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Using real option analysis for highly uncertain technology investments: The case of wind energy technology

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  • Lee, Shun-Chung

Abstract

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.

Suggested Citation

  • Lee, Shun-Chung, 2011. "Using real option analysis for highly uncertain technology investments: The case of wind energy technology," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4443-4450.
  • Handle: RePEc:eee:rensus:v:15:y:2011:i:9:p:4443-4450
    DOI: 10.1016/j.rser.2011.07.107
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    Citations

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    Cited by:

    1. McInerney, Celine & Bunn, Derek W., 2017. "Optimal over installation of wind generation facilities," Energy Economics, Elsevier, vol. 61(C), pages 87-96.
    2. Morgan Bazilian & Debabrata Chattopadhyay, 2015. "Considering Power System Planning in Fragile and Conflict States," Cambridge Working Papers in Economics 1530, Faculty of Economics, University of Cambridge.
    3. Cuervo, Felipe Isaza & Botero, Sergio Botero, 2016. "Wind power reliability valuation in a Hydro-Dominated power market: The Colombian case," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1359-1372.
    4. Arasteh, Abdollah, 2017. "Considering the investment decisions with real options games approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 72(C), pages 1282-1294.
    5. repec:eee:rensus:v:75:y:2017:i:c:p:354-367 is not listed on IDEAS
    6. repec:eee:eneeco:v:70:y:2018:i:c:p:132-142 is not listed on IDEAS
    7. Zhang, M.M. & Zhou, P. & Zhou, D.Q., 2016. "A real options model for renewable energy investment with application to solar photovoltaic power generation in China," Energy Economics, Elsevier, vol. 59(C), pages 213-226.
    8. repec:eee:rensus:v:80:y:2017:i:c:p:180-196 is not listed on IDEAS
    9. repec:eee:rensus:v:75:y:2017:i:c:p:918-926 is not listed on IDEAS
    10. Jeon, Chanwoong & Lee, Jeongjin & Shin, Juneseuk, 2015. "Optimal subsidy estimation method using system dynamics and the real option model: Photovoltaic technology case," Applied Energy, Elsevier, vol. 142(C), pages 33-43.
    11. Kim, Kyung-Taek & Lee, Deok-Joo & Park, Sung-Joon, 2014. "Evaluation of R&D investments in wind power in Korea using real option," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 335-347.
    12. Mo, Jian-Lei & Agnolucci, Paolo & Jiang, Mao-Rong & Fan, Ying, 2016. "The impact of Chinese carbon emission trading scheme (ETS) on low carbon energy (LCE) investment," Energy Policy, Elsevier, vol. 89(C), pages 271-283.
    13. repec:eee:renene:v:125:y:2018:i:c:p:783-795 is not listed on IDEAS

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