The use of real options approach in energy sector investments
AbstractEnergy shortage, global warming, and climate change led to an increase in the use of alternative sources of energy, with renewable energy sources (RES) playing a fundamental role in this new energetic paradigm. However, the investment costs often constitute a major barrier to their spread use. Moreover, the overall benefits of renewable energy technologies are often not well understood and consequently they are often evaluated to be not as cost effective as traditional technologies. From the moment that the energy sector started a deregulation process, with a high level of competitiveness and associated increased market uncertainty, traditional project evaluation techniques alone became insufficient to properly deal with these additional risk and uncertainty factors. The diffusion of the renewable energy technologies is also affected by this feature. The way investors evaluate their investments call now for the use of more sophisticated evaluation techniques. Real options approach can deal with these issues and, as so, began to be considered and applied for the energy sector decision aid. This approach it is now extensively widespread in evaluating investment projects in the energy sector. A large set of applications in almost all fields of energy decision making, from electricity generation technologies appraisal to policy evaluation is available in the literature. However the use of this technique in the field of RES is still limited and worth to be analysed. This paper addresses this issue. A review of the current state of the art in the application of real options approach to investments in non-renewable energy sources and RES is presented, giving perspectives for further research in this field.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Renewable and Sustainable Energy Reviews.
Volume (Year): 15 (2011)
Issue (Month): 9 ()
Contact details of provider:
Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/600126/description#description
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fan, Ying & Zhu, Lei, 2010. "A real options based model and its application to China's overseas oil investment decisions," Energy Economics, Elsevier, Elsevier, vol. 32(3), pages 627-637, May.
- Reinhard Madlener & GÃ¼rkan Kumbaroglu & Volkan S. Ediger, 2004.
"Modeling Technology Adoption as an Irreversible Investment Under Uncertainty: The Case of the Turkish Electricity Supply Industry,"
CEPE Working paper series, CEPE Center for Energy Policy and Economics, ETH Zurich
04-30, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Madlener, Reinhard & Kumbaroglu, Gurkan & Ediger, Volkan S., 2005. "Modeling technology adoption as an irreversible investment under uncertainty: the case of the Turkish electricity supply industry," Energy Economics, Elsevier, Elsevier, vol. 27(1), pages 139-163, January.
- Kumbaroglu, GÃ¼rkan & Madlener, Reinhard & Demirel, Mustafa, 2008.
"A real options evaluation model for the diffusion prospects of new renewable power generation technologies,"
Energy Economics, Elsevier,
Elsevier, vol. 30(4), pages 1882-1908, July.
- GÃ¼rkan Kumbaroglu & Reinhard Madlener & Mustafa Demirel, 2004. "A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies," CEPE Working paper series, CEPE Center for Energy Policy and Economics, ETH Zurich 04-35, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Venetsanos, Konstantinos & Angelopoulou, Penelope & Tsoutsos, Theocharis, 2002. "Renewable energy sources project appraisal under uncertainty: the case of wind energy exploitation within a changing energy market environment," Energy Policy, Elsevier, vol. 30(4), pages 293-307, March.
- Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard & Revdal, Ingemar, 2006.
"Investment timing and optimal capacity choice for small hydropower projects,"
2693, University Library of Munich, Germany, revised 31 Dec 2006.
- BÃ¸ckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, HÃ¥vard J. & Revdal, Ingemar, 2008. "Investment timing and optimal capacity choice for small hydropower projects," European Journal of Operational Research, Elsevier, Elsevier, vol. 190(1), pages 255-267, October.
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
- Shi-Jie Deng & Zhendong Xia, 2006. "A Real Options Approach For Pricing Electricity Tolling Agreements," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 421-436.
- Awerbuch, Shimon & Dillard, Jesse & Mouck, Tom & Preston, Alistair, 1996. "Capital budgeting, technological innovation and the emerging competitive environment of the electric power industry," Energy Policy, Elsevier, vol. 24(2), pages 195-202, February.
- Gonzalo Cortazar & Eduardo S. Schwartz & Marcelo Salinas, 1998. "Evaluating Environmental Investments: A Real Options Approach," Management Science, INFORMS, INFORMS, vol. 44(8), pages 1059-1070, August.
- Haas, Reinhard & Panzer, Christian & Resch, Gustav & Ragwitz, Mario & Reece, Gemma & Held, Anne, 2011. "A historical review of promotion strategies for electricity from renewable energy sources in EU countries," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 15(2), pages 1003-1034, February.
- Laurikka, Harri & Koljonen, Tiina, 2006. "Emissions trading and investment decisions in the power sector--a case study in Finland," Energy Policy, Elsevier, vol. 34(9), pages 1063-1074, June.
- Chorn, L.G. & Shokhor, S., 2006. "Real options for risk management in petroleum development investments," Energy Economics, Elsevier, Elsevier, vol. 28(4), pages 489-505, July.
