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Investment timing and optimal capacity choice for small hydropower projects

  • Bøckman, Thor
  • Fleten, Stein-Erik
  • Juliussen, Erik
  • Langhammer, Håvard
  • Revdal, Ingemar

This paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices. We present a real options-based method with continuous scaling, and we find that there is a unique price limit for initiating the project. If the current electricity price is below this limit it is never optimal to invest, but above this limit investment is made according to the function for optimal size. The connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant, based on all the important choices for such a plant. The main results of the spreadsheet are simulated production size and the investment costs, which are in turn used for finding the value of the real option and the price limit. The method is illustrated on three different Norwegian small hydropower projects.

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File URL: http://mpra.ub.uni-muenchen.de/2693/1/MPRA_paper_2693.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2693.

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Date of creation: 11 Jun 2006
Date of revision: 31 Dec 2006
Handle: RePEc:pra:mprapa:2693
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  1. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
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