Article Valuation of Wind Energy Projects: A Real Options Approach (original) (raw)
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Valuation of Wind Energy Projects: A Real Options Approach
Energies, 2014
We address the valuation of an operating wind farm and the finite-lived option to invest in it under different reward/support schemes: a constant feed-in tariff, a premium on top of the electricity market price (either a fixed premium or a variable subsidy such as a renewable obligation certificate or ROC), and a transitory subsidy, among others. Futures contracts on electricity with ever longer maturities enable market-based valuations to be undertaken. The model considers up to three sources of uncertainty: the electricity price, the level of wind generation, and the certificate (ROC) price where appropriate. When analytical solutions are lacking, we resort to a trinomial lattice combined with Monte Carlo simulation; we also use a two-dimensional binomial lattice when uncertainty in the ROC price is considered. Our data set refers to the UK. The numerical results show the impact of several factors involved in the decision to invest: the subsidy per MWh generated, the initial lump-sum subsidy, the maturity of the investment option, and electricity price volatility. Different combinations of variables can help bring forward investments in wind generation. One-off policies, e.g., a transitory initial subsidy, seem to have a stronger effect than a fixed premium per MWh produced.
Compound real options valuation of renewable energy projects: The case of a wind farm in Serbia
Renewable and Sustainable Energy Reviews, 2017
Renewable energy sources have become a very important issue due to environmental and sustainability concerns. In addition, most renewable energy electricity generation (RES-E) projects are characterized by considerable uncertainty and sequential decision-making. These projects' net present value (NPV) is very often close to zero, which renders them a good candidate for the application of real options valuation methodology of investment project appraisal. This paper examines the real options valuation of a potential onshore wind farm project in Serbia. The binomial tree model spans a 15 year period consisting of a 2 year investment period and a 13 year operating period, the first 12 years of which are protected by Feed-in-Tariffs according to local renewable energy regulations. The authors examine a multi-phased compound (nested) path-dependent real option consisting of mutually exclusive options-a sequential option to invest as well as expand, repower, contract and abandon options. Volatility, which is calculated by means of a Monte Carlo simulation according to the logarithmicpresent-value-returns approach, shows predominant sensitivity to the capacity factor simulated with the rescaled Weibull's probability distribution. The final binomial tree results show that the proposed sequence of options increases project value by transforming higher risk and lower return in the initial discounted cash flow model, to lower risk and higher return in the RO model. This paper contributes to the existing literature in at least two ways: it presents in-depth analysis of the real option application to the RES-E project and provides decision-makers with sophisticated tool for improving strategic thinking, capital budgeting and decision-making processes.
2015
This paper discusses the important development of electricity production from renewable energy in Spain. The regulatory framework has played a key role in this process, particularly the 661/2007 Royal Decree of May 25. The legislation grants certain rights to promoters. These rights can be characterized as options, allowing us to utilize a signifi cant number of theoretical and empirical studies in the fi eld of fi nancial option pricing in our analysis. Insofar as these derivative assets have underlying real and non-fi nancial assets (i.e., a wind farm), the rights provided for in Royal Decree 661/2007 can be considered real options. In this paper, a method is proposed to evaluate investment projects in Spanish wind power based on the Royal Decree. The value of these projects is certainly affected by the real options contained in the Royal Decree. Finally, public aid granted by the administration for the development of renewable energies is evaluated.
International Journal of Energy Economics and Policy, 2015
This paper discusses the important development of electricity production from renewable energy in Spain. The regulatory framework has played a key role in this process, particularly the 661/2007 Royal Decree of May 25. The legislation grants certain rights to promoters. These rights can be characterized as options, allowing us to utilize a signifi cant number of theoretical and empirical studies in the fi eld of fi nancial option pricing in our analysis. Insofar as these derivative assets have underlying real and non-fi nancial assets (i.e., a wind farm), the rights provided for in Royal Decree 661/2007 can be considered real options. In this paper, a method is proposed to evaluate investment projects in Spanish wind power based on the Royal Decree. The value of these projects is certainly affected by the real options contained in the Royal Decree. Finally, public aid granted by the administration for the development of renewable energies is evaluated.
