The successful geothermal risk mitigation system in France from 1980 to 2015
Christian Boissavy – Consultant G2HConseils – email@example.com
The late 1970s saw the use of geothermal resources located 2,000 metres under the Ile de France region. These low temperature geothermal resources were regulated from 1978 by a decree allowing their use, as in France the ground below the surface belongs to the State. To encourage this expansion, a Short Term Fund was set up prior to 1981 to cover the geological risks linked to the performance of deep drilling. In 1982, a Long Term Fund took place managed by the SAF Environment subsidiary of the Caisse des Dépôts et Consignations, to cover the operating life of the geothermal installations for 15 years. These are the measures that made possible the installation of 500 MW of thermal power for a cumulative saving in 3 MTOE of fossil fuels over a 35-year period. This article is a synthesis of the study to summarize the 35 years of geothermal risk mitigation system in force from 1980 until now, executed for ADEME (The French Environmental and Energy Management Agency) in 2016.
The Short Term Fund
In 1981, the need to set up a system to cover geological hazards soon came to light, when the decision was made to expand geothermal energy usage in France. It became clear that potential operators were faced with the lack of insurance products against geological risks. Initially, a system that offered both an incitement and a guarantee was set up directly under the authority of the Ministry of Industry. Projects were assessed by DRIRE (the Regional Research and Industry Departments). The mechanism put into place comprised a subsidy worth 30% of the cost of the first well, completed by a loan of 70% of this cost. The extra geological costs born of a random and unpredictable event during the works could also be covered.
In 1982, when the French Agency for Energy Management was founded, the level of subsidy was lowered to 20% of the cost of drilling. A new guarantee system needed to be implemented to replace the one-off coverage mechanism, using a statistical mechanism based on shared risks.
This Fund was fully operational until 1986. Finally, after 1986 – the year of the reverse oil crisis – no new operation that was able to qualify for the guarantee procedure was set in motion. The next drilling project only re-started in 2007, some twenty years later, as shown in Figure 1.
Figure 1: Number of geothermal wells drilled in Ile de France from 1969 to 2017.
Given the technical difficulties encountered with the operations that used the Dogger aquifer in the Paris Region, the Fund was also used for other purposes, especially to finance high-priority research programs. These actions amounted to €3.4 million over the six years from 1986 to 1992. This very significant support allowed undertakings in both in-depth studies into the corrosion-deposit problems encountered and in how to repair damaged wells. This help was spent addressing cross-functional research able to benefit the entire sector, in the following areas: sludge-free rehabilitation, corrosion, scaling inhibitors, audits, bacteria killers, inflatable packers, calibration loggings, tests into new kinds of downhole well treatments, studies into interference between wells in the Dogger aquifer, drawdown measurements for drillings, etc. Direct support was also addressed to implement specific measures, abandoning non-viable operations, dedicated to specific studies or for on-site experimentation.
In 1996, the ADEME “owners” of the Short Term Fund finally decided to definitively suspend its operations. It was effectively wound down in April 1999 and the leftover balance of about €1.5 million was transferred to ADEME’s budget.
Short Term Fund principles and results
The principle of the Short Term Fund was based on compensating project owners if the results of the first drilling did not allow the planned operation to operate under economically satisfactory conditions. The concept of success or failure is determined from the flow rate/temperature combination shown in Figure 2. This graph, which shows the temperature as a function of flow rate, illustrates success areas along with total and partial failure areas. The borderlines between the areas are determined by curves showing stable profitability using the internal rate of return as the relevant indicator. Profitability is calculated over a 20-year period, using current economic assumptions. The difference between the success and failure curves is calculated in such a way that the compensation paid makes it possible to restore the profitability ratio of the success curve.
Figure 2: Success/failure curves to manage the Short Term Fund projects.
