Real options valuation for geothermal investments considering technology selection and carbon credit: A feasibility study in Indonesia

This study integrates conventional Discounted Cash Flow (DCF) analysis with Real Options Valuation (ROV) to assess the feasibility of geothermal power plant projects utilizing two distinct technologies: Flash Condensing (FC) and Two-Phase Binary (TPB), while also considering new revenue streams derived from carbon credits. With a discount rate of 8 %, FC demonstrates superior financial performance compared to TPB. Sensitivity analysis also indicates that the IRR of both technologies is significantly influenced by interest rates, CAPEX exploitation and exploration drilling, as well as OPEX and other costs. FC demonstrates greater resilience to ± 10 % cash flow variations, making it a feasible technology at present. However, TPB has the potential to enhance its investment evaluation value, when costs can be reduced and there is the implementation of a voluntary international market for carbon credits. TPB could become more viable if the carbon credit price increases to at least $7.4/tCO2e. FC technology offers expansion opportunities by utilizing hot brine that can still be converted into energy. The expansion option, modeled using European call option Black-Scholes Model and Binomial Lattice Model, can enhance the project’s ENPV to approximately $3.86 M for FC-1 and $16.80 M for FC-2. This provides flexibility and a robust framework for uncertainties regarding decision-making at the top management level. Furthermore, it will support the development of the geothermal industry in Indonesia, the global energy transition, and achieving net zero emissions targets.