Geothermal power: What investors need to know as technologies evolve

Geothermal power is re-emerging as a serious option for firm, flexible, low-carbon energy. In 2025, global investment in next-generation geothermal reached nearly $2.2 billion, up roughly 80% year over year. In the United States, more than $1.5 billion has been invested in emerging geothermal companies since 2021, alongside a growing pipeline of new geothermal power purchase agreements. Geothermal facilities are also beginning to secure large-scale non-recourse financing for early-stage development, signaling increasing investor confidence and continued momentum across the sector. This momentum was further highlighted by Fervo Energy's successful initial public offering in May, which raised approximately $1.9 billion and marked a significant milestone for the next-generation geothermal industry.

Much of this growth reflects the development of newer geothermal approaches. Between 2021 and 2025, next-generation systems accounted for 60% of geothermal power purchase agreements (PPAs) signed. Beyond conventional geothermal, the two most developed next-generation technologies are enhanced geothermal systems (EGS) and closed-loop systems. As these technologies advance, the nature of project risk is changing. Subsurface uncertainty remains material, but drilling execution, engineering performance, and repeatability are becoming just as important. This has direct implications for how projects are diligenced, structured, and financed.

Overview of geothermal technologies

Conventional geothermal, or hydrothermal, remains the most established form of geothermal power generation, with both the longest operating history and clearest commercial precedent. This technology makes use of naturally occurring heat, fluid, and permeability in the subsurface. As a result, deployment is limited to areas with suitable geology, leading to concentration in the Western United States, where much of the most prospective geothermal resource lies on federal land. 

Enhanced geothermal systems are designed to expand that opportunity set. Rather than relying entirely on naturally productive reservoirs, EGS uses subsurface engineering techniques, including hydraulic stimulation, to improve or create fluid pathways in hot rock between wells. This broadens the geography where geothermal may be developed, although performance still depends on local geology, drilling quality, and reservoir behavior.

Closed-loop geothermal takes a different approach. It circulates fluid through sealed well configurations to absorb heat from surrounding rock, rather than relying on fluid flow from the formation itself. These systems are at an earlier stage of commercial development, with limited large-scale operating history and further validation still underway around cost, output, and long-term performance.

Permitting and environmental considerations

Permitting and environmental review have historically been major constraints on geothermal development and remain a key diligence consideration. Projects can face long timelines because approvals may involve multiple federal, state, and local agencies, as well as environmental review related to land use, water, and seismic risks. Where projects are located on federal land, a single development may trigger review at multiple stages, including leasing, exploration, drilling, and utilization, which can affect timing, cost, and financing certainty.

EGS exhibits greater site flexibility because projects are not limited to naturally productive hydrothermal reservoirs. This can expand development options and, in some cases, reduce exposure to federal permitting pathways. At the same time, environmental review may be more complex for these systems. For example, induced seismicity resulting from EGS technology is a key consideration, while fluid injection can raise groundwater and monitoring questions.

Closed-loop systems may face fewer environmental concerns because they do not rely on direct interaction with the reservoir and avoid fluid injection into the subsurface. As a result, they are generally not associated with the same induced seismicity and groundwater risks as EGS. This could support streamlined permitting in some cases. However, the regulatory track record remains limited given the early stage of deployment, so review and approval pathways remain uncertain.

Across all approaches, permitting should be evaluated alongside technical and financial assumptions, particularly where it governs the timing and sequencing of capital-intensive drilling programs. Delays or uncertainty in approvals can affect development schedules, increase costs, and reduce financing certainty, which makes permitting risk a critical factor in overall project execution.

Technical considerations

Technical diligence in geothermal focuses on subsurface conditions and well performance, though the sources of uncertainty vary by technology.

