By Fitch Solutions
- We expect that the total construction and development cost of geothermal power plants will remain high compared to that of other non-hydroelectric renewable sources, underpinned by equipment-intensive procedures and geographical limitations.
- Geothermal capacity growth has shifted from regions of North America and Western Europe to Asia, presenting more attractive investment opportunities within Asian markets with geothermal resources.
- As the global geothermal power sector expands over the coming years, we expect upward pressures on geothermal installation costs driven by grid developments and regulations.
We expect that the total construction and development cost of geothermal power plants will remain high over the coming years, underpinned by equipment-intensive procedures. Installation of geothermal power plants requires a significant amount of equipment and investment due to the nature of obtaining geothermal resources for power generation. This includes field preparation and well constructions, which require heavy drilling equipment that other non-hydropower renewables sectors do not. Additionally, since the geothermal power sector is significantly smaller compared to other non-hydropower renewables types (14GW in 2021, compared to 827GW and 836GW of wind and solar respectively), technological developments to improve the efficiency and cost of construction have been limited. Capital expenditure for geothermal power plants also plays a significant contribution to the plant’s levelised cost of electricity (LCOE), as evident from the similar trends both exhibit in the chart below. This is largely due to the nature of a geothermal power plant’s operation, which is not subject to changes in fuel feedstock costs for electricity generation.
Over the past decade, we have witnessed the cost associated with the installation of geothermal power plants increase, from USD2,620 per kW in 2010 to USD4,468 per kW in 2020. According to data provided by the International Renewable Energy Agency, geothermal is the second most expensive renewables type by installation cost, closely behind concentrated solar power’s 4,581 USD per kW in 2020. In line with this trend, the LCOE of geothermal power has also increased from USD0.049 per kWh to USD0.071. This is all amid relatively lower costs of solar photovoltaics and wind power, while prices for biomass power generation face future downward pressures.
Geothermal capacity growth has shifted from regions of North America and Western Europe (NAWE) to Asia, presenting more attractive investment opportunities within Asian markets with geothermal resources. Over the coming ten years, NAWE will experience a gradual slowdown in geothermal capacity additions as we expect that investments will be crowded out by cheaper wind and solar projects. On the other hand, the Asia region still has significant untapped geothermal potential, with key markets being Indonesia, the Philippines and New Zealand, all of which lie on the Pacific Ring of Fire (the world’s most active geothermal resource region). As reflected in our Key Projects Database, Indonesia dominates the global geothermal power project pipeline with 10 out of 41 projects registered, totalling 1.2GW in capacity and all announced to come online before 2026. Additionally, as efforts toward climate neutrality in Asia ramp up through the implementation of renewables over the coming years, we expect that geothermal power will be used to provide renewable power for communities in markets with significant potential.
As the global geothermal power sector expands over the coming years, we expect upward pressures on geothermal installation costs driven by grid developments and regulations. Though emerging and developing markets tend to have lower associated labour costs, the construction of new power lines pose a risk to making geothermal plants costlier. Taking Indonesia for example, the market has a significant potential for geothermal power projects which the government estimates to be about 24GW. However, these spots are scattered over the many islands and near mountainous and forested areas. This makes a grid connection to geothermal spots more expensive. This will add to installation costs as geothermal power sources that have not been capitalised on yet are located away from cities. Coupled with developmental costs for the electricity grid, stricter environmental regulations following drilling, extraction and emission of fumes from gases underground will place further upward pressures on the cost for geothermal power plants.
The article has been sourced from Fitch Solutions and can be read here