Investing in biogas: Timing, technological choice and the value of flexibility from input mix
AbstractIn a stochastic dynamic frame, we study the technology choice problem of a continuous co-digestion biogas plant where input factors are substitutes but need to be mixed together to provide output. Given any initial rule for the composition of the feedstock, we consider the possibility of revising it if economic circumstances make it profitable. Flexibility in the mix is an advantage under randomly fluctuating input costs and comes at a higher investment cost. We show that the degree of flexibility in the productive technology installed depends on the value of the option to profitably re-arrange the input mix. Such option adds value to the project in that it provides a device for hedging against fluctuations in the input relative convenience. Accounting for such value we discuss the trade-off between investment timing and profit smoothing flexibility.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 33 (2011)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/eneco
Real options; Flexibility; Technological choice; Renewable energy; Biomass; Anaerobic digestion;
Other versions of this item:
- Michele Moretto & Luca Di Corato, 2009. "Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix," Working Papers 2009.84, Fondazione Eni Enrico Mattei.
- Luca Di Corato & Michele Moretto, 2011. "Investing in biogas: timing, technological choice and the value of flexibility from inputs mix," "Marco Fanno" Working Papers 0134, Dipartimento di Scienze Economiche "Marco Fanno".
- Luca Di Corato & Michele Moretto, 2009. "Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix," CESifo Working Paper Series 2729, CESifo Group Munich.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
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