76108
CASE STUDY 10: HUNGARY - GeoFund
Barriers High upfront investment and high geological risk
Instrument Resource contingent finance
Application Guarantee to pay 85% of costs of unsuccessful geothermal exploration wells
Amount US$3.3 million (final payout)
PROJECT BACKGROUND AND OBJECTIVES sector had been unwilling to pursue the targeted
project.
GeoFund (the Geothermal Energy Development
Program) is funded by a GEF trust fund and The project site was north of the village of Iklodbordoce,
implemented jointly with IFC. The aim of GeoFund is to in the county of Zala, in southwest Hungary, with three
remove the barriers to geothermal energy use in Europe existing hydrocarbon exploration wells. A fourth
and Central Asia, and thereby reduce greenhouse gas production well was to be drilled there. The planned
emissions. power plant was to have been connected to the regional
system of North Transdanubian Electric Service
GeoFund was designed to provide assistance and
Company. Total estimated project costs were HUF 3.9
funding to geothermal developers and institutions that
billion (US$18.6 million), which were to be financed by
promote the use of geothermal energy. It was
MOL Hungarian Oil and Gas plc.
comprised of three instruments:
INSTRUMENTS USED
- Direct investment funding window to provide low cost
loans, contingent grants and outright grants to project The GeoFund package for Hungary included a technical
developers; assistance grant of US$810,000 and a geological risk
insurance (GRI) grant of US$3.72 million. The GRI
- Geological risk insurance (GRI) window to partially
covered the risk that after drilling and testing the
insure project investors and developers against the risks
geothermal resource would be found to be inadequate
involved in geological exploration (short-term cover)
for development as an energy source. The GRI grant
and operation (medium-term cover). The geological risk
covered 85% of the eligible drilling expenses, with the
was seen as the most difficult barrier to overcome for
remaining 15% provided by the counterparty company
the development of geothermal energy; and
(MOL).
- Technical assistance window to improve access to
In addition, MOL also financed all of the pre-drilling
information and expertise on geothermal energy.
expenses (geological surveys, prefeasibility studies, staff
A GeoFund package, covering the first two of eight salaries, as well as the post drilling expenses to return
GeoFund sub-projects, was made available to Hungary the land to its pre-drilling state), which are estimated at
in 2006. Hungary has a high quality geothermal resource about US$2-3 million. It also paid up-front to the
but relatively low utilisation. Barriers to utilisation are GeoFund a processing fee of US$10,000 and a 3 percent
high upfront investment costs and geological risks in the fee on the insured amount (US$131,254). The Grant
drilling phase. In the face of these barriers the private Agreement specified parameters for success/failure
under which the GRI could be drawn on.
1 | R E F I N e www.worldbank.org/energy/refine
INSTITUTIONAL ARRANGEMENTS The Geological Risk Insurance worked as designed when
the drilling was unsuccessful and played a key role in
GeoFund receives its funds from GEF and the
reducing the risk of drilling for the first geothermal pilot
International Geothermal Association (IGA), and
power plant in Hungary.
administered by the World Bank GeoFund coordination
team. The IGA funds were used for a region wide
Technical Assistance program.
MOL signed a Grant Agreement with the World Bank to
access the GeoFund in the form of the GRI, with the
Government of Hungary’s endorsement.
OUTCOMES
The results of the drilling and testing activities of the
Hungarian subproject indicated that the two wells
would not produce adequate geothermal flow rates for
any geothermal-based operation. This was verified in
the technical report produced by MOL, and further
verified by independent experts hired by the Bank.
Eligible financial expenses were verified by an
international auditing firm. After verification in
accordance with the Grant Agreement, a payment of
US$3.3 million was made to MOL on December 17,
2007.
Further reading
World Bank, Innovative “Geofund�? Program Supports the International Geothermal Association And Hungarian Oil And Gas
Company to Promote Geothermal Energy Development, 2007 – click here
2 | R E F I N e www.worldbank.org/energy/refine