Harnessing the power of Indonesia’s geothermal energy

By Raj Kannan (Power, Utilities & Renewables Sector Leader, Deloitte Southeast Asia), Keith Davies (Technology & Transformation Leader for Energy, Resources & Industrials, Deloitte Southeast Asia), and Samrat Bose (Monitor Deloitte Partner, Deloitte Southeast Asia)

Geothermal energy is not a recent phenomenon in Indonesia. From as early as the 1970s, exploration and prefeasibility studies have been conducted to understand the potential of harnessing its geothermal reserves for power generation. What is relatively new in recent years, however, is the renewed interest in renewable energy sources on the back of Indonesia’s commitments to the energy transition.

With President Prabowo Subianto’s announcement in November 2024 outlining Indonesia’s plan to retire all coal-fired power plants by 2040 and build more than 75GW of renewable energy to replace coal-fired power over the next 15 years[1], the country’s energy transition has entered a pivotal phase. While solar and hydropower are often perceived to be the most viable alternatives to coal, our view is that geothermal energy could also be an important contributor, if not serve as a linchpin, for Indonesia to realise these energy transition goals.

According to Indonesia Geothermal Association, the country holds 40% of the world’s geothermal reserves across Sumatra, Java, Bali, Nusa Tenggara and Sulawesi, given its positioning along the volcanic Ring of Fire. Yet, only about 10% of its estimated 24,000 megawatts geothermal capacity is currently utilised. The National Energy Plan (Rencana Umum Energi Nasional/ RUEN 2020-2024) has set a target of approximately 7,200 megawatts for geothermal energy usage by 2025. Expanding this capacity will not only enhance Indonesia’s energy independence but also advance its renewable goals, paving the way for a more resilient, sustainable future.

Our position is informed not only by the vast untapped potential of Indonesia’s geothermal reserves – the archipelago contains 40% of the world’s geothermal reserves but has utilised only a mere 10% of its potential[2] – but also by the levelised cost of electricity (LCOE) of geothermal energy in Indonesia. Specifically, at US$0.036-0.121, geothermal is in a highly competitive position as an alternative to coal-fired power. By way of comparison, the LCOE of coal ultra-supercritical units is US$0.046-0.107, while that of large-scale hydropower is US$0.024-0.159.

Indeed, recent developments suggest that geothermal is gaining momentum in Indonesia’s national renewable energy strategy. Following the award of seven new exploration licences in September 2024 at the International Geothermal Convention & Exhibition (IIGCE), the Ministry of Energy and Mineral Resources had reiterated an earlier invitation for private sector participants to invest in 12 geothermal energy projects during the UN Climate Change Conference (COP29) held in Baku, Azerbaijan in November 2024.

Overcoming barriers to commercial viability
As with all renewable energy sources, however, geothermal faces several daunting challenges to its commercial viability. Chief amongst them is economic feasibility and difficulty achieving reasonable returns on investment, not least due to the high upfront costs and risks associated with exploration and drilling, long payback periods, and significant gaps between government-mandated tariffs for geothermal energy and actual production costs.

Additionally, there is the issue of regulatory uncertainty and complexity. While the government has recently announced the introduction of a significant initiative to shorten the permit processing time for geothermal projects from 18 months to a mere five days, frequent changes in regulations and complex land acquisition processes continue to remain perennial barriers in the sector’s efforts to attract capital.

To overcome the challenges posed by the inherently capital-intensive nature of geothermal projects – and thereby, enable them to become more viable and attractive to investors – we propose that players consider the adoption of a pragmatic go-to-market approach comprising diversification along two dimensions: growth pathways, and financing pathways.

1.       Diversifying growth pathways
Given the difficulties in attracting private investment, Indonesia’s geothermal landscape currently remains dominated by state-owned enterprises. However, a handful of private sector players are proving that geothermal could be a feasible venture with diversified growth pathways.

Based on our marketplace observations, we have found that these players are extending beyond core business activities to broaden their revenue streams in ancillary areas. Examples in this regard include ongoing plans by an energy company to produce hydrogen with the use of geothermal energy at a plant in eastern Indonesia, as well as the recent inauguration of a geothermal hot spring pool in North Sulawesi as a geotourism site.

Beyond the obvious, however, we have also noted two promising adjacent domains – lithium and colloidal silica – that could provide geothermal players with new revenue streams, while also enabling them to adopt circular economy concepts. Both lithium and colloidal silica have fast-growing end-markets – driven by growing global adoption of electric vehicles and diverse industrial applications respectively – and can be derived from brine produced on-site at geothermal plants. Conversion of the brine to lithium carbonate or silica nanoparticles not only generates additional revenue streams for geothermal players, but also enables them to simultaneously tackle operational and environmental concerns relating to waste generation and pipe or facility blockages.

Nevertheless, as geothermal players re-examine their portfolios and consider their options for diversified growth pathways, a word of caution is in order: tough trade-offs lie ahead. Under an ideal scenario, players make data-driven strategic choices on where to play and how to win by considering factors such as the total addressable market, potential market share, and competitive intensity. A feasible option would be one that scores high across multiple criteria, as an indication of its high viability and probability of success. In the real world, however, such options rarely exist, and players must scrutinise each and every option through careful benchmarking, in order to strike the right balance between strategic risk and potential reward. 

2.       Diversifying financing pathways
Renewable energy projects face inherently high market, technical, and financial risks – all of which are computed by financiers into project risk premiums that increase required returns on debt and equity, and with these, the cost of capital. Bankability is therefore a critical hurdle, and conventional financing options, such as commercial loans, traditional bonds, and initial public offerings (IPOs) may be less feasible, if not out of reach.

For many geothermal players, green bonds are quickly becoming a preferred alternative financing pathway, as they often offer floating interest rates and options for accelerated payment that can help to create more stable long-term debt. In Indonesia’s context, green sukuks may also warrant additional consideration, given that the nation is currently the world’s largest issuer and a leader in the sovereign green sukuk market[3]. Other alternative debt and equity financing sources also include public-private partnerships, grants and subsidies, as well as equity injections from private equity firms or energy companies looking to fulfil their energy transition commitments.

It must be emphasised, however, that to ensure a project’s long-term viability, it is important that geothermal players are able to attract investors whose sustainable development goals and strategies are aligned with their specific needs and objectives. Furthermore, while government grants and subsidies are an option, tight state budgets may also necessitate greater collaboration with multilateral development banks and development finance institutions who could markedly facilitate investments.

Harnessing the power of Indonesia’s geothermal energy
Fundamentally, the crux of the challenge confronting Indonesia’s geothermal energy sector lies in the capital intensity of its new and novel projects. This makes their overall costs particularly sensitive to financing costs – meaning that project risk assessment and capital pricing become even more pivotal. Yet, since geothermal projects remain few and new, risk assessments often overestimate project risks.

To overcome this conundrum and kick-start a virtuous cycle for the sector, it is therefore vital that stakeholders take concerted steps to coordinate their long-term efforts towards enabling the first wave of geothermal projects to become commercially viable, bankable, and successful. This will help to improve risk perceptions, trigger a widespread downward repricing of risks, and ultimately reduce the cost of capital that will facilitate the flow of private investment towards the transition.

1 “Harnessing geothermal energy to power Indonesia’s renewable future." ABB. 26 May 2025.

2“Indonesia can reach net zero emissions before 2050, president says”. Reuters. 20 November 2024.

3 “With its abundant geothermal reserves, Indonesia aims to harvest more green energy”. CNA. 26 October 2023.

[3] “Green sukuk: Allocation and impact report 2023”. Ministry of Finance, Republic of Indonesia. 2023.