IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v231y2021ics0360544221012202.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544221012202
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2021.120972?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kroniger, Daniel & Madlener, Reinhard, 2014. "Hydrogen storage for wind parks: A real options evaluation for an optimal investment in more flexibility," Applied Energy, Elsevier, vol. 136(C), pages 931-946.
    2. Lee, Shun-Chung, 2011. "Using real option analysis for highly uncertain technology investments: The case of wind energy technology," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4443-4450.
    3. Walls, W.D. & Rusco, Frank W. & Ludwigson, Jon, 2007. "Power plant investment in restructured markets," Energy, Elsevier, vol. 32(8), pages 1403-1413.
    4. Luis M. Abadie & José M. Chamorro, 2014. "Valuation of Wind Energy Projects: A Real Options Approach," Energies, MDPI, vol. 7(5), pages 1-38, May.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. 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.
    7. Luiz Eduardo T. Brandão & Gilberto Master Penedo & Carlos Bastian-Pinto, 2013. "The value of switching inputs in a biodiesel production plant," The European Journal of Finance, Taylor & Francis Journals, vol. 19(7-8), pages 674-688, September.
    8. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    9. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
    10. 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.
    11. Hu, Yu & Solana, Pablo, 2013. "Optimization of a hybrid diesel-wind generation plant with operational options," Renewable Energy, Elsevier, vol. 51(C), pages 364-372.
    12. Lin, Boqiang & Wesseh, Presley K., 2013. "Valuing Chinese feed-in tariffs program for solar power generation: A real options analysis," Renewable and Sustainable Energy Reviews, Elsevier, vol. 28(C), pages 474-482.
    13. 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.
    14. Kirby, Natasha & Davison, Matt, 2010. "Using a spark-spread valuation to investigate the impact of corn-gasoline correlation on ethanol plant valuation," Energy Economics, Elsevier, vol. 32(6), pages 1221-1227, November.
    15. Jeon, Chanwoong & Lee, Jeongjin & Shin, Juneseuk, 2015. "Optimal subsidy estimation method using system dynamics and the real option model: Photovoltaic technology case," Applied Energy, Elsevier, vol. 142(C), pages 33-43.
    16. Boomsma, Trine Krogh & Meade, Nigel & Fleten, Stein-Erik, 2012. "Renewable energy investments under different support schemes: A real options approach," European Journal of Operational Research, Elsevier, vol. 220(1), pages 225-237.
    17. Dalbem, Marta Corrêa & Brandão, Luiz Eduardo Teixeira & Gomes, Leonardo Lima, 2014. "Can the regulated market help foster a free market for wind energy in Brazil?," Energy Policy, Elsevier, vol. 66(C), pages 303-311.
    18. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    19. 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.
    20. Carlos Bastian-Pinto & Luiz Brandão & Mariana Lemos Alves, 2010. "Valuing the switching flexibility of the ethanol-gas flex fuel car," Annals of Operations Research, Springer, vol. 176(1), pages 333-348, April.
    21. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    22. 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.
    23. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    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. Ofori, Charles Gyamfi & Bokpin, Godfred Alufar & Aboagye, Anthony Q.Q. & Afful-Dadzie, Anthony, 2021. "A real options approach to investment timing decisions in utility-scale renewable energy in Ghana," Energy, Elsevier, vol. 235(C).
    2. Maia, Cristiana Brasil & Castro Silva, Janaína de Oliveira, 2022. "Thermodynamic assessment of a small-scale solar chimney," Renewable Energy, Elsevier, vol. 186(C), pages 35-50.
    3. Allegretti, G. & Montoya, M.A. & Bertussi, L.A.S. & Talamini, E., 2022. "When being renewable may not be enough: Typologies of trends in energy and carbon footprint towards sustainable development," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    4. Marcos L. S. Oliveira & Diana Pinto & Maria Eliza Nagel-Hassemer & Leila Dal Moro & Giana de Vargas Mores & Brian William Bodah & Alcindo Neckel, 2022. "Brazilian Coal Tailings Projects: Advanced Study of Sustainable Using FIB-SEM and HR-TEM," Sustainability, MDPI, vol. 15(1), pages 1-15, December.
