© Lloyd’s 2021

Geothermal

Opportunity assessment
MatureThe relative positioning of opportunities forthe insurance industry have been weighted
by:Mature, sizeable existing markets

1. Attractiveness, which considers both
the growth and size of the market,
andCriteria

WeightingGrowth50%

50%

Maturity ofindustry

25%

Maturity of tech25%

‒ Number of existing products andcarriers
Geothermal‒ More innovative products required
to meet emerging risks

Low carbon buildings

Grid

Nascent, emerging opportunities

Batteries‒ Risks currently less known‒ Significant opportunity expected tomaterialise in the longer term
‒ Limited insurance capacity
currently

Nature based solutions
and carbon credits

Insurance
capacity25%

Insurance
product
maturity

25%

ImmatureSize‒ Established insurance products inmarket

Market maturity(industry, technology and insurance)

Marketattractiveness

2. Maturity, which takes into accountboth the wider industry and insurance
marketMarket maturity

Executive summary

Building a larger presence in emerging ‘transition’ technologies could help the insurance industry tolead innovation and grow sustainably

CCUS

Nascent, emerging opportunities‒ Early action could support earlymover advantage and capture
significant future growthHigh growth and market size

Market attractiveness(size and growth)

Classification: Unclassified2

Overview

Geothermal energy is generally thought to be limited to regions sitting on tectonic plate boundaries, but
growth in ground-sourced heat pumps has demonstrated wider opportunities

Investment

Industry and insurance market dynamics
Energy sourcing andconversion‒ Geothermal energy originates from the heat below the Earth’s surface, using wells toaccess and extract heat from one of two sources; radio-active decay of geologicalelements and heat seeping from the mantle of the Earth’s core
‒ Modern geothermal systems are often integrated to provide combined heat andpower (CHP), using hot steam to generate electricity, while simultaneously supplying
hot water through underground pipes‒‒‒‒

Transmission and storage

Engineers‒
Construction firms‒
Multinational manufacturers
Plant operators

Grid network
Heat pump vendors

Uses
‒
‒

Community and nationalenergy companies
Private energy companies

Insurance offerings

Insurance COB

Value chain‒ Geothermal energy is thought to be limited to regions sitting on tectonic plateboundaries, but at shallow depths, ground heat derived from the sun can beaccessed by ground-sourced heat pumps‒ Typically resilient to extreme climate events, geothermal as an energy source
provides supply reliability and generates negligible emissions whilst requiring low
water use and low land occupancy

Key growth drivers

Headwinds

Government support

Expensive raw metals

Location specificInnovation

Sustainability

3Classification: Unclassified

Overview

While district heating systems are a mature technology, there has been a lag in development of the geothermal
solutions due to the costs of accessing heat for power generation
Global investment breakdown

Investment

Growth drivers

Geothermal investment,
2025-2030 ($bn)1

Government support - Geothermal plants act as a good base level electricity and heat generator
to a diversified energy portfolio as they produce a constant fuel through subterranean highpressure steam. In leading countries like Indonesia, Turkey and USA, there are various
government incentives promoting investment in geothermal data gathering, plant setup anddistribution and for geothermal heat pumps in the USA+38%

Value chain

$11bn
$8bn

Insurance offerings

Insurance COB

Current market trends‒ Since 1960, the Geysers Geothermal Field, north of San Francisco, hascontinuously generated commercial geothermal power and is the largest
geothermal plant in the world, with 18 geothermal plants generating ~835MWof electricity‒ In 2020, generation increased by just 2%, falling below average growth of theprevious five years, with the lag in further development of the sector largely
due to development risks and associated costs‒ Globally, generation has grown slowly, at an average of 3.5% CAGR since2015. A gap in global policies to help reduce costs and mitigate
predevelopment risks has limited generation growth‒ In APAC, the Philippines and Indonesia are driving investment, with mostprojects focusing on flash system power plants

Innovation - Enhanced geothermal systems (EGS) is an emerging technology where undergroundreservoirs are accessed through pumping water through impermeable rock. If the method isreproducible, it could significantly increase the accessibility of geothermal power. US investment
syndicates are exploring methods of retrofitting oil and gas wells to become productive geothermal
sources. Similar research is placed into unproductive geothermal plants
Headwinds
Expensive raw metals - Each geothermal construction project requires a customised turbine
design to fully leverage the amount of steam generated by the underground reservoir. The plant isthen shaped around the turbine, so geothermal power stations aren’t reproducible at commercial
scale. Rare earth metals are required in system manufacture, making geothermal more expensive
than traditional power plants. As geothermal powerplants are highly location dependent, there islimited availability
Location specific - Geothermal plants need to be built in specific areas where geothermal energy
within underground reservoirs are accessible, which means that some areas are not able to exploit
this resource
Sustainability - To maintain the sustainability of geothermal plants, fluid needs to be pumped
back into the underground reservoirs faster than it is extracted, otherwise risk depletion

4Classification: Unclassified

Overview

The value chain for extracting heat from below the Earth’s surface for heat, power or combined (CHP) has lesscomplexity than many other green technologies and fewer stakeholders

Investment

Energy source

Value chain

Deep undergroundreservoirs

Insurance COB

Ground heat
derived from thesun

Conversion (to heat and/or power)
Binary cycle (Power)
Uses hot water to boil a working
fluid with a low boiling point. Theworking fluid is vaporized in a heatexchanger and used to turn aturbine.

