Geothermal Market: A renewable energy for the future

CONTENTS

1  Executive Summary  

4  NA  

2  ENEL S p A  

6  NA  

2.1  Company Background  6

2.2  Company Chart  8

2.3  Services and Other Activities  9

2.4  Geothermal Activities  9

2.5  Outlook  10

3  Definition of Geothermal Energy  

12  NA  

4  Geothermal  Industry

15  NA  

4.1  Geothermal Development  15

4.2  Current Situation  15

4.3  Growing Demand  17

5  Technology  

19  NA  

5.1  Technology and resource type  20

5.2  Technology overview Electric power generation  21

6  Economics  

38  NA  

6.1  Production and Operating Maintenance Costs  38

6.2  Pricing  38

7  Substitutes Renewable Energy  

43  NA  

7.1  Introduction  43

7.2  Biomass  44

7.3  Hydro  45

7.4  Solar  47

7.5  Wind  48

8  Real Option Risk Analysis  

50  NA  

8.1  Definition of Real Option  50

8.2  Real Option and Investment in Geothermal Energy  51

8.3  Country Analysis  52

8.4  Competitors Analysis  66

8.5  Geothermal Exploration  70

8.6  Distribution  72

9  Recommendation  

73  NA  

2  NA  

  Figures NA  

  Figure 1 Geothermal Energy  14

  Figure 2 - World Geothermal Power Installed Industrial and Developing Countries  

1950-97   15

  Figure 3 Installed Potential Capacity  16

  Figure 4 Earth Dynamics  19

  Figure 5 Dry Steam Power Plant  22

  Figure 6 Flash Steam Power Plant  23

  Figure 7 Binary Cycle Power Plant  24

  Figure 8 Power From Moderate Low Temperature Fluids  25

  Figure 9 - Projected Capital Costs for Hot Dry Rock  27

  Figure 10 - Development Process  30

  Figure 11 Real Option Tree  53

  Figure 12 Installed Capacity versus Open Potential Capacity  54

  Figure 13 Average Risk versus Open Potential  55

  Figure 14 GDP Growth Rate versus Open Potential  56

  Figure 15 Electricity Development Central America  59

  Figure 16 Exploration Phases  71

  Figure 17 Thermal Efficiency HOKKAIDO ELECTRIC POWER  86

Tables NA  NA  

Table 1  Key Financial Data  7

Table 2  Installed and Potential Capacity  16

Table 3  - Cost and Technical evolution data for Geothermal Electricity  37

Table 4  - Production and OM Costs  38

Table 5  - Levelized cost comparison of based power by sources  41

Table 6  - Geothermal operating and maintenance costs by plant sizes (U S  

  cents KWh)  42

Table 7  Action Plan  75

Appendix NA  NA  

Appendix 1  Financial Data Enel  76

Appendix 2  Installed Potential Capacity  77

Appendix 3  Country Risk Analysis  78

Appendix 4  Competitor Analysis  79

Appendix 5  Regulatory Framework 103  

3  NA  

1 Executive Summary

The purpose of this project is to provide Enel with an outlook and a possible development of the geothermal sector worldwide.

We analyzed the current geothermal market, its main players, the countries in which they operate as well as the most promising areas with respect to availability and accessibility.

Further, we analyzed technological trends and pursued a risk assessment of the factors that mostly affect the exploration and development of any geothermal field. Based on the above analysis, we propose our recommendation to Enel to further strengthen its geothermal activities and global positioning.

After getting a broad overview from the main geothermal organizations, we interviewed experts with technical and business background as well as geothermal operators, and visited production power plants in order to deepen our knowledge. The analysis of the information we gathered enabled us to develop the following conclusion.

Geothermal is a clean, reliable and sustainable renewable energy, which has proved to be a viable alternative to oil, coal and gas. Its capacity has grown consistently over the last 20 years due to the rising attractiveness to energy companies. Among the reasons for this growth are the reduced exploration and drilling costs, the incentives that some governments offer and the increased corporate awareness of environmental problems (i.e., the Kyoto Protocol restrictions and the Clean Development Mechanism). A good example is Iceland, where 90% of the households already profit from energy offered at a competitive price and generated by geothermal resources.

