US Geothermal's US$40 million deal to build and operate a renewable power station in Idaho looks set to be the first of a spate of such projects to crop up around the US

Although the Raft River I geothermal project did not benefit from US energy department (DOE) support - which has been available since mid-August - the funds are expected to encourage utilities to invest in clean power.

However, the Raft River I project was supported by DOE GRED grants for opening in 2004 and 2005.

The DOE has set up a US$2 billion loan guarantee programme that will back projects that support the President's Advanced Energy Initiative. This means there is a financial support package available to help fund power projects in:

• Biomass
• Hydrogen
• Hydropower
• Solar
• wind energy
• hybrid
• alternative fuel vehicles
• industrial energy efficiency

This loan guarantee programme will also included projects related to the efficient and reliable delivery of electricity, pollution control equipment, carbon sequestration, and advanced coal technologies.

But there's a catch - since the DOE does not expect to receive congressional appropriations to cover the costs of the loan guarantees, borrowers will likely have to pay the subsidy cost up front, when closing the loan.

And when you consider the scale of the US renewables and clean power production market, those looking to benefit from this support had better move fast.

The pre-application due date is 6 November 2006, and although the current solicitation is aimed specifically at the Advanced Energy Initiative, future loan guarantee solicitations may be broader.

This incentive should see a spate of renewable projects make it off the drawing board in time for the early-November deadline. And if there is a glut of investment - even with government support - that will prompt a boost in the project financing of such power projects.

While this project - Raft River I - did not benefit from these loan guarantees, there is no reason why the 26MW phase two development should not.

The project

Raft River phase one involves the construction and operation of a 10MW monthly average output binary cycle geothermal power plant.

US Geothermal submitted its response to Idaho Power's RFP for the supply of geothermal power on 11 August 2006. It proposed to convert an existing 10MW, monthly average contract to a full output contract that would allow an annual average 13MW of power sales.

Ormat Nevada, a wholly-owned subsidiary of Ormat Industries, started work on 26 April 2006 on a US$20.3 million EPC contract signed in December 2005. The project is on schedule and is expected to deliver its first power in September 2007, with commercial production in October 2007.

A US$2.6 million contract was signed with Industrial Builders of Ontario, Oregon, to construct the geothermal pipeline gathering and distribution system which will connect the production and injection wells with the power plant.

US Geothermal has purchased two new properties with ground water rights that will provide cooling water to the phase one and phase two power plants and surface access for pipelines and project facilities.

The two land parcels total 1,083 acres and have irrigation water rights for 1,904 acre-feet of water.

A third purchase - of water rights only - was also completed for an additional 544 acre-feet of ground water.

The company will lease the amount of cooling water required for phase one from these water rights to Raft River Energy I (RREI). A transfer of the water rights required for phase one from irrigation use to industrial use is pending final approval from the Idaho Department of Water Resources.

Financing

The US$123 million phase one of the Raft River development closed on 10 August 2006. The deal saw the creation of a project finance structure based on a partnership between Raft River Holdings (RRH) - a Goldman Sachs affiliate - and US Geothermal investing.

The SPV formed to own, construct and operate phase one of the geothermal power facility is Raft River Energy I (RREI).

US Geothermal made a US$5 million cash contribution and transferred to RREI US$1.5 million in property including the existing seven production and injection wells, and certain geothermal rights and leases covering 1,800 acres from the 5,238 total acres of geothermal rights currently held.

It was a straight joint venture between the two parties. The valuable Renewable Energy Production Credits require an appropriate structure to fully monetise. There are target yields and tax benefits and cash sharing as partners.

After targets are met then the majority of the project reverts to US Geothermal.

RRH will make capital contributions totaling US$34 million in accord with the construction payment schedule.

The partnership is able to consider increased development within the phase one area of interest that may have a potential power capacity of 40MW or more based on independent assessment of a 50 per cent probability that 15.6MW per square mile exists at Raft River.

The partnership does not restrict further development of the company's geothermal rights and allows for the development of the planned phase two power plants.

The US$1.7 million per year generated by the important Federal Renewable Electricity Production Tax Credits of US$19 per MW/hour for every MW/hour of energy produced over the next 10 years will be claimed by RRH.

The 20-year PPA starts at US$53.9 per MW/hour and escalates at the rate of 2.3 per cent per annum, capped at 10MW per month average.

There is also a revenue stream from the Renewable Energy Credits which are being sold on to Holy Cross Energy in first 10 years of average of US$460,000 per annum.

Daniel Kunz, US Geothermal's president and chief executive, says: 'Work is underway on PPAs and we have good interest from Eugene Water & Electric Board in Oregon for phase two as well as others.  The phase one can consider further development to phase two.'

Dundee Securities acted as financial adviser working on the financing package that is backed up by a revised contract between the project company Raft River Holdings I and the Idaho Power Company that will see upwards of 10MW delivered under a 20-year PPA.

Kunz adds: 'We are pleased to have completed this financing to develop the important first phase at Raft River.

'We believe the real opportunity for our company is to establish a solid production capability from phase one and - at the same time - proceed with initial development of our planned 26MW phase two.'

The company expects to receive total annual cash distributions up to US$1.6 million over the first four project years, with annual distributions thereafter dependent on project performance and investment yields.

Construction

Ormat Technologies subsidiary Ormat Nevada has already started construction of the plant under a fixed price contract, with start-up due in September 2007 and full operations to begin by November.

Raft River is located in south-central Idaho within a known geothermal resource area as determined by the United States Geological Survey.

The facility is being built on the site of a former DOE geothermal demonstration project that operated from 1974 to 1982, in which time more than US$40 million was invested in geothermal production infrastructure.

In phase two US Geothermal plans to drill new production wells - starting this year after the Phase 1 drilling work is completed.

And that's not the end of it for US Geothermal. Kunz says: 'We expect to announce more details about a second advanced geothermal property once we complete confidential work to acquire land and rights associated with the property.'

Conclusion

With renewed commitment from the US government - in addition to last year's seamless commitment to production tax credits (July 2005) - the market can expect to see numerous renewables projects making off the drawing board.

And with a glut of projects rolling out, it would be fair to expect to see a rise in project financing for low-carbon impact power generation facilities as the developers rush to cash in on government incentives and benefit from the President's Advanced Energy Initiative.

From bog-standard wind farms to biomass and tide power, the market can expect to see a lot more action. And the project finance community is going to be kept busy satisfying that demand.

Fortunately there is plenty of demand from the project finance banks to back such transactions, a willingness that is backed in equal parts by growing pressure to balance involvement in less popular projects with renewable deals that give them the green credentials that are increasingly important.

The project at a glance