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The role of geothermal energy as EU’s industrial power supplier – Q&A with Deloitte’s Miklós Zaránd and Tamás Pazsiczky

Deloitte’s Miklós Zaránd and Tamás Pazsiczky will be speakers at the Budapest Geothermal Energy Summit to be held on 5 June.

Just before the first Budapest Geothermal Summit, we spoke with Deloitte’s Tamás Pazsiczky (Director of the Energy & Resources Consulting Team) and Miklós Zaránd (Partner). During our conversation with senior representatives of the globally-recognised consultancy firm, we discussed today’s regulatory landscape for geothermal energy in Europe, REPowerEU, the competitiveness of geothermal energy compared to other renewable sources and Hungary’s geothermal energy policies.

Q: Looking at today’s European energy landscape, what are the short, mid-and long-term prospects for the development of geothermal energy in Central and Eastern Europe?

Miklós Zaránd: The energy crises highlighted the link between global security and local access to sufficient resources of green, renewable energy. The importance of this nexus is now understood not only by energy experts or politicians but also by the public. Geothermal energy is a renewable energy source in Europe that could and should play its part in gaining energy independence. Several European and Central and Eastern European countries or regions have higher than average geothermal gradients. In the short term, some geothermal energy could be a solution to replace some of the fossil fuels (lignite, natural gas, coal) that these countries rely on for district heating. In the mid and long run, geothermal energy could contribute to reaching international decarbonisation targets as well.

It could be a good alternative renewable energy source for industrial consumers as well, who can use it mainly for heating needs. Although geothermal energy is generally not commercially viable to provide technological heat, energy-intensive industries can rely on geothermal energy, replacing some parts of fossil fuel-based heat generation. This could help reducing consumers’ carbon footprint in the long run.

How has the EU’s REPowerEU plan affected the European geothermal industry and what legislative and regulatory changes on the EU level do you foresee?

Tamás Pazsiczky: The REPowerEU Plan was an important milestone in realising Europe-wide that using renewable energy is not only important for reaching national sustainability targets but for reducing our energy dependencies ergo vulnerabilities. The Commission proposed to accelerate the rollout of renewables and specifically proposed many measures to support the widespread use of geothermal heat pumps. It initiated a doubling of the rate of deployment of heat pumps, and measures to integrate geothermal and solar thermal energy in modernised district and communal heating systems. As the REPowerEU plan is linked to the RRFs [Recovery and Resilience Facility], this also incentivises the geothermal industry.

I expect that geothermal energy will continue to gain traction when the EU is thinking about sustainability and energy security. For example, recently, in March the European Commission proposed the Net-Zero Industry Act, which intends to increase the resilience of European supply chains. The proposal addresses technologies, among them geothermal technologies, that will make a significant contribution to decarbonisation. I expect more and more initiatives and financial subsidies for clean technologies.

How competitive is geothermal energy compared to other renewable energy sources like wind, solar and hydropower?

Miklós Zaránd: Some valuable characteristics of geothermal make it competitive compared to other renewables. As hot water reservoirs within the Earth are naturally recharged, it makes geothermal energy both renewable and sustainable. It is stable and reliable, not dependent on the weather like wind, solar or hydro, therefor it could be used as a baseload.

In addition, specific characteristics of geothermal energy namely that it can be used directly for heating makes it competitive in certain energy sector areas, such as heating solutions. 

From an economic point of view, geothermal energy projects are very intensive exploration-wise, the main risk is related to this phase, so costs are higher at the beginning. What makes it very competitive is that operational costs are much lower than other renewables or conventional power generation.

Hungary has accelerated its efforts in utilising geothermal energy by, among other things, liberalising its regulatory environment. What are the key changes?

Tamás Pazsiczky: The last 10 months were an active period for geothermal energy players keeping up with new regulatory challenges. In the four quarter of 2022, the government issued a government decision to support the uptake of geothermal energy in Hungary and as a result, relevant public bodies were tasked to review the legal environment for geothermal investment and the opportunities to encourage investment, to promote faster and more professional investment.  At the end of 2022, the legislator fully delegated the licensing and supervision of geothermal energy exploitation and energy recovery to the Supervisory Authority for Regulated Services. 

In early 2023, the Hungarian Geothermal Cluster was established to enhance the exploitation of the exceptional geothermal potential of the Carpathian Basin. Experts from the widest spectrum of the profession have been invited to participate. On 1 March 2023, amendments to the legislation came into force, making it easier than before to implement geothermal investments.

Previously, the state authority designated the areas that could potentially be explored through concession tenders, which did not work in practice. The change in the law has reversed this: contractors can now apply and, if approved, become eligible for exploration. The success of this is evidenced by the fact that more than 50 applications for exploration licenses were received in one day following the legislative changes, which has now risen to 70 (in previous years there were usually five to six geothermal projects a year). 

What is the potential of geothermal energy in Hungary? How can it benefit the country’s energy supply and what are the main challenges?

Miklós Zaránd: Geothermal energy is available in a large part of Hungary, which can be used as a baseload energy source. The Hungarian geothermal gradient that indicates the geothermal potential is around 45-60 °C/km while the global average is 33 °C/km. Also, most of these areas are untapped, so there is still a large geothermal potential in the country.

There is enormous potential for business development. The total annual geothermal potential at current technology levels is estimated by experts at 127.6 million GJ [gigajoule]. For comparison, the total amount of heat produced by domestic district heating in 2021 was ~30 million GJ, with only ~10 per cent of this produced from geothermal sources. The geothermal profile of this area is primarily for heat generation, and secondarily for combined heat and power generation.

The Hungarian Government aims to replace part of the natural gas consumption with geothermal energy. Natural gas makes up more than 33 per cent of Hungary’s total energy consumption. About 80 per cent of the annual gas consumption is residential, mainly for heating and cooling. Geothermal energy is a low-cost alternative to natural gas for district heating, for which there is a significant demand. The district heating network is expanding and being upgraded, which may also support the uptake of further geothermal projects.

Tamás Pazsiczky: The challenges associated with geothermal projects are complex. Hungary has a significant dependence on natural gas and low historical prices have not incentivised the development of sufficient geothermal capacity. Although geothermal energy has several advantages in comparison with other renewable energy sources (like solar, or wind) the exploitation of geothermal energy potential is highly research-intensive, which means that the biggest risk in geothermal projects is the success of the drilling phase once the right location has been identified. So, this makes it more costly and therefore riskier at the beginning. Consequently, the geological risks involved in financing such projects may challenge commercial banks and other investors to provide financing. Increasing the willingness of companies to take these risks is also a challenge for the government.

Another challenge is that the awareness of geothermal energy among industrial consumers and district heating companies is relatively low and therefore the market needs education.

The Hungarian energy industry is very professional however there are few players in the domestic geothermal construction market. International technological developments are incorporated into domestic solutions with delays or not at all, and the capacity of companies with the right construction capabilities is fragmented giving priority to oil and gas extraction needs.

What is the most important advice Deloitte would give to policymakers and investors considering geothermal energy development?

Tamás Pazsiczky: I think that Hungary has a huge geothermal potential, the exploitation and use of which could serve national energy interests as well as the interests of residential and industrial consumers, but its systemic development requires mutual cooperation in order to achieve mutual benefits.

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