Nevertheless, geothermal is still an underestimated energy, which is reflected by the fact that only 5.8% of the potential capacity is currently exploited. Indonesia and Mexico as well as many other countries have an open potential which in some cases is ten times higher than the capacity they are actually using. Furthermore,

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among those are countries which could be 100% powered by geothermal energy (e.g. Costa Rica, El Salvador, Kenya) 1 .

These unexplored resources are increasingly attracting international corporations that operate in all segments of the value chain and compete for the most profitable fields. Many companies supply the steam and sell the electricity generated likewise (e.g. Pertamina, Unocal, Calpine), whereas others (such as Ormat) initially focused on technology excellence and later recognized profitable business opportunities also on the supplier side.

Based on the above observations and conclusions, we suggest the following recommendations.

Considering the prosperous geothermal resources and the current market situation, we are convinced that promising opportunities exist in the USA and Indonesia, where regulations encourage development, political and economical conditions are favorable and the chance to partner with suitable local players is possible. Additionally, for future opportunities, special attention should be paid to countries like Mexico, where privatization is in process, Guatemala and Nicaragua, where political and economical conditions are not yet stable but the open geothermal potential is very high. Finally, Kenya and Ethiopia, which are located along the African Rift, represent a long term perspective since the geothermal resources are mostly unexplored but the political and economical framework hinder current market penetration.

Further details will be outlined in the presentation and in the final report.

1 http://www.geo-energy.org/PotentialReport.htm

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2 ENEL S.p.A.

2.1 Company Background

Enel S.p.A (“the Company”) was founded December 6, 1962, as Ente Nazionale per l’Energia Elettrica (National Board for the electric energy), to which the Italian Government gave the role to produce, import, export, transport, transform, distribute and sell electricity.

The company today is engaged in the generation, distribution, sale, and transmission of electricity in Italy. It also sells and transmits electricity primarily in Spain, and North and Central America. As of December 31, 2003, the company had 593 generating plants, consisting of thermal, hydroelectric, geothermal, and other renewable resources facilities. Its distribution network consisted of 1,082,369 km of lines, as of the above date. As of 31.12 2004 the company had 61,896 employees.

The Company has completed a refocusing strategy and is now entirely focused on the electricity and gas business. During 2004 they refocusing strategy was completed with the sale of real estate activities and waste treatment business, and the agreement reached for the disposal of our water activities.

Their mission is “to be the most efficient, market driven, quality focused provider of power and gas creating value for its customers, shareholders and people”. 2

The key financial data of the Company can be seen in Table 1.

During 2004 the revenues grew by 16.5% from previous year. The gross operating margin grew by 11.9% in 2004. Main increases were registered in Telecommunications (up euro 544 million) and the Parent Company (up euro 473 million). Gross operating margin of the Networks, Infrastructure and Sales Division grew by euro 151 million (up 4.1%), the Generation and Energy Management Division registered an increase of euro 136 million (up 3.5%), Transmission Networks an increase of euro 62 million (up 10%), while the Services and Other activities area

2 Enel S.p.A., “Annual Report 2004”, p.2

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registered a euro 183 million decline due to the reduction in the operating perimeter. The EBITDA rose by 11,9% and the net profit excluding extraordinary and non- recurring items grew by 68%. The Company is now a highly cash generative business and this enables us to sustain a high dividend flow. During 2004 the value of their shares rose about 38.8%, reaching a maximum of euro 7.25.

Table 1 – Key Financial Data

For the future the company predicts that growth will come in a number of areas – in renewables, where they have strong positions both in Italy and abroad; in gas, where they will acquire businesses and develop organically their customer base through their attractive dual fuel offer and their trusted brand.

