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Application of an advanced real options approach for renewable energy generation projects planning

  • Martínez-Ceseña, E.A.
  • Mutale, J.
Registered author(s):

    Nowadays, there is growing interest in renewable energy (RE) generation projects due to environmental and sustainability concerns. However, initial costs and uncertainties caused by RE source variability, changes in support schemes, and other factors can render RE projects unattractive when subject to conventional financial assessment. Initial research suggests that the value of RE projects can be enhanced by the application of real options (RO) theory in the planning and evaluation of such projects. Literature on application of RO planning in RE generation projects is limited, and typically focuses solely on flexible investment decisions and neglects flexible designs. A more comprehensive approach should address flexibility in designs. This paper proposes an advanced RO methodology for RE generation projects planning, and illustrates the methodology using variations of a hydropower case study. The fundamental differences between advanced RO approaches and other techniques are illustrated on a simple case study. The complete version of the proposed advanced methodology is then compared against other available tools. The results show higher expected profits for projects planned with the advanced RO methodology.

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    Article provided by Elsevier in its journal Renewable and Sustainable Energy Reviews.

    Volume (Year): 15 (2011)
    Issue (Month): 4 (May)
    Pages: 2087-2094

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    Handle: RePEc:eee:rensus:v:15:y:2011:i:4:p:2087-2094
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    1. Siddiqui, Afzal S. & Marnay, Chris & Wiser, Ryan H., 2007. "Real options valuation of US federal renewable energy research, development, demonstration, and deployment," Energy Policy, Elsevier, vol. 35(1), pages 265-279, January.
    2. Davis, Graham A. & Owens, Brandon, 2003. "Optimizing the level of renewable electric R&D expenditures using real options analysis," Energy Policy, Elsevier, vol. 31(15), pages 1589-1608, December.
    3. Jamasb, Tooraj & Nuttall, William J. & Pollitt, Michael, 2008. "The case for a new energy research, development and promotion policy for the UK," Energy Policy, Elsevier, vol. 36(12), pages 4610-4614, December.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    5. Tsai, W. -T., 2005. "Current status and development policies on renewable energy technology research in Taiwan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 9(3), pages 237-253, June.
    6. Kumbaroglu, Gürkan & Madlener, Reinhard & Demirel, Mustafa, 2008. "A real options evaluation model for the diffusion prospects of new renewable power generation technologies," Energy Economics, Elsevier, vol. 30(4), pages 1882-1908, July.
    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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