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How a Potential Geothermal Project Becomes Reality: The Enex Way
Thorbjörg Saemundsdóttir and Lilja Tryggvadóttir
Enex ehf
Keywords
Project development, screening, feasibility study, business
plan, project process, evaluation methods, risk assessment,
classing system, rating system, roles & responsibility chart,
fact sheet, financing
Abstract
Geothermal project developers each have their own method
of screening project leads and developing projects. This can often
be confusing for project owners that present leads to developers
at distinct stages of project realization. Many screening methods
and development steps are known and commonly used in the field.
Others are particular to specific developers and are here referred to
as in-house methods. Often, in-house variations on more common
business methods are used as well. Furthermore, software used
for development can have distinct functions and can be developed
in-house or be commercially available or a combination of the
two. This paper presents an attempt to describe the development
process and its main steps with the aim of improving the com-
munication between developers and project owners and speeding
the process to a successful project.
Enex, a geothermal developer, is interested in speeding up
the development of geothermal projects in the future and utilize
for that task known business procedures mixed with old truths
from the geothermal field. The development process described in
this article has evolved within Enex for three years and is under
constant review.
1 Introduction
Every day Enex receives a number of tips about geothermal
resources as well as requests to assess potential geothermal areas
all over the world. Only a small fraction of these requests gets
more attention than a few minutes of review before they are given
1
Pudyastuti et al., 2005: 1
2
AACE International, 2005: 2
121
GRC Transactions, Vol. 32, 2008
a polite, negative response. Of the portion that gets more than a
few minutes attention, a very small fraction becomes an actual
project. The development of geothermal projects is expensive so
they have to be chosen with great care.
The paper presents a characterization of the steps that a po-
tential project goes through from the initial contact of a project
owner to full financing of the project and start of the execution
phase. Section 2 provides an overview of the process, section 3
describes the analytical stages of the process, section 4 discusses
the financing of the project and finally section 5 draws conclusions
from the description of the process.
2 Process Overview
There are several stages a prospect goes through before proj-
ect execution starts. Between the stages are milestones where
decisions have to be made. The process is designed according to
conventional methods of evaluating projects in terms of payback,
internal rate of return (IRR) and net present value (NPV)1 com-
bined with a cost estimate classification system2 which describes
estimate accuracy on each stage and sorts them into different
classes. Enex has defined 4 classes appropriate for the Enex
projects. The required detail in cost data for each class is specified
as well as the expected effort to obtain an estimate.
The process with stages and decision points is shown in Figure
1, overleaf.
2.1 Class Characteristics
When evaluating potential projects uncertainty is reduced
as more information is gathered. At the very first stages the ac-
curacy of key figures is low since the most important factors for
the profitability of the potential project are usually uncertain.
Furthermore, there are both internal and external conditions that
will change in the process of developing the project since the time
for developing a geothermal project is somewhere between 3-7
years. In this time legislations, policies, cost and financing pos-
Saemundsdóttir and Tryggvadóttir

sibilities can change drastically and therefore the first • Internal data base – Enex has built up a rich data base
evaluation is an indication at most. While the project in our ongoing work to map the feasible geothermal
is developed further and the goal comes closer the ac- resources in the world.
Original contact

curacy increases accordingly. • Know how – Experts feelings and opinions.

Accuracy on different stages is defined in the
4 classes mentioned in the previous section: Pre-evaluation Usage of the tools on each stage is described further
Initial screening
ABC / class 1
in each stage chapter.
Class 1 – Initial Screening
• Preparation: 5 minutes – 6 hours
• Estimate Accuracy: ±50% Go / No Go
3 The Process
Go: Secure
3.1 Initial Contact
Class 2 – Pre- Feasibility Market