As of 31.12.2004 the shareholding structure was the following:

• 31.45% owned by the Ministry of Economics and Finance 3

• 10.28% by its subsidiary Cassa Depositi e Prestiti, and

• the residual 58.27% is floated on the market (mostly owned by institutional

owner, the biggest being Lazard Asset Management LLC)

3 The Ministry of Economics and Finance reduced its ownership in the company through a stock market placement (at December 31), reducing its ownership to 31,45 %.

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2.2 Company Chart 4

4 Enel, “Annual Report 2004”, p.6

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2.3 Services and Other Activities

The Services and Other activities area provides competitive services to Enel Divisions and offers them on the market. The area includes the Real Estate and services, Engineering and contracting, Information technologies, Personnel Training and Administration, Factoring and Insurance services, in addition to Water activities to be gradually divested. The financial data of these business areas can be found in Appendix 1.

2.4 Geothermal Activities

Enel has consolidated its leading international role in the renewable energy sector and is contributing to the development of innovative engineering and architectural solutions designed to integrate power stations increasingly with the environment, the landscape and the society as a whole.

One example of its commitment is the new AMIS (Mercury and Hydrogen Sulphide abatement) system applied by Enel in the geothermal sector and already operating in some plants. AMIS lowers mercury and hydrogen emissions enormously and reduces the offensive odour in the neighborhood of the power plants.

Internationally, Enel is striving to transfer its extensive knowledge of identifying, developing and optimizing geothermal resources through its expansion into Latina and North America. Through its partnership with LaGeo in El Salvador, the company is developing a new geothermal electricity generation plant and optimizing several existing plant output by adding a binary cycle system. Projects for the exploration and exploitation of geothermal plants are in the pipeline in at least five Latin American countries; in North America, Enel’s subsidiaries are actively seeking strategic investments in geothermal assets.

In Italy, Enel operates 34 geothermal plants, for a total of 700MW of installed capacity.

All the operations, from drilling the wells to operating the plants, are done in respect of the local environment: that’s why, for instance, today new colors are used

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to hide the pipelines, architects’ help is asked to build smaller plants and careful attention is given to the nature surroundings the factories.

2.5 Outlook

With regards to the generation area, the context in which Enel expects to operate in 2005 will be characterized primarily by a further evolution of the Pool Market for electricity. The Pool Market provides for a single national purchase price (SPP) of electricity, and differentiates offer prices by area in which the electricity is produced.

The Authority for Electricity and Gas introduced new norms regulating the exercise of market power (Resolution no. 254 dated December 30, 2004) and new merit order dispatching rules (Resolution no. 237 dated December 24, 2004). In order to compete in the new scenario, Enel will continue to pursue the former strategy aiming at maintaining a leadership in cost through the optimization of fuel procurement, the ongoing efficiency improvements of its generation portfolio, the continuation of the process for the conversion to combined-cycle technology and the substitution of fuels with cheaper ones. Capital expenditure in the renewable resources sector aimed at increasing the efficiency of plant and at producing green certificates to comply with constraints imposed by the Bersani Decree, will continue alongside the streamlining of processes and structures, in addition to the reduction in operation and maintenance costs with the objective of reaching set operating efficiency levels.

With regards to the distribution and sale of electricity, the regulatory framework for 2005 is developing in line with general rules set by the Authority for Electricity and Gas in the first part of 2004, involving the definition of rules for the second regulatory period (2004-2007). Tariffs for the distribution of electricity and connection fees were updated through the price-cap mechanism that was set at 3.5% in real terms (nominal 1.5%), with a reduction in the net margin for the sale and transport of electricity.

Projects launched focus on:

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• increasing the efficiency of operating processes and the containment of

costs;

• optimizing the management of investments in line with service continuity

levels achieved;

• completing the Telemanager Project with the installation of over 29 million

digital meters by the end of 2005;

• strengthening Enel’s presence in all segments of the electricity market in

view of its full liberalization, also through the offer of new tariff plans;

• the new billing system (GIOVE Project) with the objective of replacing

completely within two years

With regards to the distribution and sale of gas, the numerous Resolutions issued by the Authority in 2004 involved tariff adjustments, the quality of service and the safety of plants. Resolution no. 170/04 set criteria for the determination of distribution tariffs for the new regulatory period (October 2004–September 2008), setting the remuneration of capital employed at 7.5% and the price-cap, applied to the sole operating costs and depreciation charges, at 5%.