Investment Management and Financial Innovations, 2017
Investment analysis is a crucial process for any investment’s success. This process can be supported by both the discounted cash flow analysis and the real options analysis. Many researchers have point out restrictions for the first one, in cases of uncertainty in the entrepreneurial environment. The main types of uncertainty, concerning the wind energy sector, include uncertainties related to the price of electriticity by RES, the public policy regulatory policies, the demand, the initial capital costs, the technological progress, the weather conditions, the political and economical situations and generally the RES market structure. In this paper, we try to find the optimal investment strategy in a liberalized global electricity market, where the price of electricity is uncertain while the other parameters are configured separately in each country. The authors consider about the factors of the time for investment and the electricity’s price level, in wind energy by using the real o...
Evaluation of Investments in Wind Energy Projects, under Uncertainty. State of the Art Review
Applied Sciences
The use of renewable energy sources, especially wind energy, has been widely developed, mostly during the last decade. The main objective of the present study is to conduct a literature review focused on the evaluation under uncertainty of wind energy investment using the real options approach to find out whether public opposition (NIMBY projects) has been contemplated, and if so, what have been the flexible strategies applied for its intervention. Overall, 97 publications were analyzed, identifying 20 different models or approaches, which were grouped into eight categories: 1. Real options, 2. Optimization, 3. Stochastics, 4. Financial evaluation, 5. Probabilistic, 6. Estimation, 7. Numerical prediction, and 8. Others. The real options approach, present in 32% of the studies, was the most popular. Twenty-eight types of uncertainties were identified, which were grouped, for better analysis, into nine categories. In total, 62.5% of the studies included the price of electricity as a s...
A Compound Up-and-In Call like Option for Wind Projects Pricing
Risks
Wind energy projects represent, currently, a valid opportunity to support United Nations Sustainable Development Goal 7. However, these projects can appear financially unattractive considering the unfavorable meteorological conditions, uncertain electricity market price, uncertain market demand, unpredictable project performance, riskiness of investment stages, etc. This paper provides a real options pricing model applied for the evaluation of a wind farm project to include the uncertainty that can affect future performance. The methodology proposed uses a compound call option model with two barriers applied, respectively, to the twofold phase framework that would act as a sort of up-and-in barrier. The compound call option model allows us to valuate the managerial flexibility to proceed with the following investment stages depending on the success of the previous ones and, through the barriers, the methodology gives the investor the opportunity to consider some profitability thresh...
Valuation of Wind Energy Turbines Using Volatility of Wind and Price
The limitedness of the nonrenewable local energy resources in Israel, even in background of the later gas fields’ findings, continues to force the state to devote various efforts for the ‘green’ energy development. These efforts include installations both in the solar and in the wind energy, with a purpose to improve the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique is widely applied in many studies for valuation of renewable energy investment projects. Hence, we apply in this study the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel.
EPJ Web of Conferences, 2012
This paper describes a Dynamic Model of the electricity sector that can be used to simulate the evolution of some key variables on the long term, namely the evolution of the electricity price, of the demand and of the capacity factors of the technologies in the generation mix. This model can be used in different ways and by several agents, for instance to estimate the impact on the electricity price of the increasing presence of renewable power stations, namely using wind power and PV systems. In several countries these stations are paid feed-in tariffs with a fixed price but in some cases this scheme is under discussion and there are opinions that payments determined by the market price are more adequate and would bring fewer costs to final consumers. Such a change has to be carefully evaluated given that the presence of renewable stations bidding at an infra marginal price will affect the price itself. The model described in this paper can be used in a profitable way both by governmental agencies when preparing or studying alternative remuneration schemes to renewable stations or by promoters themselves to get more insight to the profitability of their investments, namely if the fixed feed-in tariffs in force in several countries are changed.