• Preparation: 8-100 hours Initial contact can be established in many different

• Estimate Accuracy: ±30%
Class 3 – Feasibility Study
• Preparation magnitude: Thousands of man
hours. Consultants hired. 100 hours assigned
to writing of report.
• Estimate Accuracy: Main economic variables
should be well known.
Class 4 – Business Plan Feasibility Study
• Preparation: 100-500 hours
• Estimate Accuracy: Minimal uncertainty
should be present and main risk factors well
documented and known.
Go: Secure Land
2.2 Tools Used at Each Stage
Different tools are used at each stage to facilitate the
decision-making-process at each milestone and as the
potential project progresses on its way to becoming a
real life project more tools and techniques are used to
make sure the right decisions are being made. In Enex
these tools include:
• “Gullveig” – A feasibility model for evaluating
geothermal potential developed by Enex in Micro-
soft Excel.
• EES – Engineering Equation Solver used to develop
power plant code and used to calculate possible plant
sizes, plant components, etc.
• @RISK – Software from Palisade, used to calculate
risk and possible outcomes of projects.
• WWW – the internet is used to look up information
about specific geological areas, laws and regulations
in different countries, market information etc. This Lessons Learned
information is on later stages confirmed with local
consultancies, agencies, governmental institutions
etc. as applies. Figure 1.
Fig ure 0 P rojec t F low
Project Flow.
• Collaborative software – such as 4Projects or other
document management system to share information across
organizations and countries.
• Rules of thumbs – developed by Enex for different aspects
of the projects.
Pre-feasibility ways. Enex receives a lot of requests for cooperation,
development and building of power plants through the
study
class 2
Enex webpage or e-mail but the quality of the requests
is very diverse. Most never get any more attention than
the time it takes to write a polite rejection letter still all
Go / No Go
Go: Secure leads that come in are rated with an ABC system devel-
oped by Enex.
Concession
Leads also come in the form of tenders or through
contact with people met on congresses, international
class 3 agencies or through colleagues in the geothermal field.
The best leads come from trusted colleagues or organi-
zations connected to Enex by some means. They tend
to be the clearest, most informative and easiest to prove
Go / No Go whether they are worth spending time on investigating
further.
The ABC system rates project according to the fol-
lowing criteria:
Business Plan
A – Rating
class 4
• Information readily available
• Favorable market
• Consulting work
• Budgetary quote & bid
Financing
• Project has LOI, MOU, Contracts
or similar binding agreement
Confirm Business Plan
Go / No Go
B – Rating
Go: Confirm • Information missing but the project
Resource looks interesting and requires more
information for further analysis
C – Rating
Excecution of
Project • Uninteresting leads with low enthalpy, low tempera-
tures, unfavorable market, untrustworthy third party
inquiry or is located outside of Enex defined market
areas.
A rated projects call for basic calculations from an
analyst. B rated projects call for more information gather-
ing before they are rated again. C rated projects are rejected
straight away. In the first decision point a decision has to
be made whether to reject the project or keep going.
3.2 Pre-Feasibility Study
Projects that have been classified as A projects get their first
and very basic evaluation in “Gullveig”, a feasibility model
developed by Enex in Excel, to evaluate geothermal projects.

122
 Saemundsdóttir and Tryggvadóttir

Gullveig uses rules of thumbs to produce the first results and gives
a rough estimation whether the potential is worth more investiga- Request for Feasibility Study

tion or not. Additionally the location of the project is looked up Investigate rules and

in the internal database of Enex to get a rough feeling of market regulations for the project
area. Ensure rights to the
and political situations of the project. The results are normally desired concession, land
rights, National park?
presented in a memo or a short report which can be considered a Political situation. Tax and
depreciation etc. Co-owners,
pre-feasibility study and so the potential project has reached its Project Environment
Market info

second milestone. The pre-feasibility report can be from a 3 page

memo to a 30 page report depending on its purpose.
At the second decision point the potential of the project is
discussed and the results from the first run through Gullveig
reviewed within the organization and different experts give their Contact geological partners
in iceland and the project
opinion on whether or not to proceed with the project. Finally a area if applicable Geological Research

decision is made by the management based on the outcome of the

first screening whether or not to move forward to the next phase; Geological Data

that is the making of a feasibility study.

