Potential of the energy transition for investors in Germany – Noerr Insight No 7: Geothermal energy

In our briefing German energy transition: Potential for investors we gave a detailed overview of the opportunities and risks of the energy transition in Germany for domestic and foreign investors. After looking in detail at the opportunities and challenges in the offshore wind, onshore wind, photovoltaics, renewable energy storage, electricity grids and hydrogen sectors in our series, this time, we deal with geothermal energy in part 7.

Geothermal energy

1. Current situation and challenges

Geothermal energy is a renewable technology that extracts energy from the heat emitted from within the Earth’s crust. This energy can be used directly for heating and cooling as well as to generate power. The technology itself is not new. There are already 42 large plants (as of 2022) with an installed thermal output of approx. 350 MW and an installed electrical output of 47 MW, distributed across the North German Basin, the Upper Rhine Rift and the Bavarian Molasse Basin.

The biggest challenges are of an engineering nature and could become financial risks: geothermal energy requires deep and costly drilling and the engineering risks (such as seismicity) must be managed. These drill holes require large initial investments and it is uncertain whether these will be recouped by the plant’s output due to the exploration risk. There is also the risk of a lack of acceptance by the population due to the potential environmental impact.

However, in recent months, the political debate has increasingly focused on the climate-neutral supply of heat: while the electricity sector has already made great strides, the heating sector is still far from being climate-neutral. Besides the aim of modernising household heating systems through the German Building Energy Act (Gebäudeenergiegesetz), large geothermal plants are now also set to contribute to the green heating transition. In this context, deep geothermal plants offer the greatest leverage for the energy economy.

The investor environment for geothermal energy has evolved positively in recent years. Alongside traditional strategic investors (municipal utilities), private investors are increasingly investing in operators of geothermal plants, as the heating transition has become more important overall and investors are increasingly looking for sustainable investment opportunities in this area as well. Technological advances (drilling technologies, geothermal power plant technology, etc.) have made geothermal projects more efficient and profitable, reducing investor risk.

2. Regulatory framework

The planning and operation of a geothermal plant requires numerous permits. For deep geothermal energy, permits are needed mainly under the German Federal Mining Act (Bundesberggesetz), the German Water Resources Act (Wasserhaushaltsgesetz) and if applicable the German Environmental Impact Assessment Act (Umwelt-Verträglichkeit-Prüfungs-Gesetz). Depending on the design, permits under building law or under the German Federal Immission Control Act (Bundesimmissionsschutzgesetz) may also be needed, for example for ancillary plants for power generation and the related hazardous substances.

In June 2024, the Federal Ministry for Economic Affairs and Climate Action presented a draft bill to speed up approval procedures for geothermal plants, heat pumps and heat storage. The bill aims to simplify and accelerate the legal framework for expanding these technologies.

According to the draft bill, building and operating geothermal plants, heat pumps and heat storage systems should also be defined as being in the overwhelming public interest and serving public health and safety in order to speed up approval procedures. It should also be made less easy for local residents to block geothermal projects in the future if the impact on their property is only minor. Finally, the draft bill reduces legal customer protection and thereby increases investor certainty to ensure that objections and lawsuits will no longer have a suspensive effect in the future, that interim relief can only be applied for and justified within one month of notification of the permit decision, and that the number of instances is reduced (all disputes regarding geothermal plants to be referred to the higher administrative courts).

Another important way of speeding up the process is the planned amendment to the Federal Mining Act, which is the main approval regime for deep geothermal plants. The amendment states that the relevant mining authority is at the centre of the procedure, in which, however, other authorities must also be involved. This has occasionally led to lengthy proceedings in the past. The amendment therefore essentially speeds up the involvement of other authorities and a relaxation of the obligation to have an operating plan for less dangerous plants. Also, permit procedures will be handled electronically in future via one office in a standardised process. Processing times will also be cut significantly.

Meanwhile, efforts are also being made at the regional level to promote geothermal energy as a heat source. Early this year, for example, the government of North Rhine-Westphalia presented a master plan to promote geothermal energy, with the aim of meeting up to 20% of heating needs with geothermal energy by 2045. As part of this, the state government is currently considering measures to speed up approval procedures and is also calling for the necessary amendments to federal law. Above all, however, the exploration risk is hedged in the form of a conditionally repayable grant. Depending on the actual heat output measured after completion of the drill shaft, the grant must be repaid in full, in part or not at all. This hedge should make geothermal projects significantly more appealing to investors at least in North Rhine-Westphalia.

3. Outlook

Expanding climate-neutral heating networks is becoming more and more important. Geothermal energy plays an increasingly interesting role as it is seen as an inexhaustible, carbon-neutral source of heat which can be used to supply both electricity and heating. In the future, according to studies, over 25% of heating requirements in Germany can be met by geothermal energy. The planned acceleration law will reduce the procedural obstacles and should enable faster implementation of geothermal projects, which will make planning and implementation more appealing and plannable for companies. In particular, the geothermal master plan drawn up by North Rhine-Westphalia has the potential to inspire other federal states to follow suit and drive the dynamics of geothermal energy use. This will create challenges and major benefits for the climate as well as opportunities for business and municipalities.

However, geothermal projects may entail specific technical and geological risks. They require considerable expertise and huge capital sources. It remains to be seen whether this makes investors act cautiously at first given the German government’s current incentives. It also remains to be seen how the market evolves once we see the next drilling failures or technological challenges.