Geothermal energy has an important role in Indonesia’s long-term energy transition. Located along the Pacific Ring of Fire, Indonesia possesses substantial geothermal potential capable of supporting relatively stable, low-emission electricity generation over decades.
Yet geothermal development is fundamentally different from many other renewable-energy investments.
A solar developer can measure solar irradiation before constructing a photovoltaic plant. A wind developer can assess wind speed and patterns before installing turbines. A geothermal developer, however, must invest significantly in exploration and drilling before the characteristics of the underground resource can be established with sufficient confidence.
Temperature, pressure, permeability, fluid chemistry, reservoir characteristics and well productivity all influence whether a geothermal project can ultimately perform as expected.
This creates a distinctive risk profile.
For investors, lenders, developers and project owners, geothermal risk management therefore cannot begin with the turbine, generator or power plant. It must begin with the resource beneath the ground—and continue throughout construction and the plant’s operating life.
When geothermal energy is discussed, attention often goes to the visible infrastructure: turbines, generators, cooling systems, steam pipelines, transformers and transmission connections.
But these assets represent only the later stages of a much larger investment.
The real geothermal project begins underground.
Before a power plant can generate electricity, developers must establish whether a commercially viable geothermal resource exists, understand its characteristics, drill production and exploration wells, assess well productivity, develop the steam gathering system, construct the power plant and ultimately connect the generated electricity to the grid.
Each stage introduces a different risk profile.
This makes geothermal development fundamentally different from a conventional construction project. The project may encounter significant uncertainty even before major above-ground construction begins.
The first question is therefore not simply whether the power plant can be built.
It is whether the resource can support the power plant that is being planned.
The most fundamental question in geothermal development is straightforward:
Will the geothermal resource deliver the energy output that the project expects?
Exploration studies and geological modelling can provide valuable indications, but an underground reservoir remains inherently complex. Temperature, pressure, permeability, fluid chemistry and other reservoir characteristics may vary from the assumptions used in the original project model.
A well may produce steam, but less than expected.
It may achieve the required temperature but lack sufficient permeability.
It may initially perform well while its longer-term reservoir performance develops differently from the original assumptions.
Additional wells may then be required.
These possibilities have direct implications for project economics.
The investor is therefore not only financing a power plant. At the earlier stages, the investor is also financing the process of proving that an underground energy resource can support that plant.
This is why resource risk is central to geothermal project risk management.
Once sufficient confidence in the resource has been established, the project increasingly resembles other major energy infrastructure developments.
A geothermal development may involve steam gathering systems, pipelines, wellheads, turbines, generators, transformers, cooling systems, substations, transmission infrastructure, control systems, civil works, roads and bridges.
The scale and complexity can be substantial.
The development of PGE's 55 MW Lumut Balai Unit 3, for example, officially began in January 2026, with commercial operation targeted for 2030.
Projects of this nature illustrate an important characteristic of geothermal investment: the project is not simply a power plant. It is an integrated infrastructure system connecting an underground resource to an electricity-generating facility and ultimately to the off-taker.
The reliability of that entire chain determines the reliability of the investment.
Geothermal risk is not concentrated in one location or one stage of development.
It exists beneath the ground, at the well, within the steam gathering system, inside the power plant and across the infrastructure connecting the project to the electricity network.
The challenge for project owners and decision makers is therefore to understand how these risks interact.
Once exploration moves into drilling, the project encounters one of its most significant exposures.
Geothermal wells can be deep, technically demanding and expensive. Drilling operations may encounter unexpected geological formations, high temperatures, high pressure, lost circulation, well-control issues, equipment failure, casing problems, poor well productivity or other unforeseen geological conditions.
A failed or underperforming well can have a significant financial impact.
But geothermal drilling risk should not be viewed only as a question of catastrophic failure.
A well can be technically completed and still perform below the level required by the project model.
That distinction is important.
The relevant question is not always:
“Did the well fail?”
It may instead be:
“Did the well perform sufficiently to support the project's economic assumptions?”
This makes geothermal risk management closely connected with engineering analysis, project modelling and financial resilience.
