There is a commonly held assumption among policymakers enthusiastic about next-generation geothermal (NGG) technologies that geothermal energy will be easy to capitalize and scale up because it draws on the same hydraulic fracturing and horizontal drilling techniques that catalyzed the shale boom. The state of the industry to date suggests this assumption is false. Despite the technical similarities between NGG and shale fracking, NGG technologies are an altogether different asset class—and, as such, their deployment at scale requires a different approach to the problem: project finance.

Fervo Energy—the leading developer of next-generation geothermal technologies—knows this. Just last week, Fervo secured $421 million in non-recourse project finance from institutional investors. Their investment supports the completion of Fervo’s key asset, Project Cape Station, by financing the project against its future cash flows rather than against Fervo’s balance sheet. Securing project finance for Cape Station not only signals to other investors and offtakers that Fervo’s technology has reached commercial maturity, but also—and perhaps just as importantly—allows Fervo to recycle its capital into developing new projects. This virtuous cycle can further improve the economics and efficiency of advanced geothermal as industry learning rates increase.

As we wrote just last week in The Firm Frontier, Fervo’s own data shows that next-generation geothermal (NGG) technologies are the fastest path to delivering clean firm power this decade. Cape Station may just prove it right. Fervo has succeeded in developing a unique energy technology, deploying it at pilot scale, and, now, financing its deployment at a commercial scale. Thanks to this latest infusion of project finance, Cape Station is slated to deliver more than 100 MW of new capacity to the grid by 2027, with plans to reach 500 MW as the facility expands.

Many other NGG developers are raising capital for their own pilot projects to demonstrate that they can successfully deploy utility-scale clean firm power infrastructure. What stops them from following Fervo’s path and securing project finance?

Last year, we wrote Committing to the Drill Bit, which examined precisely why shale fracking—which has technological parrallels—is the wrong historical parallel for financing NGG technologies. The two key differences between shale fracking and NGG technologies are, first, that NGG is power infrastructure whereas shale oil and gas are commodities and, second, that NGG developers have valued themselves on their technology rather than on the land and resources they own. This difference means that these NGG developers are technology companies that are struggling to get the data they need to mobilize the early-stage financing required for scaling up their pilots. For these reasons, the two sectors are distinct asset classes with distinct enabling financing conditions.

By challenging that narrative, our report identified more productive avenues by which policymakers can scale up NGG infrastructure, given its unique qualities as an asset class.

Commodity finance and infrastructure finance

During the shale boom, low interest rates and cheaper short-duration corporate bond financing allowed developers to take on higher leverage. And because oil and gas are commodities—they have liquid global markets—drillers and investors could hedge against volatile spot prices, and their short-cycle investment timeframe meant that drillers (if not investors) got repaid quickly.

NGG, on the other hand, is being developed in an era of structurally higher interest rates and costlier long-duration project financing. NGG developers have a long-cycle investment timeframe: They are building power infrastructure, which must generate cash flows over decades—and which therefore cannot be treated as a speculative short-cycle bet the way an individual shale well could. Moreover, energy markets are imperfectly commodified; most NGG developers must seek out long-term power purchase agreements (PPAs) with creditworthy offtakers to stay liquid. NGG developers therefore have a distinct financial risk profile favoring the achievement of long-term cash flow stability through a stable offtake market.

That’s the Fervo story: The company has used well-publicized pilot demonstrations and data releases, as well as PPAs with creditworthy offtakers, to convince larger institutional investors that it has derisked the geographic basins it operates in and has attenuated its projects’ subsurface uncertainties. Fervo is crossing the bridge to bankability.

While it’s true that NGG technology developers have secured ample interest from early-stage investors, all of them except Fervo thus far lack the project finance to develop and deploy their own long-term, utility-scale infrastructure assets—and the barriers to project finance are what prevents the rest of the industry from catching up to Fervo.