In this sector, Enel will continue in 2005 to pursue its growth program involving acquisitions and specific marketing with the aim of achieving a 20% market share by 2009.

With regards to the internationalization of the core business, Enel intends to pursue operations already launched such as the purchase of Slovenské Elektràrne, Slovakia’s largest electricity producer (7,000 MW, thermal, hydro and nuclear power), and will take advantage of all opportunities for an expansion abroad that allow it to exploit its know-how in countries undergoing liberalization of the electricity market and in which there is growing demand for electricity.

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3 Definition of Geothermal Energy

Geothermal energy is an enormous, underused heat and power resource that is clean as there is only little or no greenhouse gases, reliable due to the average system availability of 95%, and homegrown which makes the countries less dependent on foreign oil.

Geothermal is the heat that flows from the Earth's hot interior due to crustal plate movements. Deep circulation of groundwater along fracture zones will bring heat to shallower levels, collecting the heat flow from a broad area and concentrating it into shallow reservoirs, containing hot water and/or steam, or discharging as hot springs. Through drilling method similar to the oil drilling technology the hot water and/or steam is piped to the surface where it is used for direct use or electricity generation depending on the temperature and the pressure of the steam. The low energy waste water from such power generation is then usually re-injected back into the reservoir, or further utilized for direct heat applications. The technology of geothermal power generation will be explained in Chapter 5 in more depth.

In general there are three main categories, the high (>150°C), moderate (90°C – 150°C) and low (< 90°C) temperature resources. The high temperature geothermal resources are predominantly found in island chains and volcanic regions, whereas the moderate and low temperature resources can be found in all countries. The high temperature is almost always used for power production while most of the low temperature resources are used for direct heating purposes or agriculture and aquaculture.

As mentioned earlier there are two different types of usage of geothermal energy:

• Direct use

o geothermal heat for agricultural and aqua-culture production in colder climates and for industrial processes, o 38°C - 149°C

• Power generation

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In over 30 countries geothermal resources provide directly used heat capacity of around 12,000 MW and electric power generation capacity of over 8,000 MW. The current production of geothermal energy from all uses places third among renewables, following hydroelectricity and biomass, and ahead of solar and wind. Despite these impressive statistics, the current level of geothermal use pales in comparison to its potential. Current U.S. geothermal electric power generation totals approximately 2.200 MW or about the same as four large nuclear power plants.

The size of an individual geothermal power plant can range from as small as 100 kW to as large as 100 MW. The size not only depends on the power demand but also on the capability of the energy resource. The technology is suitable for rural electrification and mini-grid applications in addition to national grid applications. Geothermal resources play an important and significant role in developing nations where there is no availability of indigenous fossil fuel resources such as oil, coal or natural gas. In Tibet the Nagqu geothermal field (Tibet Autonomous Region, PRC/1 MWe binary plant) provides a useful energy source for the local population.

The unit costs of power currently range from 2.5 to over 10 US cents per kilowatt-hour while steams costs may be as low as US$3.5 per tonne. Costs of geothermal electricity depend on the character of the resource and project size. Influencing factors are for example the depth and temperature of the resource, well productivity, environmental compliance, project infrastructure and economic factors such as the scale of development, and project financing costs.

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Figure 1 – Geothermal Energy

4 Geothermal Industry

4.1 Geothermal Development

Figure 2 - World Geothermal Power Installed, Industrial and Developing Countries, 1950-97

Megawatts

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0 1 9 6 0 1 9 8 0 1 9 5 0 1 9 7 0 1 9 9 0

4.2 Current Situation

Geothermal energy today is exploited and used in about 30 countries worldwide. Its rapid expansion for electricity generation during the 80’s in both industrial and developing countries made it possible to reach the actual installed capacity of about 8.000MW. The USA is the leading country in terms of installed capacity, with approximately 2.500MW. The effort put in the development of this energy by some developing countries can be best seen in the Philippines, the second country in the world with the highest (about 1.900MW) installed capacity. The following figure 3 shows the installed and potential capacity by countries.

