An estimated USD54.3 mill. from the Clean Technology Fund (both from the investment plan and from the Dedicated Private Sector Program, DPSP) will be channeled to a Facility designed to lower risks of geothermal exploration and encourage investment. With the contribution of the Mexican Government and the IDB, an estimated conservative number of 9 projects could be financed.
Although Mexico has the world’s fourth largest installed capacity for geothermal power generation, the country currently exploits only 2 percent of this capacity due to perceived high risks, financial barriers and regulatory uncertainty, making the exploration phase an important barrier for development.
The project. The Geothermal Financing and Risk Transfer Facility which will be financed by a US$34.3 million CTF loan, is designed to leverage an estimated $115.6 million in additional resources from other public and private investors. The program intends to scale up private investment in geothermal power generation projects by making available financial mechanisms tailored to meet the specific needs of each project’s stage of development, and targeted at reducing Value at Risk for developers and removing the main barrier to investment
CTF IP resources in the form of a harder concessional loan are requested to be blended with IDB/NAFIN resources for financing at all stages of the development of the projects. In the construction and operation phase (only once sufficiency and stability of the resource have been proven), only standard financing tools (ordinary, subordinate or concessional debt, but also contingent finance and guarantees) will be used. Loans will also be approved for projects in earlier stages, with the support of CTF contingent recovery grant resources and GoM budgetary resources.
CTF DPSP resources are requested in the form of a contingent recovery grant to support the deployment of risk mitigation instruments specifically designed to maximize leverage and to back the financing of the projects, making them bankable and diminishing the VAR, namely
- Loans convertible to grants will be used for projects in exploration and test drilling phases, where specific incremental risks (i.e. resource risks) are highest
- Grants to partially cover insurance and insured loan premiums and/or rates will be used in the field development, production and re-injection drilling phases
The CTF-financed fund will also support the production of technical studies and reports associated with resource exploration that are required by potential investors. Other studies will contribute to the development of a national geothermal potential map, geologic modeling, design of research programs, and development of sustainability standards for the construction, operation, and decommissioning of geothermal plants.
Further studies will be carried out on regulatory reforms needed to improve the investment climate for geothermal projects. For example, there is presently no regulatory mechanism that defines a “project area,” which is needed to prevent other potential developers from obtaining permission to exploit the same area and thus jeopardize the investment. Similarly, the National Water Commission lacks a regulatory framework for the exploitation of geothermal resources.
The IDB will seek additional resources for geothermal development from bilateral and multilateral agencies, international donors, and private sources. The Bank will also use its conditional line of credit mechanism to extend additional financing and provide technical assistance resources for the necessary studies. As specific geothermal projects progress, and the risk decreases, private ordinary loans will provide long‐term funding.
Project results. Scaling up investment in the development of Mexico’s geothermal energy potential will generate significant environmental and economic benefits. By the year 2024, the estimated new geothermal capacity installed of 300 MWwill result in the reduction of GHG emissions by an estimated 1.1millin tons of CO2 per year.
Geothermal generation will also reduce dependence on imported fossil fuels, which will help to ensure stability in the country’s energy supply, provide energy needed by private industry with high export potential and high added value, and spur new investments, employment, and regional development.
In terms of economic competitiveness, geothermal power is the most efficient renewable energy supply besides large-scale hydropower, with an estimated 5 percent investment cost reduction for each doubling in installed capacity.
High-priority for renewable energy. Mexico ranks fifth in the world in petroleum consumption for electricity generation and seventh in the case of natural gas. The Mexican government is promoting the development of renewable energy to diversify the country’s energy sources and reduce environmental impacts.
Geothermal energy is recognized as a reliable and sustainable supply of energy to support the country’s development. Mexico’s geothermal reserves are estimated at nearly 10 GW; probable reserves (i.e., reserves that are more than 50 percent likely to be commercially recoverable with currently available technology) are estimated at 3.2 GW.