FINANCIAL RISK ANALYSIS OF GREEN-FIELD GEOTHERMAL PROJECTS IN INDONESIA: THE IMPACT OF INTEREST RATE SUBSIDY

Abstract

Geothermal energy has continuously received a range of government incentives
in the last decades. However, the research investigating the effectiveness of
those incentives, particularly the interest rate subsidy, is relatively limited.
Therefore, we are interested in exploring this gap at the project level by
emphasizing green-field geothermal projects. This is relevant as green-field
geothermal projects are carrying high financial risks during their early
development stages that limit their access to a cheaper financing market. The
study is carried out by employing Monte Carlo Simulation to examine the
investment of a 55 MW green-field geothermal energy project and to analyze
the extent of impact of interest rate subsidy on the project viability applied to a
selected greenfield geothermal project as the case study. The simulation results
show that, without an interest rate subsidy, the project's mean Internal Rate of
Return (IRR) is 10.31%, a level generally considered too low for high-risk
greenfield investments. Introducing a 50% interest rate subsidy raises the mean
IRR to 11.27% and increases the probability of achieving an IRR ≥ 10% from 79%
to 98.36%. These findings indicate that while interest rate subsidies improve
project financial viability, the improvement is modest relative to the 14–16% IRR
typically expected by private investors for greenfield geothermal projects,
suggesting that interest rate subsidy alone may be insufficient without
complementary policy instruments.