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The use of real options approach in energy sector investments

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  • Fernandes, Bartolomeu
  • Cunha, Jorge
  • Ferreira, Paula
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    Abstract

    Energy 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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Renewable and Sustainable Energy Reviews.

    Volume (Year): 15 (2011)
    Issue (Month): 9 ()
    Pages: 4491-4497

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    Handle: RePEc:eee:rensus:v:15:y:2011:i:9:p:4491-4497

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    Related research

    Keywords: Renewable energy sources; Energy sector; Real options; Project evaluation;

    References

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    Cited by:
    1. Luis M. Abadie & José M. Chamorro, 2014. "Valuation of Wind Energy Projects: A Real Options Approach," Energies, MDPI, Open Access Journal, vol. 7(5), pages 3218-3255, May.
    2. 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.
    3. 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, vol. 28(C), pages 474-482.

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