The Government has withdrawn its contribution towards a £50 million scheme to create energy using the heat from rocks deep underground near Redruth.
Geothermal Engineering Ltd was awarded £6 million last year from the Regional Growth Fund for the project which is earmarked for United Downs, between St Day and Carharrack.
But the company's failure to attract private funding for the scheme has led to the award being rescinded.
A spokesman for the Department for Business Innovation and Skills said: "The offer of Regional Growth Fund support for Geothermal Ltd has now been withdrawn as the company was unable to raise sufficient private sector investment to make this project work.
"We recognise that this news will be disappointing for the project and for the local area, but we must ensure that all RGF projects represent a robust and effective scheme for the region - one that brings in private sector investment, creates long-term jobs and represents value for the taxpayer."
The withdrawn money will be recycled back into the RGF scheme so that it can be used for other projects.
Ryan Law, MD of Geothermal Engineering Ltd, described the news as "unfortunate", but said the project was not dead.
He said: This was unfortunate, but not entirely unexpected.
"We had hoped that deep geothermal electricity would receive a tariff that would put us on a level playing field with Germany.
"Unfortunately this did not happen and our industrial partners decided to invest elsewhere in Europe.
"As the RGF was dependent on private investment, DBIS didn't have that much choice but to withdraw the offer.
"We will still continue with the United Downs project, but we do not think that substantial private investment will be forthcoming until the Feed in Tariff level for deep geothermal electricity is competitive with other countries in Europe."