The Short Term Fund was independent from the Long Term Fund, but any project owner who took out Short Term cover was required to join the Long Term Fund. The initial fund amount of €2.6 million allowed guaranteeing some 24 operations on the basis of a failure rate of 25%. The cost of the project owner’s contribution was set at 1.5% of the maximum guaranteed amount. In case of failure, compensation was set at 20% (the subsidy amount) of the guaranteed amount at the very least and 90% at the most (after deducting the subsidy). The concept of a geological incident was characterised by the fact that it must be random, unpredictable and not result from any failure to comply with state of the art practices.
Figure 3 shows the contrast between the results from the operations in the Paris Basin (78%) and those undertaken in the other sedimentary basins (62%).
Figure 3: Rate of success of geothermal wells in Paris basin and out: blue – success, red – partial failure, green – total failure.
The Short Term Fund was able to cover 15 claims during the period 1982–1990, amounting to a total compensation amount of about €3 million. There were 12 operations which failed totally, at Bourg en Bresse, Valence, Avignon, Reims, Epernay, Clermont Ferrand, Provins, Condé sur Escaut, Ile de Ré, Plaisir and Meudon, and 3 partial failures took place at Jonzac, Fontainebleau and Fresnes.
The financial results as closed on 30 April 1999 (a new fund based on the same structure restarted only in 2007 for new projects) show that over the entire life of the Short Term Fund, this represented an amount of about €3.5 million to finance 56 different projects. Table 1 indicates the balance of the Fund.
Table 1: Balance of the Short Term Fund (1980-1999).
The Long Term Fund and its results
As geothermal projects are mainly loan financed, lenders wished to see guarantees set up to cover any geological incidents that could arise during operations. This is the reason why a mechanism able to cover these kinds of risks was set up. This mechanism was covered by an agreement between the Ministry of Industry and SAF-Environment in April 1981 setting out the terms of its formation and its operation. This mechanism was based on the existence of a balancing mutual fund called the Long Term Fund, backed up by an additional insurance policy taken out with a pool of insurers.
The Fund was initially provided with €1 million by the state. To this amount were later added a number of instalments of top-up funding from the state, payments by beneficiaries (3% of the cost of the installations guaranteed) and financial income from investing available cash. Initially the guarantee duration ran for fifteen years, but changes were made from 1999. This is because most of the geothermal projects that were undertaken between 1980 and 1987, for the most part on behalf of local authorities, were financed with loans taken out at high interest rates, given the high rates of inflation that were prevalent at the time, and before inflation started to fall significantly, hence the progressive rise in real interest rates on these loans.
In parallel, operating income, which was indexed to the cost of fossil fuels, started to fall sharply after 1987 in the wake of crashing oil prices. Faced with these economic and financial difficulties, starting in 1990 geothermal installation project owners, with the support of the authorities, initiated a policy of renegotiating their initial debts. This resulted especially in a substantial lengthening of the term for paying down the debt. On average, this period went from 15 to 25 or even 30 years for some operations.
The guarantees covered the wells, the materials and the equipment used in the geothermal loop, as long as the claim was made before the normal end of life of the equipment, the flow rate and temperature of the geothermal fluid. The other causes for a claim, e.g. a lack of maintenance, electrical failures, manufacturing or assembly faults, poor operating optimisation, sabotage and fire were excluded. Decisions on whether to approve new operations or whether or not to pay out on claims were left solely to the Technical Committee.
The guaranties covered three kinds of claims:
- Where the incident is not repairable (i.e. if the loss of power is definitive) then there were two possible cases:
- The loss of installation heating power does not fall below the 50% threshold, but it does however significantly lower the level of operating income (triggering a partial claim). In this case, the compensation level is calculated on the basis of a factor that takes into account both the age of the installation and the loss of installation power in relation to the reference value taken out when the contract was signed. This compensation is paid out annually.
- An irreversible loss of geothermal resource power such that it no longer allows the installations to be operated (a total loss claim). In this case compensation to the project owner is paid in one lump sum and it equals a fraction of the Fund intervention limit calculated proportionally to installation write-off aspects.
- Where the incident is repairable (or where the installation power loss is temporary and can be recovered): in this case, the guarantee takes on the cost of repairing the damage, so long as it results from a geological or geothermal cause, as well as paying out compensation for interrupting operation.