Geothermal projects operate in an environment where outcomes are rarely completely binary.
A resource may perform below expectation without completely failing.
Production may decline faster than expected.
Additional wells may become necessary.
The reservoir may behave differently from the geological model.
Commissioning may be delayed.
Each individual deviation may appear manageable, but together they can materially affect project economics.
A robust risk assessment therefore needs to consider scenarios rather than only catastrophic events.
What happens if production is 20% below expectation?
What happens if additional wells are required?
What happens if reservoir performance declines faster than expected?
What happens if commissioning is delayed?
These questions connect technical uncertainty directly to the project's financial structure.
After the resource has been established, the project remains exposed to conventional power-generation risks.
Turbines can fail.
Generators can suffer mechanical or electrical damage.
Transformers can be damaged.
Control systems can malfunction.
Fire can occur.
Machinery can break down.
The steam gathering system can also become a critical point of failure.
Pipelines, valves, separators and related equipment must continuously handle geothermal fluids under demanding conditions. Corrosion, scaling, pressure variations, thermal stresses and fluid chemistry can affect equipment performance.
A failure in the steam gathering system can therefore reduce or stop electricity generation even when the underground reservoir itself remains healthy.
This illustrates an important risk-management principle:
A geothermal plant is only as reliable as the weakest critical component in the energy chain.
The geological conditions that create geothermal resources are also associated with natural hazards.
Geothermal projects are frequently located in volcanic or tectonically active areas. Depending on the location, the project may face earthquake, volcanic activity, landslide, flood, extreme rainfall, lightning and fire exposures.
Location therefore becomes more than a question of resource quality.
The project must also consider what natural hazards could affect its assets, infrastructure and access throughout its operating life.
For a geothermal project expected to operate for decades, risk assessment cannot focus solely on the conditions that make the resource attractive.
The same environment that creates the energy resource may also create physical hazards to the infrastructure built around it.
For a geothermal project, the value at risk is not limited to the replacement cost of damaged equipment.
A major loss can interrupt electricity generation, reduce revenue, disrupt contractual obligations and continue to affect the project while repairs are underway.
This makes the concept of exposure particularly important.
Consider a major turbine or generator failure.
The physical damage may be repairable.
But what happens if the repair requires six months?
The financial consequence of the loss can therefore become substantially larger than the physical damage itself.
This is the fundamental issue behind Business Interruption exposure.
For infrastructure investors and lenders, the question should not simply be:
“How much will it cost to repair the damaged equipment?”
It should also be:
“How much value is lost every day that the project cannot operate?”
The financial impact of a plant failure depends heavily on recovery time.
A component that can be repaired locally within several weeks presents a very different exposure from a specialized component that must be manufactured overseas and installed by specialist engineers.
A comprehensive risk review should therefore examine:
These questions connect physical risk directly to business continuity.
The project company's exposure is also influenced by its contractual and stakeholder structure.
A geothermal project may involve project owners, developers, EPC contractors, drilling contractors, equipment suppliers, technology providers, financiers, PLN or other off-takers, government authorities and local communities.
Each stakeholder has different responsibilities and different interests.
This makes risk allocation a critical part of project exposure.
The project needs to establish:
If these responsibilities are unclear, a physical loss can quickly become a contractual dispute.
The relationship between risk management and financing is increasingly important as Indonesian geothermal projects seek international funding.
In June 2026, three PGE projects entered Indonesia's Green Book 2026, securing potential international financing of up to US$477.87 million:
The financing involves concessional loans from JICA and the World Bank, with the projects targeted for commercial operation between 2030 and 2032.
This demonstrates how geothermal projects are increasingly viewed as bankable infrastructure investments rather than simply engineering developments.
For lenders and investors, project viability depends not only on expected generation capacity but also on the project's ability to withstand adverse events and recover from losses.
Risk management therefore becomes part of the project's overall investment resilience.
From L&G's perspective, one of the most important principles in geothermal risk management is that insurance should not be the starting point of the discussion.
A traditional approach may begin with:
“What insurance coverage does the project need?”