Investing in technology

It matters that NGG developers are, for now, largely owner-operators of their own technologies rather than competing developers of a similar technology. Each is raising venture and early-stage equity capital on the basis that their NGG technology suite is uniquely better or more cost-efficient than that of their competitors. While these developers are developing pilot projects and promising that they can build out their NGG technology at commercial scale, their returns are tied to short-term market validation of their technology rather than to the cash flows from the long-term deployment of their technology as infrastructure.

This should not be interpreted as a negative; it is promising to see so many exciting new NGG technologies being tested. But it is distinct from how the shale boom was financed—as a land speculation play, not a technology play. After the Devon-Mitchell merger of 2002, a flood of midstream wildcat drillers began speculating on land where they could deploy hydraulic fracturing and horizontal drilling techniques—on which Mitchell did not enforce intellectual property rights—to secure rapid returns to extracting oil and gas. NGG developers, on the other hand, are not midstream market actors speculating on land; they are technology companies that intend to be owner-operators of infrastructure that uses their proprietary drilling techniques.

Shale drillers could also issue corporate bonds and dilutive equity because, at least until oil markets crashed in 2014, they could promise high short-duration returns to their investors on the basis of lucrative commodity yields. NGG technology companies cannot easily do either of these things. Issuing corporate bonds is challenging because they do not have the asset base or short-term income to afford to increase their leverage while remaining creditworthy. And they are under pressure not to dilute their existing shareholders who care about short-duration returns to market validation of their technology. While both of these avenues for securing financing may certainly be available to NGG developers in the future—perhaps when NGG deployment has proceeded enough to create a midstream ecosystem of EPCs (engineering, procurement, and contracting firms) comfortable with subsurface uncertainties across a derisked suite of NGG drilling technologies—they do not seem viable today.

Geothermal project finance

Our work in Committing to the Drill Bit uses financial history to illuminate the ways policymakers must actively shape energy markets to support the deployment of NGG technologies.

Fervo’s approach shows the benefits of doggedly pursuing project finance. Fervo, as a company approaching IPO, can secure ample near-term returns on the grounds that it has demonstrated the viability of its technology suite and has secured PPAs with reputable offtakers for its Cape Station project. Thus, Fervo’s Cape Station project, as a ring-fenced infrastructure asset, can secure stable, long-term, bond-like cash flows that are attractive to bank lenders and institutional investors rather than venture capital.

Sage, another NGG company, is pursuing a different but perhaps equally viable deployment strategy. By giving Ormat, an established player in conventional geothermal energy deployment, the exclusive right to deploy Sage’s NGG power and energy storage technologies at its own geothermal power stations, Sage gains Ormat’s access to subsurface resources, expertise in surface powerplant and interconnection, and financial reputation–while Ormat can expand its power offerings and gain access to Sage’s technology at little risk to itself. Both Fervo and Sage highlight that technology development is a wholly different challenge than infrastructure deployment. Policymakers should respond accordingly.

There are many straightforward ways for policymakers to support the broader commercialization and deployment of NGG technologies as power infrastructure. As we detailed in our report, they should expand incentives and support for attenuating subsurface drilling uncertainties across the Mountain West—particularly through the creation of creative drilling insurance structures, the likes of which already exist in Europe and East Africa. They should develop targeted project finance solutions to ensure that NGG developers do not waste their equity capital and can more easily secure longer-term construction financing. They should build more transmission and storage across the energy grid to improve the liquidity of NGG resources on wholesale energy markets. And they should support technology diffusion among developers, EPCs, and utilities to ensure that market participants can discover innovative NGG deployment strategies. Solutions like these can help compress the deployment time of promising new NGG technologies such that they can be factored into utility and PUC grid planning.

Fervo’s announcement marks the company’s remarkable achievement of working to make a nascent technology bankable for the first time. But other NGG developers have some distance to go before they can secure their own project finance commitments from investors.

In the meantime, geothermal energy will not simply scale itself up; even the shale boom required substantial policy derisking and sufficiently permissive financial conditions. NGG technologies, while distinct, will be no different.