To set up Prisma ORM in a Next.js project, first install the Prisma Client package using npm. Then initialize Prisma with 'npx prisma init', which creates the schema.prisma file and environment variables. Next, define your data models inside schema.prisma. After that, run 'npx prisma migrate dev' to apply these models to your database, creating or updating tables. Then generate the Prisma Client code with 'npx prisma generate'. Finally, import PrismaClient in your Next.js code and create an instance to start querying your database. This setup ensures your app can communicate with the database using Prisma's easy-to-use client.