Policy Tools to Support Geothermal Resource Development

Policy Tools to Support Geothermal Resource Development

Geothermal energy –  that is, the heat energy generated and stored in the earth – has great potential as a relatively clean energy source. It can be found in shallow ground, or in water and rock located many kilometres below the surface. Depending upon the nature of the particular resource, geothermal resources can be used in geo-exchange systems, direct heat systems, or power plant developments.

Geothermal resources can play an important role in the transition to a low carbon energy future. For example, It has been estimated that installing 1,000 heat generating systems across Alberta, each drawing 100 degree Celsius from deep wells in the deep Canadian sedimentary basin, could save about 30 megatonnes of carbon dioxide (MT CO₂) per year by replacing gas heating with geothermal heating (by way of comparison, the oil sands industry generates about 34.7 MT CO₂ per year) (see Simon Weides, Exploration of geothermal resources in the Alberta Basin). Remote communities in particular could benefit from geothermal resource development which would reduce dependency on diesel fuel transports (see Simon Weides).

Why do we need policy tools?

While a comprehensive regulatory scheme is an essential foundation for the development of geothermal energy, that is not the only piece of the puzzle. Other jurisdictions – including Germany, Iceland, and France – have demonstrated success with using policy instruments to support their geothermal industries and it is recommended that the same be done in Alberta. Policy support is essential as a means to reduce development risks and alleviate market pressures on a nascent industry.

The initial exploratory stages of geothermal resource development require significant up-front capital, are associated with high drilling costs, and are subject to the risk of not hitting a productive resource (see Crewson-Thompson). Some of these risks may be off-set to some extent by using existing oil and gas data (see Leitch-Switzer) and repurposing existing oil and gas wells (see Bankes). Despite these potential cost reductions, geothermal resource development in Alberta is at such early stages that significant financial risk still exists. This, in turn, can make it difficult to obtain private financing and investment (see Crewson-Thompson). It is essential that policy tools designed to off-set or alleviate the inherent financial risks be developed to encourage geothermal energy development (see Speer et al.).

What policy tools can be used?

There are a variety of policy tools which can be used to support the emerging geothermal industry including:

• royalty breaks/holidays;
• financial support programs such as cost-share programs, public insurance, and early-stage fiscal incentives;
• market incentives for renewable energy production including feed-in-tariffs and renewable portfolio standards; and
• policies to address data gaps.

The Geothermal Resources Development Act, once proclaimed and in force, will amend the Mines and Minerals Act to allow the government to impose royalties on geothermal resources (but only for “deep geothermal” resources which are those found below the baseline of groundwater protection). While we agree that the government should have the authority to impose royalties on geothermal resources, in order to encourage development in the early stages of the geothermal industry, it is likely appropriate to not impose a royalty. Royalties may become appropriate in later stages of industry development.

In order to reduce the risks associated with geothermal resource exploration and development, financial support programs in various configurations have been used in other jurisdictions. For example, in the United States cost-share programs were used to offset drilling costs (i.e. the government shouldered some of the drilling costs in exchange for data packages from the geothermal operator).  In Finland, public insurance programs have provided up-front loans for drilling which revert to non-repayable grants in the event of a non-productive resource.  Other jurisdictions have provided early-stage fiscal incentives such as easing imports on machinery and equipment, reduced license fees and tax credits/exemptions.

Some policy tools are specifically focused on using geothermal resources to fuel power power plants (only one application of geothermal resources).  Market incentives – feed-in-tariffs (FIT) and renewable portfolio standards (RPS) programs –  have been successfully used in several jurisdictions to encourage the development of renewable energy sources. These programs encourage the development of geothermal electrical generation by securing a market and suitable price for the renewable energy generated.

FIT programs involve setting a guaranteed price for sellers of renewable energy and guaranteeing access to the electrical grid. There are a myriad of components to be considered in designing a FIT program which make the difference between a successful and unsuccessful program. For instance, a key component is setting either a fixed price payment independent of market price or a premium price payment which adds a premium to the market price. Other considerations include eligibility for participation in the program, the role of the utility, the length of power purchase agreements, and the imposition of caps on project size/program total capacity.

RPS programs involve setting enforceable renewable energy targets. The targets set by a RPS program are mandatory and failure to meet a target will result in a penalty. Typically, the targets are set as annual production targets which are to be met by electricity suppliers (i.e. utilities).  However, this may vary with the precise RPS program design.  RPS programs should also include mechanisms to ensure that customers do not have to bear excessive cost increases as a result of the program.

In terms of policies to address data gaps, other jurisdictions have taken a variety of approaches to increase public accessibility of geothermal data. In some jurisdictions, such as the US and Sweden, participation in financial support programs is predicated on public release of data obtained. In other jurisdictions, all exploration and production data becomes public record after a set number of years (for example, after 5 to 10 years in the Netherlands).

What should we do in Alberta?

Jurisdictions that have been successful in developing robust geothermal industries have used a combination of policy tools. Developing the precise mix for Alberta requires stakeholder consultation, economic analysis and clear priorities. We do have a few recommendations as a starting point:

• The Renewable Electricity Act should be maintained as it establishes a legislated target for developing electrical capacity from renewable resources. The Act could be enhanced by placing specific requirements on individual utilities, as well as enabling a market for trading RPS credits.
• Policies and programs must be put into place in order to actually achieve the target established by the Renewable Electricity Act. These policies and programs could be similar to or a recommencement of the Renewable Electricity Program previously used in Alberta, or could be a FIT program. Although these programs do not address the upfront risk associated with developing a geothermal resource, it can ensure a market for geothermal-based electrical production.
• Aside from establishing robust RPS and FIT programs, development of geothermal resources likely requires financial incentives. These can be:
  • Direct government support such as grants and cost sharing.
  • Loans which are backed by the government or are directly provided by government to geothermal developers.
  • Publicly funded insurance which absorbs the economic setbacks associated with drilling failures (typically by insuring drilling costs for the short-term risk that a geothermal resource is not to be commercially viable).
  • Early stage fiscal incentives such as easing import duties on machinery and equipment; reduced licence fees; and tax incentives.
• Consider opportunities to increase access to exploration data, including making data public after a prescribed time. At the very least, participation in a provincial scheme such as cost-shared drilling or risk insurance should be conditional upon a requirement to publicly release data.

Although some of these policy tools are designed to transfer risk to the public purse, there are other social and environmental objectives to be considered (such as increased renewable energy sources). The appropriate level of risk (that is, the level of support) will be a matter of assessing the various policy goals of the program.

Interested in more information about policy support for geothermal resource development?

Geothermal Energy Module 3 Policy Support Mechanisms for Geothermal Energy Development in Alberta by Brenda Heelan Powell

Published: October 26th, 2020

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