In conventional hydrothermal projects, the primary risk is resource identification and confirmation. Success depends on accurately understanding subsurface temperature, permeability, and fluid availability. Even where a resource is identified, reservoirs are highly site-specific. This limits the transferability of data from one location to another and adds uncertainty to production forecasts. In addition, produced fluids often contain dissolved minerals and salts that can lead to corrosion in wells and surface equipment, increasing maintenance requirements and affecting long-term performance.

For EGS, the key question is how the system performs after development and whether that performance can be sustained. Outcomes depend on drilling quality, how effectively the reservoir is stimulated, and the flow rates achieved between wells. Investors also need confidence that results can be repeated across multiple wells, not just in a single successful test. Key concerns include how output changes over time, the risk of cooled fluid reaching production wells too quickly, and how consistent results are across different sites. EGS projects typically require more wells and longer development timelines, which increases exposure to drilling and execution risk as well as the potential for cost overruns.

For closed-loop systems, performance depends on how efficiently heat can be transferred from the surrounding rock into the well system. This reduces reliance on natural reservoir conditions but introduces new questions around system design and long-term performance. The amount of heat that can be produced, and how that holds up over time, remains an important technical risk to evaluate. These systems often require long, complex wellbores, and making drilling design and cost key considerations.

Commercial and financial considerations

Geothermal projects have a distinctive investment profile: high upfront capital, extended development timelines, and relatively low operating costs once online. This can be attractive because geothermal provides firm, and dispatchable output and supports contracted revenues. However, it also requires significant capital commitment before performance is fully demonstrated. Across all geothermal technologies, drilling and well development are major cost drivers and central to overall project viability.

U.S. federal policy provides additional support through energy tax credits for geothermal projects beginning construction in the next decade. The ability to capture these incentives can significantly alter the business case for geothermal projects, and as a result the time required to get shovels in the ground has the potential to majorly shift project economics.

For conventional hydrothermal, once the resource is adequately defined, the commercial model is relatively mature. Power purchase agreements can support project financing based on a well-understood operating profile. For next-generation geothermal, similar structures are emerging, but the business case depends more heavily on demonstrated performance and cost control.

For EGS, revenue certainty depends on whether developers can consistently achieve targeted flow and temperature across multiple wells, not just in a single pilot. This makes phased development, milestone-based capital deployment, and conservative assumptions especially important. While costs are currently higher and more variable than conventional hydrothermal, learning curves in drilling and well design could significantly reduce costs over time if performance becomes repeatable at scale.

Closed-loop systems present a different commercial dynamic. Because they do not rely on reservoir flow in the same way, they may reduce some subsurface risks. However, they place greater emphasis on thermal performance and drilling efficiency. Current evidence suggests that near-term opportunities may be stronger in direct-use and thermal applications than in utility-scale power.

These distinctions are reflected in financing approaches. Hydrothermal projects can typically access project finance once resource risk is reduced. Newer geothermal technologies tend to require more equity, sponsor support, and phased development as performance is proven. A key challenge is that subsurface and thermal performance risks are difficult to contract or transfer to third parties, leaving developers exposed until results are demonstrated at scale. This can increase the cost of capital and heighten the importance of guarantees, insurance, or other risk-sharing mechanisms in earlier phases. In addition, limited operating histories and a lack of standardized contracting structures can constrain financing options.

Investment activity in the sector is increasing, but repeatable large-scale financing for next-generation geothermal remains in development. Over time, cost reductions—particularly in drilling—along with demonstrated performance and more standardized structures, are expected to improve financing and broaden the investor base.

Conclusion

The key diligence questions in geothermal are evolving as the technology set expands. In conventional hydrothermal, the focus remains on resource quality, long-term performance, and reliability of production forecasts. In next-generation systems, more attention is placed on drilling execution, how well systems perform over time, and whether results can be consistently replicated across wells and projects.

Geothermal can play an important role in the energy transition by providing clean, reliable, around-the-clock power. Realizing that potential will require significant capital and a willingness from investors and lenders to engage with a changing risk profile. The ability to assess, understand, and mitigate these evolving risks will be critical to unlocking investment at scale.