Transmission and storage

Transfer to local grid throughstep up transformer at plant

Double flash (Power)
Hot water, ~180°, flows up throughpipes under its own pressure, as thepressure decreases it turns tosteam to drive a turbine.

Uses/markets
End-use is primarily electricity
generation, ground heatpumps are used for heating

Geothermal energy can be used
to heat buildings all year round,used in 70 countries. However, amore popular air source heatpump has emerged which
accounts for 80% of sales

Dry steam (Power)
Steam is piped from undergroundwells to the plant where it isdirected into a turbine.
Ground heat pumps (Heat)
Uses hot water to boil a working
fluid with a low boiling point. Theworking fluid is heating the building
through radiation.

Insurance offerings

Key example stakeholders‒ Engineers‒ Construction firms‒ Multinational manufacturers‒ Plant operators – both private andgovernment owned‒ Grid network‒ Community and national energy companies‒ Heat pump vendors‒ Private energy companies

5Classification: Unclassified

Overview

The exploratory phases of geothermal projects can present the most material risks and potential cost increases

Investment(Re)insurance class ofbusiness impact
Accident andhealth

Key coverage sought for projects

Gaps in coverage currently offered

Property: Traditional property cover, machinery breakdown and businessinterruption are important. High machine break down exposure, given the sitelocations​ being in fault zones prone to seismic activity and maintenance-related
issues such as the corrosion of wellheads, casings, and pipelines, hydrogen-related
embrittlement, and out-of-production wells which could also impact operations

Casualty

Value chain

Cyber

Financial lines

Insurance COB

Marine, aviation,transport (MAT)

Motor

Property damage and business interruption cover exists for machine breakdown
and site related risks‒

Enhanced geothermal systems, is an emerging technology where undergroundreservoirs are accessed through pumping water through impermeable. Despite its
potential advantages, risks related to this technology are out of insurers’ appetite as
the method could increase the chance of earthquakes. More research is needed inthis area‒

Government backed insurance schemes and the World Bank initiative, GeoFund,offered coverage to most countries in Europe, but all have now expired‒There is insurance coverage that exists in the market to mitigate financial loss
due to failure of exploratory drilling however, due to the small number ofprojects, financing and insurance solutions are limited‒

Damage to third party property, environmental risks such as chemical spills
during operation and coverage for bodily injury resulting from these exist‒

There are tailored and comprehensive solutions available however the number ofcarriers and products are limited due to small number of geothermal projects

Additionally, “finder’s risk” insurance, or “exploration risk” covers the risk of not
finding a geothermal energy source at a given site
PropertyCasualty (environmental): Various natural gases stored under the Earth’s surface
are released into the atmosphere during the operational drilling. The rate at which thegas is emitted increases near geothermal plants, therefore emissions need to bemonitored and maintained

Other

Insurance offerings

Property/Casualty: (Drilling and geological hazards): Due to unknown conditions
underground, during drilling and construction a site may be subject to well instability,
risk of casing collapse, damage to the bottom hole assembly, blowout, andcontamination of adjacent ground water resources. When equipment is damaged orunrecoverable, financial risks increase for project principals since drilling equipment
rental agreements always include a “new-for-old” stipulation, regardless of the causeof the loss.

‒Impact
HighMedLow-6
Classification: Unclassified

Overview

Products already exist to support geothermal projects, and the insurance industry is well placed to enable thetransition of assets through retrofitting as the technology becomes proven
Example market offerings

Investment

ProviderProduct description‒ Renewable energy insurance solutions provide coverage for renewable technologies who have risks ranging frommechanical breakdowns to natural hazards‒ Solutions include construction and erection all risk, operational all risk and third-party liability‒ These solutions include delayed start up and business interruption

Value chain‒ Geothermal resource risk insurance covers a pre-determined number of wells with a pre-agreed drilling and testingschedule, removing reservoir output risk during the initial development drilling phase‒ As a result, it provides protection for project developers’ and third parties’ equity and encourages the influx of private equity
and other third-party capital to finance the development stages of reservoirs‒ Munich Re has provided geothermal exploration risk insurance in Kenya, making the project’s financing easier to scheduleand more reliable

Insurance offerings

Insurance COB‒ In early drilling phases, if the targeted reservoir is unable to produce enough output in steam or heat, project is usually
discontinued so multi-well exploration risk insurance covers such resource risks to help ambitious projects be realised‒ Insurance policy covers the cost of surveys for hot spring operators to determine if geothermal power stations are altering
the quality and composition of hot spring water

7
Classification: UnclassifiedNotes & Sources (2/3)
Page numberSource

Notes

38

Global Geothermal Alliance; Global Data; IRENA; International Energy Agency; World Energy Investment;
Bloomberg

39

IEA, Global Data; TFM Data; IRENA; DECC; USGS

40

Global Data; IEA; IRENA; Company websites

41

Aon analysis

42

ITF 2022 products and services showcase; Carrier websites

1. According to the Base Case – Forecast Policy Scenario (UN PRI)

1. Based on a Net Zero Scenario

8Classification: Unclassified

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9Classification: Unclassified