Targeted Financial Instruments Can Accelerate Geothermal Project Financing

High development costs and uncertainty during the early development phase remain persistent financing bottlenecks for geothermal projects. Invest-NL, Energie Beheer Nederland (EBN) and Geothermie Nederland therefore commissioned Fakton Energy to investigate which financial instruments could help reduce these challenges. The joint study outlines four instruments that can make risks more manageable, enabling private financiers to participate at an earlier stage.

Developers of geothermal projects are required to make substantial investments early in the development process, while the actual heat production potential of a geothermal well only becomes clear after drilling. Financiers generally become involved only after a successful well has been proven, permits have been granted and sufficient certainty exists regarding heat offtake. As a result, developers carry the full project risk for a prolonged period.

In addition, developers’ equity remains tied up in a limited number of projects for a long time, reducing their ability to initiate new developments.
Improved bankability is essential, particularly because geothermal energy is important for building a sustainable and resilient energy system. As a local and renewable heat source, geothermal energy can contribute to reducing dependence on fossil fuel imports and international energy and commodities markets. Geothermal heat also provides a continuous supply of energy, independent of sunshine, wind or weather conditions. This makes geothermal energy an important component of the future sustainable heat mix.

Four barriers are slowing down development

The joint analysis shows that high development costs, uncertainty during the early project phase and limited financing options are slowing the scale-up of geothermal energy in the Netherlands.
Interviews with developers, financiers, public institutions and international experts identified four dominant barriers:

• insufficiently effective instruments to mitigate geological risk and heat offtake risk;
• high capital requirements during the development phase;
• uncertainty regarding heat demand and market uptake;
• complex and lengthy permitting procedures.

The risk-return balance during the development phase is currently misaligned. Developers are required to invest significant capital, while private financiers are often only able to participate at a later stage. Targeted financial instruments can help bridge this gap.

Using public funding to leverage private investment

A key conclusion of the analysis is that public funding is most effective when it is used to reduce specific risks and mobilise private capital. This allows public resources to be deployed efficiently to address financing challenges and advance promising projects.
Successful examples in France and Germany demonstrate that geothermal energy can scale up significantly when different financial instruments are combined.
Invest-NL, EBN and Geothermie Nederland advocate a coherent package of financial instruments and policy measures to address the financing bottleneck structurally. The foundation is a revised RNES scheme, modelled on successful French or German approaches, supplemented by measures covering the development, drilling and construction phases.
Examples include:

• a partial CAPEX subsidy for the drilling and construction phases;
• expansion of the Heat Networks Guarantee Scheme to include the geothermal source, or the creation of a public-private fund for development loans;
• targeted reduction of geological risks in promising areas through the play-opener principle;
• pooling projects to spread development risks through a Green Deal structure.

In addition, scaling up geothermal energy will require better subsurface data, stronger collaboration across the heat value chain and more predictable permitting procedures.

A broader perspective

The report demonstrates how public and private stakeholders can work together to overcome a common financing challenge. By making development risks more manageable, private financiers can participate earlier, enabling promising projects to move forward more quickly.
The analysis therefore provides a positive outlook for the further development of geothermal energy, as well as for other innovative energy projects that contribute to a competitive, sustainable and less import-dependent energy system.