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Optimal investment strategies in decentralized renewable power generation under uncertainty

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  • Fleten, Stein-Erik
  • Maribu, Karl Magnus
  • Wangensteen, Ivar

Abstract

This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.

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File URL: http://mpra.ub.uni-muenchen.de/7647/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 218.

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Date of creation: Mar 2005
Date of revision: Jun 2006
Handle: RePEc:pra:mprapa:218

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Related research

Keywords: Real options; Renewable electricity technologies; Electricity markets; Stochastic price; Distributed generation;

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References

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  1. Décamps, Jean-Paul & Mariotti, Thomas & Villeneuve, Stéphane, 2003. "Irreversible Investment in Alternative Projects," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 193, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2004.
  2. Ang, B.W. & Huang, J.P. & Poh, K.L., 1999. "Break-even price of distributed generation under uncertainty," Energy, Elsevier, Elsevier, vol. 24(7), pages 579-589.
  3. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, INFORMS, vol. 46(7), pages 893-911, July.
  4. Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, Elsevier, vol. 41(3), pages 265-268.
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Cited by:
  1. Martínez Ceseña, E.A. & Mutale, J. & Rivas-Dávalos, F., 2013. "Real options theory applied to electricity generation projects: A review," Renewable and Sustainable Energy Reviews, Elsevier, Elsevier, vol. 19(C), pages 573-581.
  2. Siddiqui, Afzal & Fleten, Stein-Erik, 2008. "How to Proceed with Competing Alternative Energy Technologies: a Real Options Analysis," MPRA Paper 15502, University Library of Munich, Germany, revised 04 May 2009.
  3. William E., Lilley & Luke J., Reedman & Liam D., Wagner & Colin F., Alie & Anthony R., Szatow, 2012. "An economic evaluation of the potential for distributed energy in Australia," Energy Policy, Elsevier, Elsevier, vol. 51(C), pages 277-289.
  4. Malte Sunderkötter & Christoph Weber, 2011. "Mean-Variance optimization of power generation portfolios under uncertainty in the merit order," EWL Working Papers, University of Duisburg-Essen, Chair for Management Science and Energy Economics 1105, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2011.
  5. Arvesen, Øystein & Medbø, Vegard & Fleten, Stein-Erik & Tomasgard, Asgeir & Westgaard, Sjur, 2012. "Linepack storage valuation under price uncertainty," MPRA Paper 43270, University Library of Munich, Germany.
  6. Wagner Sousa de Oliveira & Antonio Jorge Fernandes, 2012. "Optimization Model for Economic Evaluation of Wind Farms - How to Optimize a Wind Energy Project Economically and Technically," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 2(1), pages 10-20.
  7. Theodoros M. Diasakos, 2011. "A Simple Characterization of Dynamic Completeness in Continuous Time," Carlo Alberto Notebooks, Collegio Carlo Alberto 211, Collegio Carlo Alberto.

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