- Fleten, Stein-Erik & NÃ¤sÃ¤kkÃ¤lÃ¤, Erkka, 2010. "Gas-fired power plants: Investment timing, operating flexibility and CO2 capture," Energy Economics, Elsevier, Elsevier, vol. 32(4), pages 805-816, July.
- Majd, Saman & Pindyck, Robert S., 1987.
"Time to build, option value, and investment decisions,"
Journal of Financial Economics, Elsevier,
Elsevier, vol. 18(1), pages 7-27, March.
- Saman Majd & Robert S. Pindyck, 1985. "Time to Build, Option Value, and Investment Decisions," NBER Working Papers 1654, National Bureau of Economic Research, Inc.
- Siddiqui, Afzal & Fleten, Stein-Erik, 2008.
"How to Proceed with Competing Alternative Energy Technologies: a Real Options Analysis,"
15502, University Library of Munich, Germany, revised 04 May 2009.
- Siddiqui, Afzal & Fleten, Stein-Erik, 2010. "How to proceed with competing alternative energy technologies: A real options analysis," Energy Economics, Elsevier, Elsevier, vol. 32(4), pages 817-830, July.
- Siddiqui, Afzal S. & Marnay, Chris & Wiser, Ryan H., 2007. "Real options valuation of US federal renewable energy research, development, demonstration, and deployment," Energy Policy, Elsevier, vol. 35(1), pages 265-279, January.
- Lee, Shun-Chung & Shih, Li-Hsing, 2010. "Renewable energy policy evaluation using real option model -- The case of Taiwan," Energy Economics, Elsevier, Elsevier, vol. 32(Supplemen), pages S67-S78, September.
- Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Moreira, Ajax & Rocha, Katia & David, Pedro, 2004. "Thermopower generation investment in Brazil--economic conditions," Energy Policy, Elsevier, vol. 32(1), pages 91-100, January.
- Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 479-508, August.
- Hlouskova, Jaroslava & Kossmeier, Stephan & Obersteiner, Michael & Schnabl, Alexander, 2005. "Real options and the value of generation capacity in the German electricity market," Review of Financial Economics, Elsevier, Elsevier, vol. 14(3-4), pages 297-310.
- Marreco, Juliana de Moraes & Carpio, Lucio Guido Tapia, 2006. "Flexibility valuation in the Brazilian power system: A real options approach," Energy Policy, Elsevier, vol. 34(18), pages 3749-3756, December.
- Ekern, Steinar, 1988. "An option pricing approach to evaluating petroleum projects," Energy Economics, Elsevier, Elsevier, vol. 10(2), pages 91-99, April.
- Menegaki, Angeliki, 2008. "Valuation for renewable energy: A comparative review," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 12(9), pages 2422-2437, December.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- van Benthem, A.A. & Kramer, G.J. & Ramer, R., 2006. "An options approach to investment in a hydrogen infrastructure," Energy Policy, Elsevier, vol. 34(17), pages 2949-2963, November.
- Nalin Kulatilaka & Enrico C. Perotti, 1998. "Strategic Growth Options," Management Science, INFORMS, INFORMS, vol. 44(8), pages 1021-1031, August.
- Luis M. Abadie, 2009. "Valuation of Long-Term Investments in Energy Assets under Uncertainty," Energies, MDPI, Open Access Journal, vol. 2(3), pages 738-768, September.
- John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 15(1), pages 8-23.
- Frayer, Julia & Uludere, Nazli Z., 2001. "What Is It Worth? Application of Real Options Theory to the Valuation of Generation Assets," The Electricity Journal, Elsevier, Elsevier, vol. 14(8), pages 40-51, October.
- Martínez-Ceseña, E.A. & Mutale, J., 2011. "Application of an advanced real options approach for renewable energy generation projects planning," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 15(4), pages 2087-2094, May.
- Felder, Frank A, 1996. "Integrating financial theory and methods in electricity resource planning," Energy Policy, Elsevier, vol. 24(2), pages 149-154, February.
- Davis, Graham A. & Owens, Brandon, 2003. "Optimizing the level of renewable electric R&D expenditures using real options analysis," Energy Policy, Elsevier, vol. 31(15), pages 1589-1608, December.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
- Luis M. Abadie & JosÃ© M. Chamorro, 2014.
"Valuation of Wind Energy Projects: A Real Options Approach,"
MDPI, Open Access Journal, vol. 7(5), pages 3218-3255, May.
- Luis M. Abadie & José M. Chamorro, . "Valuation of wind energy projects: A real options approach," Working Papers 2012-11, BC3.
- Lin, Boqiang & Wesseh, Presley K., 2013. "Valuing Chinese feed-in tariffs program for solar power generation: A real options analysis," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 28(C), pages 474-482.
- Shahnazari, Mahdi & McHugh, Adam & Maybee, Bryan & Whale, Jonathan, 2014. "Evaluation of power investment decisions under uncertain carbon policy: A case study for converting coal fired steam turbine to combined cycle gas turbine plants in Australia," Applied Energy, Elsevier, vol. 118(C), pages 271-279.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.