). The feasibility of developing a new geothermal power project depends on the financial return that would result from the investment. This return is affected by many input variables: capital and operational costs and their timing; the fiscal environment applicable to the project income and cost streams; the electricity tariff; the proportion of debt; the cost of debt, and; whether the analysis is based on 100% equity or on the equity actually invested. Whereas the Debt:Equity variables can be determined relatively precisely, assessments of project capital costs and their timing are affected by uncertainties regarding the number and cost of wells and the cost of field development (infrastructure, pipelines, power plant, transmission line). If the project is an additional unit at an existing development, these uncertainties are much lower than if the project is a greenfield development. This is particularly so where exploration drilling has not been undertaken to prove a geothermal resource exists and to confirm the fluid conditions and size of the reservoir. Where the parties to a PPA are willing to negotiate an equitable tariff, a Monte Carlo simulation of the tariff is a useful tool. Such a tool can be used to generate a probabilistic spread of tariffs which meets specific investment criteria (e.g. a given net present value or a target internal rate of return). As a project progresses from exploration to development, uncertainties (and thus risks) in the input variables can be expected to reduce. Correspondingly there will be a reduction in the range of tariffs which meets the investment criteria within a certain probability band (e.g. in the range 10 to 90% probability of exceedance). This paper describes such an approach and presents some results for hypothetical projects. The results demonstrate how the funding regime has a strong impact on the tariff required to meet a specified internal rate of return (IRR). |