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Switch and defer option in renewable energy projects: Evidences from Brazil

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  • Nunes, Luis Eduardo
  • Lima, Marcus Vinicius Andrade de
  • Davison, Matthew
  • Leite, André Luis da Silva

Abstract

The global electricity sector is responsible for a large share of greenhouse gas. Renewable energy (RE) is a feasible alternative to maintain sustainable growth and economic development, as it appears to be a means to reduce emissions and decarbonize economies. Renewable energy projects present some uncertainties and flexibilities that are ignored by traditional methods of evaluation, such as the net present value (NPV), which can lead to undervaluation. This paper aims to assess the switch-output option and defer option for RE projects according to their features in the Brazilian electricity market. The real options approach (ROA) for RE projects seeks to capture the value of uncertainties and flexibilities that all projects have from an investor's point of view. Then, when we adopted a more sophisticated approach that values flexibilities and uncertainties for RE projects, it was possible to conclude that there was a clear increase in value when compared to traditional investment analysis methods like the NPV.

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  • Nunes, Luis Eduardo & Lima, Marcus Vinicius Andrade de & Davison, Matthew & Leite, André Luis da Silva, 2021. "Switch and defer option in renewable energy projects: Evidences from Brazil," Energy, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:energy:v:231:y:2021:i:c:s0360544221012202
    DOI: 10.1016/j.energy.2021.120972
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    More about this item

    Keywords

    Real options; Renewable energy; Valuation; Investment decision; Uncertainty;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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