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Real Options Analysis for Investment Decisions in Geothermal Energy

Author

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  • Michel Becker
  • Marcus Vinicius Andrade de Lima
  • Juliana Baldessar Weber

Abstract

Geothermal renewable energy can contribute to the reduction of greenhouse gas emissions. However, difficulties have been encountered during its development. It is characterized by high-risk investment and irreversibility, whereas traditional investment analysis techniques have limited applications. As a tool for evaluating energy investments, the real options theory allows flexibility to be incorporated into project design in the face of an uncertain environment and has demonstrated the ability to add economic value to investments. Based on simulations of a geothermal project implemented in Brazil in a real-options framework specifically adapted for the analysis of geothermal investments, this study demonstrates that the tool is efficient in adding economic value to the analysis. In addition, it provides a comprehensive view of the project, identifying the managerial flexibilities and uncertainties that influence profits the most. This model is expected to encourage researchers and investors to evaluate geothermal energy projects in Brazil.

Suggested Citation

  • Michel Becker & Marcus Vinicius Andrade de Lima & Juliana Baldessar Weber, 2023. "Real Options Analysis for Investment Decisions in Geothermal Energy," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 15(12), pages 160-160, December.
    • Handle: RePEc:ibn:ijefaa:v:15:y:2023:i:12:p:160
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    References listed on IDEAS

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    1. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Dalbem, Marta Corrêa & Brandão, Luiz Eduardo Teixeira & Gomes, Leonardo Lima, 2014. "Can the regulated market help foster a free market for wind energy in Brazil?," Energy Policy, Elsevier, vol. 66(C), pages 303-311.
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    Cited by:

    1. Ang Yang & Ang Li & Zongxing Li & Yuhui Sun & Jing Gao, 2025. "Investment Analysis of Low-Carbon Yard Cranes: Integrating Monte Carlo Simulation and Jump Diffusion Processes with a Hybrid American–European Real Options Approach," Energies, MDPI, vol. 18(8), pages 1-30, April.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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