Power Plant Investments in the Turkish Electricity Sector: A Real Options Approach Taking into Account Market Liberalization
In this paper we study the economic feasibility of constructing a 560 MW coal-fired power plant in Turkey, using real options theory . We start from a short review of the Turkish electricity market as well as the literature on real options theory and power plant investment. We then investigate the peculiarities and uncertainties related to large-scale power generation. Our special research focus is on the determination of the real options value of the sequential nature of the power plant project considered. To this end, we develop a sequential investment model based on the binomial tree model of Cox, Ross and Rubinstein . The four stages considered are (1) initial project development; (2) detailed planning and permitting; (3) first major project payments; and (4) release of final order. We find that especially for the strategic planning of projects the application of the real options analysis (ROA) can be very useful. The relatively high option value compared to the net present value (NPV) of the project makes clear that the flexibilities of reacting during project realization, depending on the market developments, can be assigned an immense value. A further advantage of the ROA for a staged or sequential investment lies in the fact that it also delivers, besides the option value of the investment, the optimal strategy for exercising the option (i.e. if and when to invest). The revelation of action possibilities and their examination sheds new light on the conventional calculation of the NPV of such projects.
|Date of creation:||Dec 2010|
|Date of revision:||Jul 2011|
|Contact details of provider:|| Web page: http://www.eonerc.rwth-aachen.de/fcn|
More information through EDIRC
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.:
- Siddiqui, Afzal S. & Maribu, Karl, 2009. "Investment and upgrade in distributed generation under uncertainty," Energy Economics, Elsevier, vol. 31(1), pages 25-37, January.
- Robert C. Merton, 2005.
"Theory of rational option pricing,"
World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288
World Scientific Publishing Co. Pte. Ltd..
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005. "Choice of nuclear power investments under price uncertainty: Valuing modularity," Energy Economics, Elsevier, vol. 27(4), pages 667-685, July.
- Gollier, Christian, 2004. "Choice of Nuclear Power Investments under Price Uncertainty: Valuing Modularity," IDEI Working Papers 287, Institut d'Économie Industrielle (IDEI), Toulouse.
- Gollier, Christian & Proult, David & Thais, Françoise & Walgenwitz, Gilles, 2004. "Choice of Nuclear Power Investments ander Price Uncertainty: Valuing Modularity," IDEI Working Papers 270, Institut d'Économie Industrielle (IDEI), Toulouse.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 479-508.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
- Marreco, Juliana de Moraes & Carpio, Lucio Guido Tapia, 2006. "Flexibility valuation in the Brazilian power system: A real options approach," Energy Policy, Elsevier, vol. 34(18), pages 3749-3756, December.
- 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 637-654, May-June.
- 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)
When requesting a correction, please mention this item's handle: RePEc:ris:fcnwpa:2010_021. 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: (Hendrik Schmitz)
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.