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

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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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File URL: http://www.ihs.ac.at/publications/eco/es-209.pdf
File Function: First version, 2007
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Bibliographic 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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Related research

Keywords: Portfolio optimization; CVaR; climate change policy; uncertainty; real options; electricity; investments;

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Cited by:
  1. 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.

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