U.K. May Boost Subsidy on ‘Unexploited’ Geothermal Power Plants

The U.K. may boost subsidies for geothermal energy, predicting that an industry that now has a single well nationwide can supply as much as 10 percent of consumer electricity needs.

Government officials have started reviewing aid programs for renewable energy plants, including those whose turbines draw heat from at least 2 miles below the Earth’s surface, said Greg Barker, the U.K. energy and climate change minister.

Prime Minister David Cameron’s administration, seeking 200 billion ($325 billion) in investment to replace aged power stations in the next decade, also has pledged to reduce fossil fuels emissions by a third and to double the portion of electricity coming from renewable sources by 2020. That’s forcing officials to look beyond the wind, nuclear power and natural gas industries for low-emissions energy.

“Deep geothermal energy is an exciting renewable energy source with considerable unexploited potential,” Barker said in an e-mailed response to questions made to his office.

GDF Suez (GSZ) operates the U.K.’s only deep geothermal well, providing heat to buildings in Southampton along the south coast. EGS Energy Ltd. and Geothermal Engineering Ltd. have won planning approval for generation projects in the region. Further incentives may be needed to draw bigger investors such as Israel’s Ormat Industries (ORMT) Inc., Chevron Corp. (CVX) and Enel Green Power SpA (EGPW), which are tapping bigger geothermal projects in the U.S., Asia and Europe, executives said.

‘Non-Existent’

“The geothermal industry in the U.K. is non-existent at the moment,” said Padraig Hanly, chief executive GT Energy Ltd., an Irish project developer. “There is no sufficient financial support mechanism in place to drive it forward.”

U.K. government officials are currently examining support levels for small and large-scale clean-energy generation under its feed-in-tariff and Renewable Obligation Certificate systems. The tariffs guarantee above-market prices for power from clean and low-carbon sources. The ROCs, as they’re known, must be bought by utilities that don’t generate enough renewable energy.

The government also is considering how to stimulate renewable-heat projects, which moderate temperatures in buildings. It may support geothermal technologies as part of that effort.

The Department of Energy and Climate Change is due to announce incentives for renewable heat next month. The first decisions from the review of subsidies under the feed-in-tariff may come by July, with new prices coming into force in April 2012 under a program announced Feb. 7. For subsidies under the ROC system, results may be published in the second half of the year, with new rates active from April 2013.

‘Hotspot’

Barker said the southwest of the U.K. including Devon and Cornwall is a “hotspot” for geothermal energy, with the potential to supply 2 percent of the nation’s electricity. His department estimates the technology eventually could generate 10 percent of power nationally. Hanly of GT Energy says it could supply 30 percent of heating needs.

Geothermal wells, which bore 2 miles or more into pools underground of steam or hot water as much as 300 degrees Celsius (572 degrees Fahrenheit), provide around-the-clock power. The supply, once tapped, is more reliable than intermittent wind and solar energy. Heat pumps work at more moderate temperatures closer to the surface to heat and cool buildings.

Bigger Markets

Worldwide, geothermal wells with a capacity to produce about 10.8 gigawatts of power are operating, and 13.2 gigawatts more are planned, Bloomberg New Energy Finance estimates. The largest development pipelines are in the most developed markets, which are the U.S., the Philippines and Indonesia.

Britain has the expertise to drill wells, completing 191 for oil and gas companies last year according to the lobby group Oil & Gas U.K. Ltd. To date, geothermal developers have shied away from Britain because of uncertainty about planning rules and government incentives, said Nomura Code Securities Ltd., a London-based investment bank considering funds for the industry.

“These issues have been a key concern for investors when discussing potential financing,” said Ken Rumph, equity research analyst at Nomura.

Developers want higher subsidies and insulation from drilling risks before they pour money into geothermal projects. Hanly said he’s received indications from Barker, the government minister, that officials may be willing to increase the number of ROCs that can be earned by geothermal energy projects with the capacity to generate more than 5 megawatts.

More ROCs

“We spoke with Minister Greg Barker, and in my opinion he might give us four ROCs,” which is double the current level, Hanly said. “What could be a way forward is to put a cap on the amount of capacity deployed to decrease financial exposure to the Department of Energy and Climate Change.”

Doubling the subsidy level through ROCs would result in geothermal electricity earning about 195 pounds a megawatt-hour, up from the current 98 pounds. Tidal energy developers also are pushing for an increase in the number of ROCs they earn to five from two.

The energy department obtained 200 million pounds for funding low-carbon technologies from the Treasury in October. It indicated 60 million pounds will be spent on offshore wind port development, leaving 140 million pounds that has yet to be allocated.

In the past two years, the government has invested 5 million pounds in the industry. It slashed grant funding from its Deep Geothermal Challenge Fund to 1.1 million pounds from 2 million pounds for 2010. Marine energy by comparison received 54.6 million pounds in the past 18 months. A single geothermal well costs about 10 million pounds, according to Ryan Law, chief executive of Geothermal Engineering.

Daldrup & Soehne AG (4DS), a German drilling company, is seeking at least 300 euros ($420) a megawatt-hour to prospect for geothermal electricity in Britain.

“If there is a friendly setting of industrial partners and of the government we will be keen to invest in the U.K.,” said Dietmar Brockhaus, a spokesman from Daldrup.

To contact the reporter responsible for this story: Louise Downing in London at Ldowning4@bloomberg.net

To contact the editor responsible for this story: Reed Landberg in London at landberg@bloomberg.net

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