IDEAS home Printed from https://ideas.repec.org/a/bbz/fcpbbr/v5y2008i2p103-120.html
   My bibliography  Save this article

Valuation of a Power Plant with the Real Options Approach

Author

Listed:
  • Alexandre Caporal

    (Abengoa Brasil)

  • Luiz Eduardo Teixeira Brandão

    (PUC-Rio)

Abstract

Since the late 1990s, the Brazilian electric power industry has been undergoing significant structural changes, the main objective being to increase competition and attract private investment. Due to this, the National Electric Energy Agency has offered a large number of investment opportunities through auctions of the right to build and operate power plants (mostly hydroelectric) and transmission lines, including small hydroelectric plants.In this article we propose a valuation model for a power generation plant under uncertainty and with the flexibility to choose the optimal power purchase agreement using the real options approach, and then apply this model to the case of a small hydroelectric plant. The results indicate that the flexible project has a value significantly greater than that obtained through traditional discounted cash flow methods.

Suggested Citation

  • Alexandre Caporal & Luiz Eduardo Teixeira Brandão, 2008. "Valuation of a Power Plant with the Real Options Approach," Brazilian Business Review, Fucape Business School, vol. 5(2), pages 103-120, May.
    • Handle: RePEc:bbz:fcpbbr:v:5:y:2008:i:2:p:103-120
    as

    Download full text from publisher

    File URL: http://bbronline.com.br/index.php/bbr/article/download/442/668
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Frayer, Julia & Uludere, Nazli Z., 2001. "What Is It Worth? Application of Real Options Theory to the Valuation of Generation Assets," The Electricity Journal, Elsevier, vol. 14(8), pages 40-51, October.
    2. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. E. Brandão, Luiz & Dyer, James S. & Hahn, Warren J., 2012. "Volatility estimation for stochastic project value models," European Journal of Operational Research, Elsevier, vol. 220(3), pages 642-648.
    2. Fernandes, Gláucia & Gomes, Leonardo Lima & Brandão, Luiz Eduardo Teixeira, 2018. "A risk-hedging tool for hydro power plants," Renewable and Sustainable Energy Reviews, Elsevier, vol. 90(C), pages 370-378.

    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. 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.
    2. Schachter, J.A. & Mancarella, P., 2016. "A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 261-271.
    3. Dominik Kryzia & Michał Kopacz & Katarzyna Kryzia, 2020. "The Valuation of the Operational Flexibility of the Energy Investment Project Based on a Gas-Fired Power Plant," Energies, MDPI, vol. 13(7), pages 1-16, March.
    4. 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.
    5. Andrejs Čirjevskis, 2022. "Measuring Collaborative Synergies with Advanced Real Options: MNEs’ Sequential Acquisitions of International Ventures," JRFM, MDPI, vol. 16(1), pages 1-18, December.
    6. 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.
    7. Hörnlein, Lena, 2019. "The value of gas-fired power plants in markets with high shares of renewable energy," Energy Economics, Elsevier, vol. 81(C), pages 1078-1098.
    8. Sinha, Pankaj & Mudgal, Hemant, 2011. "Valuation of 3G spectrum license in India: A real option approach," MPRA Paper 31281, University Library of Munich, Germany.
    9. Bert M. SADOWSKI & Mathijs VERHEIJEN & Alberto NUCCIARELLI, 2008. "From Experimentation to Citywide Rollout: Real Options for a Municipal WiMax Network in the Netherlands," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(70), pages 101-126, 2nd quart.
    10. Carol Alexander & Xi Chen, 2021. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 299(1), pages 1025-1056, April.
    11. Fabien A. Roques & William J. Nuttall & David M. Newbery & Richard de Neufville & Stephen Connors, 2006. "Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?," The Energy Journal, , vol. 27(4), pages 1-24, October.
    12. Babak Jafarizadeh & Reidar B. Bratvold, 2019. "Exploration economics: taking opportunities and the risk of double-counting risk," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 32(3), pages 323-335, November.
    13. Martins, José & Marques, Rui Cunha & Cruz, Carlos Oliveira, 2014. "Maximizing the value for money of PPP arrangements through flexibility: An application to airports," Journal of Air Transport Management, Elsevier, vol. 39(C), pages 72-80.
    14. Wickart, Marcel & Madlener, Reinhard, 2007. "Optimal technology choice and investment timing: A stochastic model of industrial cogeneration vs. heat-only production," Energy Economics, Elsevier, vol. 29(4), pages 934-952, July.
    15. Kumbaroglu, Gürkan & Madlener, Reinhard & Demirel, Mustafa, 2008. "A real options evaluation model for the diffusion prospects of new renewable power generation technologies," Energy Economics, Elsevier, vol. 30(4), pages 1882-1908, July.
    16. L. Robin Keller & Kelly M. Kophazi, 2010. "From the Editors..," Decision Analysis, INFORMS, vol. 7(2), pages 151-154, June.
    17. Pepermans, G. & Driesen, J. & Haeseldonckx, D. & Belmans, R. & D'haeseleer, W., 2005. "Distributed generation: definition, benefits and issues," Energy Policy, Elsevier, vol. 33(6), pages 787-798, April.
    18. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
    19. Kamel, Ahmed & Elwageeh, Mohamed & Bonduà, Stefano & Elkarmoty, Mohamed, 2023. "Evaluation of mining projects subjected to economic uncertainties using the Monte Carlo simulation and the binomial tree method: Case study in a phosphate mine in Egypt," Resources Policy, Elsevier, vol. 80(C).
    20. Tianyang Wang & James S. Dyer, 2010. "Valuing Multifactor Real Options Using an Implied Binomial Tree," Decision Analysis, INFORMS, vol. 7(2), pages 185-195, June.

    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:bbz:fcpbbr:v:5:y:2008:i:2:p:103-120. 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: Sarah Lasso (email available below). General contact details of provider: https://edirc.repec.org/data/fucapbr.html .

    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.