For every claim that gave rise to compensation, the Fund’s coverage was limited to €520,000 before deducting a deductible of €68,000. Between €520,000 and €3.4 million, 15-year cover provided by a first group of insurers came to bear. Over €3.4 million and up to the value of the guaranteed total, a second group of insurers provided risk cover for a five-year period. The guarantee provided by each group of insurers was covered by an insurance policy taken out by SAF as the business manager and by the Project Owner.
Nevertheless, this lengthening period of financial write downs for geothermal installations raised the issue of the matching extension in the guaranties. This is how a ten-year extension was decided on, after the initial 15-year cover period.
Starting in 2000, new fund governance was initiated with the formation of a Technical Committee presided by ADEME, where DRIRE and Project Owners especially were represented. The insurers for their part withdrew from the mechanism, with the system becoming wholly reliant on the fund.
An additional €3.8 million was given to the Fund by ADEME in three successive instalments paid in 1999, 2000 and 2001, with the project owners paying fees worth a total amount equivalent to the fresh cash put up by ADEME. The operations in the other part of the territory (mainly Aquitaine) did not subscribe to this ten-year extension, so they exited the guarantee mechanism.
Many operations were also shut down after a few years in service. This was due to technical reasons linked to corrosion-deposit phenomena that had not been anticipated at the outset, but also for economic reasons, as the business plans drawn up had been upset by the oil crises. Cities preferred to abandon geothermal use during a period when the performance of dual well drillings was negative due to the physical and chemical nature of the geothermal water, as well as the poor durability of the submerged pumping equipment transposed directly from the oil industry and not sized or designed for continuous operation at very high flow rates.
The Long Term Fund was closed down at the end of 2015. The Fund balance as of 19 May 2016 is detailed in Table 2 for a total operating duration of 35 years. It is worth remarking the quasi-parity between public funding and payments made by the beneficiaries as well as the major contribution provided by the financial income generated.
Table 2: Balance of the Long Term Fund (19 May 2016).
During this 35-year period, 72 projects were processed by SAF-Environment, but this does not necessarily mean that a contract was signed: 123 issues were declared at 42 different operations. There have only been three cases where litigation could not be avoided, in the operations at Bondy, La Celle Saint Cloud and Porte de Saint Cloud (CCPCU). All of these cases were won by SAF-Environment.
SAF-Environment: the Fund manager
SAF-Environment was founded specifically by the authorities in 1980 with the assignment of setting up and then managing the guarantee system. An administrative, accounting and financial management agreement was put in place in October 1982 between AFME and SAF, when the guarantee fund was transferred from the Ministry of Industry to AFME. This agreement is renewable every three years. SAF is a Caisse des Dépôts et Consignations subsidiary that also has a number of public and private sector financial establishments among its shareholders, all directly involved in expanding the use of geothermal energy (see Figure 4).
Figure 4: Organization of SAF-Environment.
SAF-Environment is assisted by a Technical Committee comprising:
- the management committee represented by the Chairman of SAF-Environment and its Managing Director,
- an ADEME representative – acting on behalf of the State –with veto power over the decisions reached by the Technical Committee,
- a representative of BRGM (French geological survey),
- a representative of the insurers acting in excess of the Fund ceiling,
- one or more qualified parties co-opted by the Technical Committee.
Technical Committee sessions may also be attended by technical experts drafted in by the Committee or by representatives of the beneficiary project owners designated by their organisations, within the framework of the Committee’s extraordinary sessions. Decisions to approve new operations or to pay out compensation for claims are exclusively up to this Committee, an independent body instituted by the Fund’s statutes.
Final results of the two funds
As an estimate, the cumulative production of the operations covered by the Fund was 34,360,000 MWh, which represents approximately 3 million geothermal TOE and over 6 million tons of CO2 emissions avoided during the period. The SAF Environment Short and Long Term Funds allowed 102 wells to be drilled over a 34-year period.
