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Repowering of Wind Turbines: Economics and Optimal Timing

  • Himpler, Sebastian

    ()

    (RWTH Aachen University)

  • Madlener, Reinhard

    ()

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

For more than 20 years now, wind power has been one of the main renewable energy sources, especially in countries like Denmark, one of the pioneer countries in developing onshore wind turbines. Whereas offshore wind utilization still has a high risk profile the repowering of wind converter offers an interesting alternative to further increase the use of renewable energy. This paper first provides an overview of the historical development of wind utilization in Denmark, with a special focus on incentive systems. Second, we study the economics and optimal timing of repowering for the case of Danish wind farms. We use a two-factor real options modeling framework following the Mc Donald and Siegel (1986) approach, which allows consideration of the investment costs as well as revenues, both following a continuous time, stochastic process. In a next step, a Monte Carlo Simulation is applied to determine the probability of success of repowering for each year. Finally, we discuss the results and highlight the effects necessary to increase repowering activities. We find that until now, the high uncertainty in terms of revenues hinders the further development of repowering in Denmark and lowers the probability of success significantly, while the selling price of the used turbine has only a minor effect on the optimal timing of repowering. Therefore, wind developers should argue for a larger stake of secured parts in revenues, achievable via higher governmental guaranteed incentives.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 19/2011.

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Length: 43 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:ris:fcnwpa:2011_019
Note: revised July 2012
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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.
  2. Ian M. Dobbs, 2004. "Replacement Investment: Optimal Economic Life Under Uncertainty," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 729-757.
  3. Sperling, Karl & Hvelplund, Frede & Mathiesen, Brian Vad, 2010. "Evaluation of wind power planning in Denmark – Towards an integrated perspective," Energy, Elsevier, vol. 35(12), pages 5443-5454.
  4. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  5. 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.
  6. Rohlfs, Wilko & Madlener, Reinhard, 2010. "Valuation of CCS-Ready Coal-Fired Power Plants: A Multi-Dimensional Real Options Approach," FCN Working Papers 7/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  7. Reinhard Madlener & Marcel Wickart, 2004. "Optimal Technology Choice and Investment Timing: A Stochastic Model of Industrial Cogeneration vs. Heat-Only Production," CEPE Working paper series 04-37, CEPE Center for Energy Policy and Economics, ETH Zurich.
  8. Agnolucci, Paolo, 2007. "Wind electricity in Denmark: A survey of policies, their effectiveness and factors motivating their introduction," Renewable and Sustainable Energy Reviews, Elsevier, vol. 11(5), pages 951-963, June.
  9. Zambujal-Oliveira, João & Duque, João, 2011. "Operational asset replacement strategy: A real options approach," European Journal of Operational Research, Elsevier, vol. 210(2), pages 318-325, April.
  10. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 1-20, March.
  12. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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