Fervo eyes project-level finance as it plans for geothermal at scale

Last month, Fervo raked in $244 million in its latest round of financing. The raise comes as the enhanced geothermal company builds up its second project — and begins to consider project-level financing rather than the corporate equity that it has primarily relied on so far. 

• The top line: Fervo is roughly six months into exploratory drilling for a 400-megawatt project in Utah, which is poised to deliver power to the grid starting in 2026, and is planned to reach full-scale production in 2028. As that process unfolds, the company is considering how to attract cheaper and project-level financing, both for the Utah plant and others to come. 
• The market grounding: While geothermal has been around for over a century, enhanced geothermal technologies like Fervo’s are newer to the scene. Fervo uses fracking methods native to the oil and gas sector — from which the Houston-based company also recruits about 60% of its staff — to access underground hot rocks and pump water into the well to create steam. This method allows Fervo to drill wells without worrying about natural permeability. It's still a nascent approach, though it has begun to attract interest both from new developers and offtakers — even though traditional geothermal has become a hard sell for investors. 
• The current take: Gabriel Malek, Fervo’s chief of staff, said the company is receiving interest from a wide swath of venture investors, but is still considered too green for project-level debt: “The pilot project brought more investors in the door than we otherwise would have seen,” he said, “but didn't yet prove our operational track record enough to move to that next tier of investment.”

Fervo has picked up momentum since its last fundraise. After announcing a partnership with Google in 2021, the first two wells financed by the tech giant went live in November 2023, sending electricity to the Nevada grid that serves the company’s data centers. 

That was Fervo’s first commercial project, proving that its tech can function beyond a pilot. And according to an analysis published by the company of its Utah project that got underway in June 2023, Fervo is already seeing costs and drilling times come down as it moves from well to well; Malek said the goal is to “continue dragging down those costs by making each geothermal well look like the one drill prior to it.”

But investors that could provide low cost financing, including project debt, need more proof.

In the recent Series D funding round, Malek said Fervo is operating somewhere between venture capital and growth financing. Ultimately, most of its latest funders were strategic investors like Devon Energy or else VCs, he said, because “investors still want to see that true utility-scale, first-of-a-kind project” before they’re willing to contribute “deeper, derisked forms of capital.” 

That said, the company’s goal in the second half of 2024 is to sell down part of the project-level equity in the upcoming Utah project, and “get away from relying on corporate equity” as quickly as possible.

“That's going to be a lot cheaper than the corporate equity that we have,” Malek said, adding that Fervo has started those project financing conversations only recently. “We just haven't been at this stage previously as a company.”

In the longer-term, Fervo’s goal is to rely on traditional project finance models used in solar, wind, or other forms of infrastructure. 

Geothermal power purchase agreements — which offer developers predictable revenues that are key to attracting project finance — are already underway. Fervo has signed PPAs with community choice aggregators in California for 53 megawatts of the Utah project, Malek said.

“I think the day and age of geothermal PPAs is already upon us, but there's certainly more room for progress following the path of solar,” Malek said, adding that Fervo has frequent internal conversations about how to make geothermal both modular and standardized, like solar. How can we make geothermal development a manufacturing process just like churning out solar panels? Because that's when you see the most rapid cost reductions and that's when you see the clearest path towards scale.”

The key here, he added, is to differentiate Fervo from the traditional geothermal projects that come with significant resource risk. Investors often needed information on half of the wells in a well field — to prove the technology and location’s feasibility — before they would offer project financing. Fervo hopes its enhanced approach makes that much drilling unnecessary; it aims to demonstrate energy potential after drilling just two wells.

“Our goal is that as the market becomes more familiar with enhanced geothermal, they will appreciate that actually, after two wells, there is no resource risk,” Malek said. “That just means that earlier in the process, you can get rid of those high cost of capital VC dollars and bring in the much cheaper forms of capital.”

This move comes as other enhanced geothermal companies emerge on the scene, especially around Texas and its robust fossil fuel infrastructure and workforce. Just last week, the MIT spinoff Quaise Energy — which aims to build “geography agnostic” geothermal tech using high-power microwaves — announced an influx of $21 million to help it build its first pilots and strengthen supply chains.

Malek said Fervo welcomes the new entrants to the market, as there is strength in numbers when it comes to speaking with policymakers and investors about enhanced geothermal: “It's hard for us to make convincing asks when we're just a team of one,” he said. 

Hurdles to scale

At present, Fervo’s biggest challenge is financing, especially the difficulty of accessing public rather than private capital.

Demonstration funding from the Department of Energy’s Office of Clean Energy Demonstrations “can be really impactful,” Malek said, especially when it comes to getting a company’s first major utility-scale project off the ground.

“Then it's easier for private finance to come in afterward, and rinse and repeat these projects,” he added. 

(That said, just last month, Fervo was one of the three companies selected by the Department of Energy for up to $60 million in funding to “demonstrate the efficacy and scalability of enhanced geothermal systems.” Fervo’s project is a pilot, also located in Utah.)

Another major issue is permitting. It’s a particular snag for enhanced geothermal, Malek said, because the projects “almost look like two companies Frankenstein’ed into one.” 

There’s the upstream operations, which bear a resemblance to oil and gas projects drilling wells out in the field, and then there’s the power plant construction element. The two need to be connected to actually get electricity from Fervo’s projects, but both require their own permits. 

“You have this awkward dance where you permit the well field, but then you need to wait on the permit for the power plant,” Malek said. “But what if construction doesn't line up perfectly with those timelines? Well, then you have a lot of workers standing around waiting for [Bureau of Land Management] approval to move forward." 

Fervo is hopeful that — as enhanced geothermal becomes more widespread — that those two processes can be combined into one.

When it comes to conversations with investors, though, the challenges are more emotional than logistical; Malek said one major hurdle is the fact that many of the people who financed traditional geothermal projects got burned. Because of this Fervo has struggled against the “huge biases and preconceived notions” about its work, which developers of more novel frontier technologies like direct air capture don’t face. 

“We have to really explain how what we're doing is different from traditional geothermal, and why we don't face the same resource and operational risks that traditional geothermal developers have.” 

That said, Malek said those conversations are getting easier, partly because of the success of its Google project so far; and also because of the company’s validators in the oil and gas industry — including upstream fossil fuel company Devon Energy, which led the company’s Series D round — who are able to speak to the technology’s promise.

Editor's note: This piece was updated on March 18 to clarify that 1) Fervo was considered "too green" for project debt, not project equity more broadly, and 2) most of Fervo's Series D investors were strategics like Devon Energy, not VCs (though VCs still played a significant role).