Template

3.3 Feasibility Study

Concept Design
The definition of a feasibility study is that it is an analysis
of the potential project that should serve to assist the manage-
ment to decide whether to proceed with a particular project or Design Data Template

not. The final product of this stage is the feasibility study report
which should contain information about the possible outcomes
of the project, financial and operational information as well as a
Writing Feasibility Study
Report

proposed project plan.3

As aforementioned the feasibility study stage has a class 3
rating and preparation is estimated in magnitude of thousands of
man hours. Time to write the report is assumed to take up to 100
hours. It is vital before entering into work of this magnitude that it Feasibility Report

is clear why this work is being done, who

is asking for the plan and last but not least, W – Why
who will pay the bill in the end. In order
to make this clear to everyone involved a W – Who
contract is made, which in fact serves as a
Delivery and presentation
of Feasibility Study

project charter as well. The contract is a W – What

simple document, no longer than a single W – Where
page, where the 5 Wʼs listed in Figure
2 play a big role. First the question of W – When
why should a feasibility study be made?
Secondly, who is asking for the feasibil- Figure 2. The 5 W’s.
ity study and will therefore bear the cost.
Thirdly what is the scope of the project, what kind of project is
this? Fourth, where is the project located and where should the
feasibility report be delivered? Fifth, when should the report be
delivered and what is the timeframe of the project?
This contract might seem unnecessary but it is clear that if the
questions listed by the contract can not be answered and a com-
mon understanding on these details reached, so everyone agrees
on it, there are no grounds for spending thousands of expert and
specialist hours on making a study that might not have the support
it needs to become more than a piece of paper.
The feasibility study stage is present in all types of businesses
and is well known and documented. The Enex way is quite
conventional4 and is best described by Figure 3 but because of
the enormous scope of geothermal projects and this amount of
Figure 3. The process of a feasibility study.
information produced on this stage and the following stages, Enex
has also developed an in-house procedure to keep track of all the
activity in the feasibility study stage.
In the beginning of the Feasibility Study stage a coordinator is
assigned to the study and different roles and responsibilities within
the project are defined as shown in Figure 4, overleaf. This phase
produces a lot of information and data which is vital to keep track
of and keep accessible for all the team members included in this
stage and for that purpose a structured archiving system is set up.
Online tools like 4projects Extranet have proved helpful when the
feasibility study work is done both by internal and external staff
but if the bulk work is done by internal Enex staff the archiving
system might be located on the company’s intranet.
Geologists are assigned to the project and pre-existing geo-
logical information is reviewed or new information gathered and
researched, depending on the knowledge status of the area in
question. If there are no pre-existing wells in the area which can

