GeoEnergy GmbH with F.I.S.I. Spa
G.C. Andersen was mandated to find investors by “GeoEnergy GmbH”, a German developer of geothermal power plants with 27 potential concession fields.
Germany encourages investments in emission-free electricity production through the German Renewable Energy Sources Act (“EEG”), by ensuring investors stable and predictable long-term returns. The EEG guarantees an attractive feed-in tariff of nowadays €0.25/KWh for electricity generated through geothermal energy. Grid operators have to connect geothermal power plants at the utility’s cost to the grid and are required to take the entire production capacity.
Each geothermal concession field requires drilling to a depth of at least 3km, at costs of around €20 million, but at a residual “dry-whole risk” of up to 10% per drill site, regardless of rigorous geological exploration. Financial institutions were not willing to assume that risk.
Using a portfolio approach individual risk was 100% insured against dry-hole risk through AAA rated German insurers by bundling several reservoirs. The cost of the insurance was built into the investment, still leading to a mid-teen percent unlevered IRR on the entire portfolio.
Notwithstanding the insurance, investors still balked at the perceived risk and project financing was only available once the plant had passed the “circulation test” where water had been flowing to and from the reservoir at sufficient heat and water capacity to establish the plant’s eventual viability.
The €25 million equity per power plant needed to get to that stage exceeded GeoEnergy’s financial capabilities. In the next step GCA therefore arranged for F.I.S.I. Spa., a privately held Italian energy holding, to invest the necessary capital in the developer, and arranged for FISI’s drill-operator-subsidiary to receive the drilling contracts.
Following the M&A transaction FISI mandated GCA to restructure GeoEnergy’s outstanding debt and eventually acquired the remaining equity stake from the former owners.
As a last step GCA arranged mezzanine debt, project financing and the eventual final debt structure, which eventually returns100% of each plant’s cost to FISI, while retaining the full 100% equity in the plant.