For the Short Term Fund, there were few failures and they tended to be located outside the Paris Basin, where the knowledge of the deep level ground was the least accurate. Of the 116 geothermal wells bored in France during the period, 102 benefitted in one way or another from the support of one or both of these Funds. This represents 81% of the geothermal wells drilled in France, as some geothermal wells had already been drilled before the Fund was set up.
For the Short Term Fund, €200 million investment spending was guaranteed during the drilling phase, with only €5 million financed by the authorities.
For the Long Term Fund, 42 operations saw their operating period insured against damage linked to the geology and the hydrogeology of the fields used. These were mainly geothermal operations in the Dogger aquifer. During the life of the Fund, some project owners even prolonged the coverage period for their operations by taking out cover for an additional ten years, extending the length of their guarantee to 25 years.
Over the Long Term Fund, investment worth €260 million was guaranteed, including not only the cost of the drilling works but also of the geothermal loops for 63 operations nationwide. The payments made by the State came to €8 million, meaning that for every €1 put up by the State, €33 of investments were covered for a period of 25 years.
Lastly, regarding the new dual wells bored in these last few years at the same locations as former dual wells that had been closed and abandoned, without exception, the public and private sector project owners took out new Short and Long Term Fund coverage contracts, although the geological risk could be considered as low or even nil after the dozens of wells that had been drilled in the same Dogger deep level aquifer. The owners did so either on their own initiative or at the behest of the financiers called on to finance the new investments.
It is therefore obvious that expanding the use of geothermal energy by deep level drilling can only be significant if the initial geological risk faced by the project owner for most of the capital expenditure is insured.
By extension, at the European level, we observe that all of the private sector insurance packages attempted in Europe (Germany) and around the world have failed. These mechanisms generally allowed the geological risks for one or two operations to be covered before winding down due to the cost of the premiums, which sometimes represented as much as 25–30% of the cost of the drilling. Another factor was insurers withdrawing after achieving a success to failure ratio that was too low to produce any profitable business. Such mechanisms have been established in a developing market, not yet mature, where not enough projects were developed to ensure mutualisation of the risk.
Successful experiments regarding this kind of fund for operations intended to produce heat do exist in Europe. The government of the Netherlands set up a mechanism very similar to the SAF Environment Funds, one that has allowed 30 geothermal wells to be drilled in that country in the past ten years.
With the notable exception of a few European market participants operating in well-developed geothermal regions, project developers have very little capability to manage the financial risk owing to the poor knowledge of the deep subsurface, lack of technological progress and high cost. In effect the probability of success/failure weighted net present values of project cash flows tend to be overly negative, thus effectively shutting out private capital from investing in geothermal energy.
However, with technology development (increasing the probability of success of finding and developing geothermal reserves) coupled with experience and thus reductions in cost, project developers will eventually be able to accept and –where appropriate – transfer project risks (technical, economical, commercial, organisational and political) so that private funding will become available. Until then, a Geothermal Public Risk Insurance Fund (GRIF) is seen as an appealing public support measure for supporting geothermal development.
ADEME. 2017. Historique et bilans détaillés des systèmes de garantie
Court et Long Terme des opérations géothermiques sur aquifères profonds mis en place en France au début des années 1980 (Detailed history and description of the two geothermal risk mitigation systems created in France beginning of the 1980s). . Rapport ADEME 2017. (G2HConseils).
GEOELEC. 2013. European Geothermal Risk Insurance Fund (EGRIF). June 2013. GEOELEC Report Deliverable 3.2 (BRGM and EGEC).- http://www.geoelec.eu/wp-content/uploads/2011/09/D-3.2-GEOELEC-report-on-risk-insurance.pdf
ALTENER. 1997. European Insurance Scheme to cover geological risk related to geothermal operations. Final Report ALTENER programme. June 1997. (CESEN-BRGM-SAF Environment) http://infoterre.brgm.fr/rapports/RR-39701-FR.pdf
This article has been published in European Geologist Journal 43 – Geothermal – The Energy of the Future
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