IDEAS home Printed from https://ideas.repec.org/a/vrs/foeste/v16y2016i2p84-102n7.html
   My bibliography  Save this article

An Assessment of Wind Farm Construction Efficiency Using the Real Option Method

Author

Listed:
  • Łukaszewski Tomasz

    (University of Szczecin, Faculty of Economics and Management, Institute of IT in Management, Mickiewicza 64, 71-101 Szczecin, Poland)

  • Głoćko Wojciech

    (Chairman of the Board, Epa Wind sp. z o.o, Wojska Polskiego 156, 71-324 Szczecin, Poland)

Abstract

From a developer’s point of view the construction of a wind farm in Poland is an investment project assessed in terms of economic efficiency. This paper discusses the selection of methods to be used for the assessment of such investments: it proposes to consider wind farm construction as an option and price it using models developed for the financial market. The purpose of the paper is to present a practical application of the option pricing method to the assessment of wind farm construction efficiency, in particular to compare the option and discount methods. Calculations are based with the example of an actual wind farm completed by one of the authors. The values of the project are different depending on the chosen method of estimation. The pricing carried out using the options method will lend legitimacy to the DCF result or suggest the verification of its correctness and review of the assumptions made. In both cases the application of the options method will have an advantageous impact on the investment decision.

Suggested Citation

  • Łukaszewski Tomasz & Głoćko Wojciech, 2016. "An Assessment of Wind Farm Construction Efficiency Using the Real Option Method," Folia Oeconomica Stetinensia, Sciendo, vol. 16(2), pages 84-102, December.
    • Handle: RePEc:vrs:foeste:v:16:y:2016:i:2:p:84-102:n:7
    DOI: 10.1515/foli-2016-0027
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/foli-2016-0027
    Download Restriction: no
    File URL: https://libkey.io/10.1515/foli-2016-0027?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    2. Kim, Amy M. & Li, Huanan, 2020. "Incorporating the impacts of climate change in transportation infrastructure decision models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 134(C), pages 271-287.
    3. Guedes, José & Santos, Pedro, 2016. "Valuing an offshore oil exploration and production project through real options analysis," Energy Economics, Elsevier, vol. 60(C), pages 377-386.
    4. Biancardi, Marta & Di Bari, Antonio & Villani, Giovanni, 2021. "R&D investment decision on smart cities: Energy sustainability and opportunity," Chaos, Solitons & Fractals, Elsevier, vol. 153(P2).
    5. Santos, Lúcia & Soares, Isabel & Mendes, Carla & Ferreira, Paula, 2014. "Real Options versus Traditional Methods to assess Renewable Energy Projects," Renewable Energy, Elsevier, vol. 68(C), pages 588-594.
    6. Manley, Bruce & Niquidet, Kurt, 2010. "What is the relevance of option pricing for forest valuation in New Zealand?," Forest Policy and Economics, Elsevier, vol. 12(4), pages 299-307, April.
    7. Dapena, Jose Pablo, 2003. "On the Valuation of Companies with Growth Opportunities," Journal of Applied Economics, Universidad del CEMA, vol. 6(01), pages 1-24, May.
    8. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    9. Chandra, Atul & Hartley, Peter R., 2024. "Sequential investment decisions for mining projects using compound multiple volatility real options approach," Resources Policy, Elsevier, vol. 97(C).
    10. Sina Atari & Yassine Bakkar & Eunice Omolola Olaniyi & Gunnar Prause, 2019. "Real options analysis of abatement investments for sulphur emission control compliance," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(3), pages 1062-1087, March.
    11. Kyle Hyndman & Alberto Bisin, 2022. "Procrastination, self-imposed deadlines and other commitment devices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(3), pages 871-897, October.
    12. 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 67-78, September.
    13. Haehl, Christian & Spinler, Stefan, 2018. "Capacity expansion under regulatory uncertainty:A real options-based study in international container shipping," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 113(C), pages 75-93.
    14. Ariste, Ruolz & Lasserre, Pierre, 2001. "La gestion optimale d’une forêt exploitée pour son potentiel de diminution des gaz à effet de serre et son bois," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(1), pages 27-51, mars.
    15. Madlener, Reinhard & Stoverink, Simon, 2012. "Power plant investments in the Turkish electricity sector: A real options approach taking into account market liberalization," Applied Energy, Elsevier, vol. 97(C), pages 124-134.
    16. Twine, Edgar E. & Kiiza, Barnabas & Bashaasha, Bernard, 2015. "The Flexible Accelerator Model of Investment: An Application to Ugandan Tea- Processing Firms," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 10(01), pages 1-15, March.
    17. Cristina Mihaela Onica & Nicoleta Ghilic & Maria-Gabriela Chirita, 2015. "News And Perspectives On Accounting And Econometric Modeling Cash Flow Indicators In The Companies Listed On The Capital Market," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 435-443.
    18. Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
    19. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    20. Carmen Schiel & Simon Glöser-Chahoud & Frank Schultmann, 2019. "A real option application for emission control measures," Journal of Business Economics, Springer, vol. 89(3), pages 291-325, April.

    More about this item

    Keywords

    real options; efficiency assessment; wind farms;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:foeste:v:16:y:2016:i:2:p:84-102:n:7. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.