An Integrated CVaR and Real Options Approach to Investments in the Energy Sector

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An Integrated CVaR and Real Options Approach to Investments in the Energy Sector

Author Info

Fortin, Ines (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
Fuss, Sabine (University of Maastricht/UNU-Merit, Maastricht, The Netherlands)
Hlouskova, Jaroslava (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
Khabarov, Nikolay (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria)
Obersteiner, Michael (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria)
Szolgayova, Jana (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria)

Abstract

The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of particular technologies under uncertainty. These technologies are coal-fired power plants, biomassfired power plants and onshore wind mills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is the Conditional Value-at-Risk (CVaR).

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Publisher Info
Paper provided by Institute for Advanced Studies in its series Economics Series with number 209.

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Length: 38 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ihs:ihsesp:209

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-05-12 (All new papers)
NEP-CFN-2007-05-12 (Corporate Finance)
NEP-ENE-2007-05-12 (Energy Economics)
NEP-ENV-2007-05-12 (Environmental Economics)
NEP-RMG-2007-05-12 (Risk Management)

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