3
Urkiaha et al. 2006: 264
4
Hofstrand et al. 2006: 2

123
Saemundsdóttir and Tryggvadóttir

latest information. For

Finance Legal Risk PM Site / the purpose of keep-
ing everyone informed
ROLES Coordinator Geology Concept Analyst Market matters Supply Analyst Buyer
RESPONSIBILITIES [NN] [NN] [NN] [NN] [NN] [NN] [NN] [NN] [NN]
Archiving / 4Projects R A A A A A A A I Enex designed “fact
Time Schedule for BP
Cost for the BP
R
R
I I I I I I I
I
sheets” as shown in
Outside resources Table 1. Purpose of the
management R
fact sheets is to sum up
all the vital information
Contract for Deliverable R A Abbreviations
Review R A A A A A A A A: Active
Report R A A A A A A A I: Informed
R: Responsible into simple tables, mak-
ing it more accessible
Executive Summary R BP: Business Plan
1. Introduction R
2. Geoscience R and transparent.
The chapters
3. Design R Initials
NN: nomen
4. Finances R A A A
4.1 Market R A
nominandum
throughout a typical
4.2 Investment R
Enex feasibility study
reflect the development
5. Risk R
6. Project Management &
Structure R process, first the geol-
ogy is described, sec-
7. Discussion &/or
Conclusion R
References & Lists R A A A A A A A ondly the environment
Figure 4. Typical roles & responsibility chart for an Enex feasibility study. of the project, thirdly the
concept design, fourthly
give information about temperature, flow and chemistry it may the supply, estimate of investment /CAPEX and finally the profit-
be necessary on this stage to drill a test well to prove the resource ability calculations and financial information.
and gather basic information from. Each chapter of the study needs information from the previous
The project environment is studied extensively. The market section, plus inputs from a variety of specialists so the information
and prices are investigated as well as rules, regulations and per- needs to flow between chapters and specialists. The “fact sheets”
mits needed for the specific area. Rights and power purchase are just simple tables that need to be filled out at the end of each
agreements are studied and local partners investigated if that is chapter and if information is changed. If new data is discovered or
appropriate. a different strategy becomes more interesting, the whole chapter is
It is impossible to make a precise estimate of a resource when changed accordingly. Most importantly the fact sheets are changed
wells haven’t been drilled and it is not yet known what will come which means that and the people working on next section do not
out of the ground, however with expert estimates the guess will need to read through the whole text every time something changes,
probably be a good approximation of the expected reality. In some in search for the values needed but simply view the fact sheets for
cases the feasibility study will contain more than one scenario the desired stage and easily follow revisions.
which is reflected through the design, feasibility calculations and The final product of the feasibility study stage is the feasibil-
financial information. ity report which should contain all the vital information for the
First design, or the concept design, of the plant is made by the project management team to be able to understand whether the
design team in EES and the cost of the project estimated, both by project is a viable, feasible and achievable.
rules of thumbs and by contacting suppliers and manufacturers. The third and probably the most important decision point is
Then the project is run through Gullveig (the Enex profitability the go/no go decision making by the PM team after the feasibility
model for geothermal projects) for the second time, calculating study report has been delivered and presented.
feasibility of the project and allowing the basic project plan to
be outlined. 3.4 Business Plan
Finally, financial information is displayed, estimated profit- If the project was deemed feasible at the third decision
ability and financing options discussed. point the project has reached the business plan stage. The
As mentioned before this stage produces an enormous business plan is a continuance of the feasibility study. The
amount of information and during this phase information is PM team reaches a conclusion on what strategy is suitable
constantly being produced or acquired, so as the study work for the specific project and the business plan should cover
progresses it becomes difficult for all team members to follow the that strategy only. The business plan should be more concise
than the feasibility study yet contain
Table 1. Overview of the fact sheets, all relevant information regarding the
Fact sheet Regarding Responsible Application
project and no unnecessary details. It
should serve as a roadmap from idea
A Geosciences Geologist Used for Concept & FS to execution of the project, foreseeing
B Project Environment Market director/affiliate Used for Concept & FS obstacles during execution phase and
C Concept Concept Design (R&D) Used for Supply, Profitability Calc. & FS plan preventive measures to minimize
D Supply Project management Used for Profitability Calc & FS
impact of unforeseen events.
Essentially the same team works on
E Financing Finance dep./CFO Used for Profitability Calc & FS the business plan as worked on the feasi-

