Geothermal Models
Executive Summary
Key Takeaways
- ✓ A geothermal project carries genuine exploration and drilling risk ahead of financial close, since the resource's actual capacity and quality are not fully confirmed until wells are drilled and tested, unlike a solar or wind resource assessment based on established measurement techniques.
- ✓ Reservoir decline — a decline in the geothermal resource's heat and pressure output over time — is distinct from equipment degradation and should be modelled as its own explicit schedule, sourced from reservoir engineering assessment rather than a generic equipment degradation rate.
- ✓ Capital expenditure for a geothermal project is typically front-loaded and high relative to its output, driven substantially by exploration and drilling costs incurred before resource confirmation, and should be phased explicitly against the project's actual development timeline.
- ✓ Make-up wells — additional wells drilled during the operating life to offset reservoir pressure decline and sustain output — should be modelled as an explicit capital cost and timing assumption where the project's development plan anticipates them.
- ✓ Because of the phased risk profile, financing structures for geothermal projects commonly differ by phase, with exploration and drilling financed differently from confirmed-resource construction and operation, and the model should reflect this phased financing structure where applicable.
Objective¶
This guide covers the phased risk profile specific to geothermal financial models, within Energy Financial Modelling, building on Power Project Financial Model Structure.
Exploration and Drilling Risk¶
Unlike solar or wind, whose resource is confirmed through established measurement techniques ahead of financial close, a geothermal resource's actual capacity, temperature, and pressure are not fully confirmed until exploratory and production wells are drilled and tested. This means genuine resource uncertainty persists later into project development than for most other renewable technologies, and the model should represent this exploration and drilling phase as its own distinct risk period, with capital committed before the resource is fully confirmed, rather than assuming resource certainty from the outset as would be appropriate for a solar or wind project.
Reservoir Decline, Distinct from Equipment Degradation¶
Reservoir decline — a reduction in the geothermal resource's heat and pressure output over time, driven by the physical depletion of the underground reservoir through extraction — is a resource-level phenomenon, entirely distinct from equipment degradation, which reflects wear in the above-ground turbine and plant equipment. These should be modelled as two separate, explicit schedules: reservoir decline sourced from reservoir engineering assessment, and equipment degradation sourced from manufacturer specification, since conflating the two obscures which is actually driving an output shortfall.
Front-Loaded Capital Expenditure¶
Because exploration and drilling costs represent a substantial share of total project capital cost and are incurred before the resource is fully confirmed, geothermal capital expenditure is typically more front-loaded relative to confirmed output than a solar or wind project's, where capital is committed against an already-assessed resource. The model should phase capital expenditure explicitly against the project's actual development timeline, reflecting the sequence of exploration, confirmation, and construction spending.
Make-Up Wells¶
Many geothermal projects anticipate drilling additional make-up wells during the operating life to offset reservoir pressure decline and sustain output at or near its original level — conceptually similar to an augmentation schedule in a battery energy storage project. Where the project's development plan anticipates make-up wells, their capital cost and timing should be modelled explicitly, not omitted or assumed to be covered within ordinary operating cost.
Phased Financing Structure¶
Because of the differing risk profile between the exploration/drilling phase and the confirmed-resource construction and operating phase, financing structures for geothermal projects commonly differ by phase — exploration and drilling risk financed with higher-risk capital or public/development finance support, and the lower-risk operating phase financed with more conventional project finance debt once the resource is confirmed. The model should reflect this phased financing structure explicitly where it applies to the specific project, rather than assuming a single uniform financing structure across the full project life.
Common Construction Pitfalls¶
Resource treated as confirmed from the outset. Applying solar- or wind-style resource certainty to a geothermal project before drilling confirmation understates genuine exploration risk.
Reservoir decline conflated with equipment degradation. Combining the two into a single output decline schedule obscures which factor — resource depletion or equipment wear — is actually driving an output shortfall.
Make-up well costs omitted. Failing to model anticipated make-up well capital cost and timing understates total lifecycle capital expenditure.
Recommended Practices¶
- Model the exploration and drilling phase as a distinct risk period with capital committed before resource confirmation.
- Build reservoir decline and equipment degradation as two separate, explicitly sourced schedules.
- Phase capital expenditure against the project's actual exploration-to-construction development timeline.
- Model anticipated make-up well capital cost and timing explicitly where the development plan includes them.
- Reflect a phased financing structure where exploration/drilling and construction/operating phases are financed differently.
Continue Reading¶
Related Pillars¶
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Frequently Asked Questions
What makes geothermal exploration and drilling risk different from a solar or wind resource assessment?
A solar or wind resource assessment is based on established, statistically robust measurement techniques (irradiance or wind speed monitoring) that confirm the resource with reasonable confidence before financial close. A geothermal resource's actual capacity, temperature, and pressure are not fully confirmed until exploratory and production wells are drilled and tested, meaning genuine resource uncertainty persists later into project development than for most other renewable technologies.
What is reservoir decline, and how does it differ from equipment degradation?
Reservoir decline is a reduction in the geothermal resource's heat and pressure output over time, driven by the physical characteristics of the underground reservoir being depleted through extraction — a resource-level phenomenon, distinct from equipment degradation, which reflects wear in the above-ground turbine and plant equipment. The two should be modelled as separate, explicit schedules.
Why is geothermal capital expenditure typically front-loaded?
Because exploration and drilling costs — a substantial share of total project capital cost — are incurred before the resource is fully confirmed, unlike a solar or wind project where capital cost is incurred against an already-assessed resource, making the geothermal capital expenditure profile more front-loaded relative to confirmed output.
What are make-up wells?
Additional wells drilled during a geothermal project's operating life to offset reservoir pressure decline and sustain output at or near its original level — where the project's development plan anticipates make-up wells, their capital cost and timing should be modelled explicitly, similar to an augmentation schedule in a battery storage project.
Does geothermal financing typically follow a single structure across the project's life?
Not always — financing structures commonly differ by phase, with exploration and drilling risk financed differently (often with higher-risk capital or public/development finance support) from the lower-risk construction and operating phase once the resource is confirmed, and the model should reflect this phased financing structure where it applies to the specific project.
References
Related Articles
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A power generation financial model is architected around a technical output schedule — generation volume for a variable-output asset or available capacity for a dispatchable one — that drives every downstream calculation: the electricity revenue stack, the operating cost build, and, where the asset is project-financed, debt sculpting and covenant testing. This guide sets out that architecture as a sequence of explicit, separately built modules, distinct from a standard corporate model's revenue-growth-first structure.
Degradation Rate
Degradation rate is the annual decline in equipment output over a generation asset's operating life, reflecting expected panel, turbine, or other equipment performance decline. It should be applied as an explicit, consistent annual schedule reconciled to the technical basis used elsewhere in the model, since even a small inconsistency compounds materially over a multi-decade asset life.
Capacity Factor
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