A risk-management approach begins with a different question:
“What could threaten the project's objectives, and how would the project absorb the consequences?”
That distinction matters.
Insurance is one component of a broader risk strategy. It cannot compensate for inadequate engineering, poor contractual risk allocation, weak business continuity planning or insufficient understanding of the geothermal resource.
A geothermal project should first be understood as a complete risk ecosystem.
That means examining the resource, drilling programme, project design, equipment, construction schedule, contractors, supply chain, natural perils, financial structure, business interruption exposure and contractual risk allocation.
Only after these elements are understood can an appropriate insurance strategy be developed.
This approach is particularly important because geothermal risk changes as the project progresses.
During exploration and drilling, the primary concerns may include resource uncertainty and drilling exposures.
During construction, attention shifts toward physical damage, construction delays, third-party liability, marine transportation and commissioning.
During operation, machinery breakdown, property damage, business interruption and natural perils become increasingly important.
The insurance programme therefore needs to evolve with the project.
There is no single insurance programme that is appropriate for every geothermal development.
The appropriate structure depends on the project's development stage, technology, location, contractual arrangements, financing structure and overall risk profile.
During construction, potential protection may include:
During operation, potential protection may include:
The important principle is not the number of policies.
It is whether the insurance structure corresponds to the actual exposures.
Insurance should follow the risk profile of the project—not the other way around.
L&G also considers contractual risk allocation to be an essential part of the overall risk strategy.
Geothermal projects involve multiple parties, and each party controls different aspects of the risk.
The drilling contractor may control drilling execution.
The EPC contractor may control construction activities.
Equipment suppliers may control manufacturing quality.
Technology providers may have specific responsibilities relating to equipment or performance.
The project company ultimately remains exposed to the consequences of many events even when the immediate cause originates with another party.
This is why contracts and insurance cannot be considered independently.
A risk that is assumed to belong to another party must actually be supported by appropriate contractual provisions, financial capacity and, where appropriate, insurance.
Otherwise, the project may discover after a loss that the expected risk transfer does not work as intended.
Another important L&G consideration is recovery.
A risk strategy should not stop at identifying what can be damaged. It should also examine how quickly the project can recover.
Critical equipment should be identified.
Replacement lead times should be understood.
Spare-part availability should be assessed.
Specialist engineering support should be considered.
Alternative suppliers should be evaluated.
The financial impact of different downtime scenarios should be modelled.
These considerations are particularly important for geothermal power plants because the financial consequences of prolonged interruption can continue long after the physical damage has occurred.
The role of an insurance broker in a complex geothermal project should therefore extend beyond obtaining an insurance quotation.
The broker should help connect the technical, contractual and financial dimensions of risk.
For L&G, that means asking questions such as:
These questions allow risk transfer to become part of a broader project-risk strategy.
The objective is not simply to purchase insurance.
It is to build a risk structure that supports the project's ability to withstand uncertainty, recover from loss and protect its long-term financial objectives.
Indonesia has an enormous geothermal opportunity.
PGE alone has a roadmap to develop up to 3 GW of geothermal potential, while the company currently manages 727 MW of installed capacity and is targeting 1 GW within the next two to three years.
But installed megawatts are only one measure of project success.
A resilient geothermal project also requires resource confidence, engineering excellence, financial discipline, operational resilience, strong HSE practices, effective contractual risk allocation and appropriate risk transfer.
The ultimate question is therefore not only:
“How many megawatts can the project generate?”
It is:
“How resilient is the investment when the project encounters uncertainty, damage or prolonged interruption?”
That is where risk management becomes strategically important.
The heat beneath Indonesia may represent the energy resource.
But the investment above it must be designed to withstand uncertainty.
For geothermal investors, developers, lenders and project decision makers, risk management should begin long before the first megawatt is generated.
It should begin when the project is still beneath the ground.
Team
Direktur Utama
Terhubung dengan kami
Hubungi Omar untuk mendiskusikan kebutuhan asuransi dan solusi pengelolaan risiko Anda melalui halo@lngrisk.co.id atau WhatsApp.
