Investment decisions under uncertainties in geothermal power generation

Geothermal energy is one of the strategies employed by the Indonesian government to meet rising electricity demand. Developing geothermal energy is often characterized by uncertainties and requires sequential decision-making which is divided into four development phases: 1) identification, 2) exploration, 3) exploitation, and 4) engineering, procurement, construction, and commissioning (EPPC) before it can be commercialized. Traditional valuation techniques often produce a negative net present value (NPV), suggesting decision to reject the project's investment plan. This paper investigates the economic viability of a geothermal power generation project using both NPV and real options analysis (ROA). Costs and uncertainties associated with the various development phases as well as the investment structure of geothermal projects are studied. We develop a framework for assessing the impact of four uncertainties using a binomial lattice: capacity factor, electricity price, make-up welldrilling costs, and operation and maintenance (O&M) costs. Secondary data from an Indonesian context geothermal power plant was used. Positive option values were found for the lattice approach compared to negative values found for the common NPV calculation. The result of this study showed the successful outcome of the exploration stage is very critical to determining the continuation of the project. The framework supports decision-makers in evaluating the impact of geothermal power generation projects in the face of uncertainty by providing a rigorous analysis. The movement of the underlying asset's value in the whole project's lifetime will assist the management in deciding on whether to exit or continue.