Using real option analysis for highly uncertain technology investments: The case of wind energy technology
This study examines the feasibility of using a theoretical model and empirical analysis methods to value renewable energy (RE) investment from perspective of real option analysis (ROA). Based on use of a ROA approach, the RE value is evaluated with respect to its ability to conform to the main sensitivity analysis of RE investment, as well as an empirical method devised to value RE investment by using actual data. The economic intuitiveness underlying the decision-making process for RE investment is elucidated, while empirical analysis is performed to demonstrate the effectiveness of the options value embedded in current development planning in Taiwan for wind energy. In addition to revealing the advantages of RE development when considering real option, analytical results indicate that ROA is a highly effective means of quantifying how investment planning uncertainty (including managerial flexibility) influences RE development. Besides evaluating the value of current RE investment, this study demonstrates that results of the theoretical model, empirical analysis, and sensitivity analysis correlate well with each other. Restated, the value of developing RE increases when increasing the underlying price, time to maturity, risk-free rate, and volatility. Conversely, the value of developing RE decreases when increasing the exercise price.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 15 (2011)
Issue (Month): 9 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/600126/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/journaldescription.cws_home/600126/bibliographic|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Saidur, R. & Islam, M.R. & Rahim, N.A. & Solangi, K.H., 2010. "A review on global wind energy policy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(7), pages 1744-1762, September.
- Hwang, Jenn Jiang, 2010. "Promotional policy for renewable energy development in Taiwan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(3), pages 1079-1087, April.
- Clift, Roland, 2007. "Climate change and energy policy: The importance of sustainability arguments," Energy, Elsevier, vol. 32(4), pages 262-268.
- Islam, Mazharul & Fartaj, Amir & Ting, David S. -K., 2004. "Current utilization and future prospects of emerging renewable energy applications in Canada," Renewable and Sustainable Energy Reviews, Elsevier, vol. 8(6), pages 493-519, December.
- 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.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Ku, Se-Ju & Yoo, Seung-Hoon, 2010. "Willingness to pay for renewable energy investment in Korea: A choice experiment study," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(8), pages 2196-2201, October.
- Kumbaroglu, Gürkan & Madlener, Reinhard & Demirel, Mustafa, 2008.
"A real options evaluation model for the diffusion prospects of new renewable power generation technologies,"
Elsevier, vol. 30(4), pages 1882-1908, July.
- Gürkan Kumbaroglu & Reinhard Madlener & Mustafa Demirel, 2004. "A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies," CEPE Working paper series 04-35, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Ming-Cheng Wu & Chun-Yao Tseng, 2006. "Valuation of patent - a real options perspective," Applied Economics Letters, Taylor & Francis Journals, vol. 13(5), pages 313-318.
- Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 87-54.
- Lee, Shun-Chung & Shih, Li-Hsing, 2011. "Enhancing renewable and sustainable energy development based on an options-based policy evaluation framework: Case study of wind energy technology in Taiwan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(5), pages 2185-2198, June.
- 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.
- Chen, Falin & Lu, Shyi-Min & Chang, Yi-Lin, 2007. "Renewable energy in Taiwan: Its developing status and strategy," Energy, Elsevier, vol. 32(9), pages 1634-1646.
- Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard & Revdal, Ingemar, 2006.
"Investment timing and optimal capacity choice for small hydropower projects,"
2693, University Library of Munich, Germany, revised 31 Dec 2006.
- Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard J. & Revdal, Ingemar, 2008. "Investment timing and optimal capacity choice for small hydropower projects," European Journal of Operational Research, Elsevier, vol. 190(1), pages 255-267, October.
- Wang, Qiang, 2010. "Effective policies for renewable energy--the example of China's wind power--lessons for China's photovoltaic power," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(2), pages 702-712, February.
- Liou, Hwa Meei, 2010. "Policies and legislation driving Taiwan's development of renewable energy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(7), pages 1763-1781, September.
- Lee, Shun-Chung & Shih, Li-Hsing, 2010. "Renewable energy policy evaluation using real option model -- The case of Taiwan," Energy Economics, Elsevier, vol. 32(Supplemen), pages S67-S78, September.
- Bor, Yunchang Jeffrey & Zhang, ZhongXiang, 2010. "Asian energy in the context of growing security and environmental concerns," Energy Economics, Elsevier, vol. 32(Supplemen), pages S1-S2, September.
- del Río, Pablo & Unruh, Gregory, 2007. "Overcoming the lock-out of renewable energy technologies in Spain: The cases of wind and solar electricity," Renewable and Sustainable Energy Reviews, Elsevier, vol. 11(7), pages 1498-1513, September.
- Venetsanos, Konstantinos & Angelopoulou, Penelope & Tsoutsos, Theocharis, 2002. "Renewable energy sources project appraisal under uncertainty: the case of wind energy exploitation within a changing energy market environment," Energy Policy, Elsevier, vol. 30(4), pages 293-307, March.
- Tu, Wubin & Zhang, LingXian & Zhou, Zhongren & Liu, Xue & Fu, Zetian, 2011. "The development of renewable energy in resource-rich region: A case in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(1), pages 856-860, January.
- Díez-Mediavilla, M. & Alonso-Tristán, C. & Rodríguez-Amigo, M.C. & García-Calderón, T., 2010. "Implementation of PV plants in Spain: A case study," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(4), pages 1342-1346, May.
- Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
- Jäger-Waldau, Arnulf, 2007. "Photovoltaics and renewable energies in Europe," Renewable and Sustainable Energy Reviews, Elsevier, vol. 11(7), pages 1414-1437, September.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:rensus:v:15:y:2011:i:9:p:4443-4450. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.