Executive summary
Proponents of enhanced geothermal energy are correct that this nascent technology has incredible potential to decarbonize the U.S. energy system. Enhanced geothermal systems (EGS) share drilling technologies with the shale fracking industry, making them a compelling option for policymakers looking to leverage existing American supply chains to drive decarbonization at scale. But the market structures of these two sectors differ significantly. Policymakers interested in supporting rapid EGS deployment should understand these distinctions and respond appropriately rather than expecting a geothermal boom to emerge spontaneously simply because EGS projects rely on an already-proven technology suite.
The key differences between EGS projects and shale fracking include:
- Proven reserve discovery: Unlike shale drillers, which can easily identify and monetize proven reserves, EGS developers currently struggle to credibly demonstrate at scale that heat extraction rates won’t decline over time, hindering their access to project finance at scale.
- Different business models and financing structures: While fracking was primarily a land speculation business where wildcatters made money through land appreciation rather than through exclusive access to technology, EGS developers are likely to remain owner-operators of power infrastructure, with a different relationship to both drilling rights and to their unique and proprietary drilling technologies.
- Market structure disparities: Shale drillers sell into global commodity markets with high liquidity, while EGS serves electricity markets characterized by regional fragmentation and long-term power purchase agreements. EGS projects more closely resemble gas power plants in their business and risk profile than they do gas suppliers; in other words, EGS projects are infrastructure investments generating stable long-term cash flows over decades, not commodity speculation plays, which profit from price volatility.
- Legal and financial infrastructure gaps: The fracking boom benefited from tax credits, specialized accounting methods, cash-and-carry agreements, and permissive land lease terms that aren’t yet adapted for the EGS sector.
To accelerate EGS deployment, policymakers should pursue four key strategies:
- Derisk heat resource exploration: Replicate the Department of Energy’s FORGE test site across the country to create “derisked basins” and develop mechanisms to mitigate flow test drilling risks.
- Enhance project finance and offtake support: Provide short-duration term loans to establish cash flow history for other institutional investors, create “pre-payment” structures analogous to cash-and-carry contracts to support upfront capital expenditure, and establish offtake warehousing facilities to support PPA liquidity and project creditworthiness.
- Expand long-distance transmission capacity: Build out grid infrastructure to create more liquid electricity markets to reduce dependence on corporate PPA buyers.
- Promote technology diffusion: Support research consortia and standardization of project development procedures to lower costs and facilitate knowledge-sharing.
For enhanced geothermal energy to become a keystone component of America’s clean energy portfolio, policymakers must deliberately build the legal, financial, and market infrastructures needed for its success. Policymakers must recognize that EGS projects are infrastructure investments that require patient capital and policy certainty in order for the sector to reach its full potential.