Despite the numerous advantages that this resource has compared to fossil fuels (among others, geothermal energy practically doesn’t pollute and is

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sustainable), the open potential is still very high, as it is cleared from the

following table 2 and figure 3 5

Table 2 – Installed and Potential Capacity

Figure 3 – Installed & Potential Capacity

5 IGA, www.iga.igg.cnr.it/index.php

GEO, www.geo-energy.org

Geothernet, www.geothermie.de/egec_geothernet/menu/frameset.htm

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4.3 Growing Demand

Despite the fact that use of geothermal energy is growing and major breakthroughs are being made in technology and direct uses expanding, the energy accounts for only four tenths of 1% of world-wide energy use. This is because fossil fuel is cheap and plentiful and is portable, unlike geothermal energy, besides having a well established infrastructure throughout the world. Furthermore, there is no restriction on this energy supply within this century. Thus, the real challenge is how to dramatically increase geothermal energy production and use by at least 1000 MW a year in the face of this stiff competition.

Currently, there is little or no penalty on polluting the environment although this is slowly changing with the Kyoto Protocol. Some countries are making efforts to cut down on global warming gases. In fact, recent data show that today, the level of carbon dioxide is ten times lower than in the past. And there is a growing momentum to develop the so called "green energy" market for there is a certain percentage of people and governments that are willing to pay more for clean energy, and this trend seems to be growing.

The growth is most rapid in places where government commitment is strong. For example, in Iceland, 90% of houses are heated using geothermal energy while in the Philippines, 26% of electricity is from this energy source. But the energy is slow in being used to its full potential in emerging and industrialized countries. In the former, it is because of lack of money. Funding is needed as what is available at present is not adequate. This is due in part to unstable government and inadequate laws and regulations to attract private funding. Therefore it is important that people and governments know that although the initial cost of power generation and direct heat utilization is high, the life cycle cost of geothermal energy is low. Thus, when the initial cost has been recovered, operational and maintenance costs are competitive. What is needed is government interest to finance geothermal projects as well as a long-term energy plan.

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Work must be done within individual governments to convince them of the benefits derived from geothermal energy; that it is clean, renewable, and indigenous. It must be made known that geothermal energy has a low life cycle cost and of the need to support its development. Resources are most abundant in emerging nations. World-wide, about 40 million people make use of geothermal energy. This can be increased to 800 million people.

It is estimated that the total worldwide geothermal resource potential suitable for future economic development amounts to about 150 EJ/a (1 EJ = 1018 J) for electricity generation and 350 EJ/a for direct heat uses.

Though it is difficult to predict future development, growth of up to 15% per annum for both geothermal power generation and direct heat use is possible for the period to 2010. By 2020, geothermal energy could supply over 5% of the global electricity. The associated savings in fossil fuel use and the reduction in CO2 production would be significant.

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Technology 6

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The gradual radioactive decay of elements within the earth maintains the earth's core at temperatures in excess of 5000°C. Heat energy continuously flows from this hot core by means of conductive heat flow and convective flows of molten mantle beneath the crust. The result is that there is a mean heat flux at the earth's surface of around 16 kilowatts of heat energy per square kilometer which is dissipated to the atmosphere and space. This heat flux is not uniformly distributed over the earth's surface but tends to be strongest along tectonic plate boundaries where volcanic activity transports high temperature material to near the surface. Only a small fraction of the molten rock feeding volcanoes actually reaches the surface. Most is left at depths of 5-20 km beneath the surface, where it releases heat that can drive hydrological convection that forms high temperature geothermal systems at shallower depths of 500-3000m.

The figure below illustrates the relationship between tectonic plate boundaries and volcanic areas.

