Evaluation of hydropower upgrade projects - a real options approach
AbstractWhen 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 23005.
Date of creation: 07 May 2010
Date of revision:
Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-11 (All new papers)
- NEP-ENE-2010-06-11 (Energy Economics)
- NEP-PPM-2010-06-11 (Project, Program & Portfolio Management)
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