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Renewable Energy Project Appraisal Using The Real Options Methodology

Author

Listed:
  • Vasileios PAPADIMITRIOU

    (Researcher, Department of Regional Development and Planning, University of Thessaly, Volos, Greece)

  • Serafeim POLYZOS

    (Professor, Department of Regional Development and Planning, University of Thessaly, Volos, Greece)

  • Dimitrios TSIOTAS

    (Assistant Professor, Department of Regional and Economic Development, School of Applied Economics and Social Sciences, Agricultural University of Athens, Amfissa, Greece)

Abstract

Renewable energy sources (RES) are characterized as clean forms of energy and come directly or indirectly from the impact of solar energy on the environment. The overall process of planning, designing, constructing, and operating renewable energy projects involves complex uncertainties and risks, which are difficult to analyze and evaluate effectively through traditional investment appraisal methods. Each RES project presents different types of uncertainties, which are categorized as external and internal. The Real Options (RO) theory for evaluating investments in RES projects can provide additional investment options at different stages of the projects, enhancing flexibility and improving the decision-making ability of a company's management. This paper summarizes the specifics governing RES projects, the main characteristics of the RO methodology, and an overall framework for its application to RES projects. This framework is used to evaluate an investment in a 500kWp photovoltaic (PV) park in Greece. The uncertainties selected for the analysis of the RO methodology are the electricity sales price and the production from the specific PV project. In addition, the options/rights of the investor that are considered, are to continue or abandon the investment in each phase of the project implementation. The results, based on the current data and have included the possible fluctuation in the values of the two aforementioned uncertainties, show that investing in a PV project of similar size and technology in Greece is advantageous and worth undertaking. The intention to finance a large proportion of the investment by the banks plays an important role in this.

Suggested Citation

  • Vasileios PAPADIMITRIOU & Serafeim POLYZOS & Dimitrios TSIOTAS, 2023. "Renewable Energy Project Appraisal Using The Real Options Methodology," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(1), pages 85-96, June.
    • Handle: RePEc:hrs:journl:v:xv:y:2023:i:1:p:85-96
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    References listed on IDEAS

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    More about this item

    Keywords

    project appraisal methods; real options theory; renewable energy projects; risk and uncertainty analysis; construction project management;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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