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Evaluation of hydropower upgrade projects - a real options approach

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  • Elverhøi, Morten
  • Fleten, Stein-Erik
  • Fuss, Sabine
  • Heggedal, Ane Marte
  • Szolgayova, Jana
  • Troland, Ole Christian

Abstract

When evaluating whether to refurbish existing hydropower plants or invest in a new power plant, there are two important aspects to take into consideration. These are the capacity chosen for the production facilities and the timing of the investment. This paper presents an investment decision support framework for hydropower producers with production facilities due for restoration. The producer can choose between refurbishing existing power plants and investing in a new production facility. A real options framework is proposed to support the investment decision. Using a case from Norsk Hydro ASA, a Norwegian hydropower producer, we employ the framework to evaluate the investment opportunities. Our main contribution is an approach that combines hydropower scheduling and real options valuation, and the results from our analysis suggest feasible investment strategies for Norsk Hydro ASA.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23005.

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Date of creation: 07 May 2010
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Handle: RePEc:pra:mprapa:23005

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Keywords: Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets;

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References

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  1. Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard & Revdal, Ingemar, 2006. "Investment timing and optimal capacity choice for small hydropower projects," MPRA Paper 2693, University Library of Munich, Germany, revised 31 Dec 2006.
  2. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, Elsevier, vol. 85(8), pages 708-721, August.
  3. Kjaerland, Frode, 2007. "A real option analysis of investments in hydropower--The case of Norway," Energy Policy, Elsevier, Elsevier, vol. 35(11), pages 5901-5908, November.
  4. E. Nasakkala & J. Keppo, 2008. "Hydropower with Financial Information," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(5-6), pages 503-529.
  5. Chorn, L.G. & Shokhor, S., 2006. "Real options for risk management in petroleum development investments," Energy Economics, Elsevier, Elsevier, vol. 28(4), pages 489-505, July.
  6. Stein W. Wallace & Stein-Erik Fleten, 2002. "Stochastic programming in energy," GE, Growth, Math methods, EconWPA 0201001, EconWPA, revised 13 Nov 2003.
  7. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(7), pages 1437-1460, April.
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Cited by:
  1. Kroniger, Daniel & Madlener, Reinhard, 2013. "Hydrogen Storage for Wind Parks - A Real Options Evaluation for an Optimal Investment in More Flexibility," FCN Working Papers, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) 3/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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