124

bility study but some adjustments might be made e.g. if it is clear
that the project in question needs specific expertise.
This stage is the last stage before financing and actual execu-
tion, so it is vital to eliminate as much of uncertainties as possible
at this stage. All information has to be thoroughly researched and
confirmed, as well as all ownership, agreements, tariffs, taxes,
legal and politic issues have to be cleared.
When the resource has been confirmed the design team makes
a detailed design of the plant in question. When all parameters
have been calculated the investment plan and final profitability
estimates can be made. Results of the profitability estimates are
represented by internal rate of return (IRR), net present value
(NPV) and payback period as well as financial ratios and con-
ventional balance sheets and income statements.
Project risk is assessed in three ways:
1. Zürich hazard analysis .5
Main aspects of the projects are identified such as geo-
scientific, technical, legal, political, environmental, etc.
The likelihood of events is estimated as well as the impact
they may have on the project if they happen and they are
rated accordingly and classified into risk categories. The
classified risk categories are reviewed and mitigations
suggested in order to minimize either the likelihood or
the effect of the events, giving each event a new rate and
hopefully a lower risk class.
2. Sensitivity analysis.
Main factors of the project, such as temperature, flow,
investment cost etc. are scrutinized in order to estimate
which factors influence the IRR of the project the most.
3. Financial risk assessed in @RISK.
For realizing better the probability of IRR of the project
and of equity, 5000 different outcomes are simulated in
risk assessment software called @RISK. Input distribu-
tion functions are defined for uncertain parameters and
random variables with those distribution functions formed
with Monte Carlo random variables. The results from the
simulations then form a distribution of the possible IRR
outcomes which indicate the possible financial results of
the project.
The business plan report is the final product of the analytical
preparation of the project before actual execution and gives the
PM team the baseline for their final decision on whether to go
through with the project or not. The business plan is also the main
document presented to investors and creditors in the financing
stage and should be written according to standard practice to be
readily accessible for investors.
4 Financing
In arranging or engineering financing for a sizeable project
the sources can be many. In Enex’ experience, great care must
be taken in tailoring the financial structure in a manner that best
fits the projects’ goals, characteristics, local specifics and the
5
Zurich Insurance Company, 1998
125
Saemundsdóttir and Tryggvadóttir
owners’ expectations. Several ways and combination of ways
are available:
• Grants from state, municipality or funds (EU development
funds, WB controlled funds or Foreign aid funds)
• Own capital – shares
• Subordinate loans
• Export import loans, equipment supplier loans
• Bank loans (often syndicated-financing loans)
The following is an example showing type of financing struc-
ture that Enex has found to suit well financing needs of geothermal
heating projects in developing countries:
Pre-implementation stage Own capital or grant money
Implementation Turnkey with state or municipal guarantee
Post implementation Grants and own capital
International financing
Financing from local banks
Bank loans with state or municipal guarantees
Bank loans
What separates financing a geothermal project from any other
projects are the specific characteristics of geothermal projects
i.e. high up front investment cost, high initial risk which is then
outweighed with long project life time, low operational cost as
well as with high quality risk mitigation.
Financing can be used as insurance when including interna-
tional funds, banks or aids it brings a political leverage to the proj-
ect. For example the district heating in Galanta, Slovakia would
have benefited by equity from an international fund or a politically
strong national entity to help with invoicing the heat sales. In that
way powerful investors can be their own risk mitigation by being
involved in the community in more than one way.
Geothermal projects are dependant as other energy projects
upon the energy market controlled by policies, incentives and
power purchase agreements, these all affect the project and its’
financing possibilities and needs. The focus on renewable energy
with feed in tariff, tax incentives and green certificates makes the
cash flow of the projects vary for each region, e.g. in Germany
the government has chosen to encourage production of renewable
energy by legislation that dictates that green power plants get paid
a higher price for their energy than actual market price. Germany
also encourages growth in the production of renewable energy by
offering bonus to plants that are built and start producing energy
within certain timeframes etc. USA on the other hand supports
renewable energy through their tax laws. Geothermal power plants
are awarded tax credits for a certain period of time while they are
growing legs. Generally developers need to follow changes in
the energy markets that they are entering to predict the future of
their investment.
The ultimate risk however in geothermal projects lies within
the resource. This can be mitigated through expert views, studies
and insurances. The insurances typically insure the first wells
while establishing the initial, most critical, knowledge about the
Saemundsdóttir and Tryggvadóttir
resource. Some investors are also willing to take the risk with the
developer, mostly due to high insurance fees.
When financing has been secured the actual project execution
can commence.
5 Conclusion/Summary
Geothermal projects may not be the largest most costly proj-
ects carried out; however their complexity calls for a thorough
preparation phase before execution. The geothermal resource
requests both time for exploration and risk mitigation which af-
fects the whole preparation phase. The complexity and amount of
data involved calls for a disciplined structure and well organized
process so it will not complicate and obstruct the development
of the project. The financing of geothermal projects, as other
projects, requires data to be presented for investors in a readily
accessible way according to standard practice and if the analytical
process is thorough and well executed it should have diminished
126
uncertainties and risks related to the project which in turn should
facilitate financing and execution of the project.
6 References
AACE International, 2005. Cost estimate classification system – as applied
in engineering, procurement and construction for the process industries.
TCM Framework: 7.3 - Cost Estimating and Budgeting. (http://www.
aacei.org/technical/rps/18r-97.pdf)
Hofstrand, D., Holz-Clause, M, 2006. What is a Feasibility Study? Ag
Marketing Resource Center, Iowa State University. (http://www.exten-
sion.iastate.edu/AGDM/wholefarm/pdf/c5-65.pdf)
Pudyastuti, K., Danar, A. & Prak, G., 2005. Financing Strategy for Geo-
thermal Based Energy Projects. World Geothermal Congress. Interna-
tional Geothermal Association. Antalya, Turkey, 24-29 April 2005.
Urkiaga, A., De las Fuentes, L. et al.; 2006. Methodologies for feasibility
studies related to wastewater reclamation and reuse projects. Desalina-
tion, Volume 187, Issues 1-3, 5 February 2006, Pages 263-269.
Zurich Insurance Company, Risk engineering, 1998. The Zurich Hazard
Analysis. Risk Topics, Issue 8, December 1998.