Figure 4 – Earth Dynamics

6 World Bank, www.worldbank.org/html/fpd/energy/geothermal/

EERE, www.eere.energy.gov/geothermal/powerplants USA Department of Energy, www.geothermal.id.doe.gov

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However, even in parts of the world far from plate boundaries, there can still exist areas of higher than average natural heat flow. Deep circulation of groundwater along fractured zones in such localities will bring heat up from depth, collecting the heat from a broad area and concentrating it into a shallow reservoir or discharging as hot springs. The resulting fluid temperatures are lower than those produced in volcanic systems but often can sustain very high flow rates.

Geothermal resources vary widely from location to location, depending on the temperature and depth of the resource, the chemical makeup of the rocks, and the abundance of ground water. The types of geothermal resource will in turn, to a large degree determine the type of technology chosen to utilize the resource.

5.1 Technology and resource type

Geothermal resources vary in temperature from 50-350 ºC, and can either be dry, mainly steam, a mixture of steam and water or just liquid water. In order to extract geothermal heat from the earth, water is the transfer medium. Naturally occurring groundwater is available for this task in most places but more recently technologies are being developed to even extract the energy from hot dry rock resources.

The temperature of the resource is a major determinant of the type of technologies required to extract the heat and the uses to which it can be put.

The table below lists the basic technologies normally utilized according to resource temperature.

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5.2 Technology overview – Electric power generation

5.2.1 High temperature resources

High temperature geothermal reservoirs containing water and/or steam

can provide steam to directly drive steam turbines and electrical generation plant.

More recently developed binary power plant technologies enable more of the

heat from the resource to be utilized for power generation. The binary cycle

technology is described in detail below. A combination of conventional flash and

binary cycle technology is becoming increasingly popular.

High temperature resources commonly produce either steam, or a mixture

of steam and water from the production wells. The steam and water is separated

in a pressure vessel (Separator), with the steam piped to the power station where

it drives one or more steam turbines to produce electric power. The separated

geothermal water (brine) is either utilized in a binary cycle type plant to produce

more power, or is disposed of back into the reservoir down deep (re-injection

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process) wells. The following is a brief description of each of the technologies most commonly used to utilize high temperature resources for power generation.

Dry steam power plant

Steam plants use hydrothermal fluids that are primarily steam. The steam goes directly to a turbine, which drives a generator that produces electricity. The steam eliminates the need to burn fossil fuels to run the turbine. (Also eliminating the need to transport and store fuels!) This is the oldest type of geothermal power plant. It was first used at Larderello in Italy in 1904, and is still very effective. Steam technology is used today at The Geysers in northern California, the world's largest single source of geothermal power. These plants emit only excess steam and very minor amounts of gases.

Figure 5 – Dry Steam Power Plant

Flash steam power plant

This is the most common type of geothermal power plant. The illustration below shows the principal elements of this type of plant. Once the steam has been separated from the water, it is piped to the powerhouse where it is used to drive the steam turbine. The steam is condensed after leaving the turbine, creating a partial vacuum and thereby maximizing the power generated by the turbine-generator. The steam is usually condensed either in a direct contact

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condenser, or a heat exchanger type condenser. The condensed steam then forms part of the cooling water circuit, and a substantial portion is subsequently evaporated and is dispersed into the atmosphere through the cooling tower. Excess cooling water called blow down is often disposed of in shallow re- injection wells. As an alternative to direct contact condensers shell and tube type condensers are sometimes used, as is shown in the schematic below. In this type of plant, the condensed steam does not come into contact with the cooling water, and is disposed of in injection wells.

Figure 6 – Flash Steam Power Plant

Typically, flash condensing geothermal power plants vary in size from 5 MW to over 100 MW. Depending on the steam characteristics, gas content, pressures, and power plant design, between 6 and 9 tonne of steam each hour is required to produce each MW of electrical power. Small power plants (less than 10 MW) are often called well head units as they only require the steam of one

well and are located adjacent to the well on the drilling pad in order to reduce pipeline costs. Often such well head units do not have a condenser, and are called backpressure units. They are very cheap and simple to install, but are inefficient (typically 10-20 tonne per hour of steam for every MW of electricity) and can have higher environmental impacts.

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