    5. Hui Zhu & Yijie Bian & Fangrong Ren & Xiaoyan Liu, 2024. "An Efficiency Evaluation and Driving Effect Analysis of the Green Transformation of the Thermal Power Industrial Chain: Evidence Based on Impacts and Challenges in China," Energies, MDPI, vol. 17(15), pages 1-18, August.
    6. Nametala, Ciniro Aparecido Leite & Faria, Wandry Rodrigues & Lage, Guilherme Guimarães & Pereira, Benvindo Rodrigues, 2023. "Analysis of hourly price granularity implementation in the Brazilian deregulated electricity contracting environment," Utilities Policy, Elsevier, vol. 81(C).
    7. Qüinny Soares Rocha & Rafaele Almeida Munis & Richardson Barbosa Gomes da Silva & Elí Wilfredo Zavaleta Aguilar & Danilo Simões, 2023. "Photovoltaic Solar Energy in Forest Nurseries: A Strategic Decision Based on Real Options Analysis," Sustainability, MDPI, vol. 15(5), pages 1-11, February.

    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. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    2. Kitzing, Lena & Juul, Nina & Drud, Michael & Boomsma, Trine Krogh, 2017. "A real options approach to analyse wind energy investments under different support schemes," Applied Energy, Elsevier, vol. 188(C), pages 83-96.
    3. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    4. Martín-Barrera, Gonzalo & Zamora-Ramírez, Constancio & González-González, José M., 2016. "Application of real options valuation for analysing the impact of public R&D financing on renewable energy projects: A company′s perspective," Renewable and Sustainable Energy Reviews, Elsevier, vol. 63(C), pages 292-301.
    5. Moon, Yongma & Baran, Mesut, 2018. "Economic analysis of a residential PV system from the timing perspective: A real option model," Renewable Energy, Elsevier, vol. 125(C), pages 783-795.
    6. Carmen Schiel & Simon Glöser-Chahoud & Frank Schultmann, 2019. "A real option application for emission control measures," Journal of Business Economics, Springer, vol. 89(3), pages 291-325, April.
    7. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    8. Cheng, Cheng & Wang, Zhen & Liu, Mingming & Chen, Qiang & Gbatu, Abimelech Paye & Ren, Xiaohang, 2017. "Defer option valuation and optimal investment timing of solar photovoltaic projects under different electricity market systems and support schemes," Energy, Elsevier, vol. 127(C), pages 594-610.
    9. 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.
    10. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    11. Bastian-Pinto, Carlos L. & Araujo, Felipe V. de S. & Brandão, Luiz E. & Gomes, Leonardo L., 2021. "Hedging renewable energy investments with Bitcoin mining," Renewable and Sustainable Energy Reviews, Elsevier, vol. 138(C).
    12. Yu, Shiwei & Li, Zhenxi & Wei, Yi-Ming & Liu, Lancui, 2019. "A real option model for geothermal heating investment decision making: Considering carbon trading and resource taxes," Energy, Elsevier, vol. 189(C).
    13. José Balibrea-Iniesta, 2020. "Economic Analysis of Renewable Energy Regulation in France: A Case Study for Photovoltaic Plants Based on Real Options," Energies, MDPI, vol. 13(11), pages 1-19, June.
    14. Barbara Glensk & Reinhard Madlener, 2019. "Energiewende @ Risk: On the Continuation of Renewable Power Generation at the End of Public Policy Support," Energies, MDPI, vol. 12(19), pages 1-25, September.
    15. Fleten, Stein-Erik & Linnerud, Kristin & Molnár, Peter & Tandberg Nygaard, Maria, 2016. "Green electricity investment timing in practice: Real options or net present value?," Energy, Elsevier, vol. 116(P1), pages 498-506.
    16. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    17. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    18. Balibrea-Iniesta, José & Rodríguez-Monroy, Carlos & Núñez-Guerrero, Yilsy María, 2021. "Economic analysis of the German regulation for electrical generation projects from biogas applying the theory of real options," Energy, Elsevier, vol. 231(C).
    19. Marcel Philipp Müller & Sebastian Stöckl & Steffen Zimmermann & Bernd Heinrich, 2016. "Decision Support for IT Investment Projects," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 58(6), pages 381-396, December.
    20. Didier Nibbering & Coos van Buuren & Wei Wei, 2021. "Real Options Valuation of Wind Energy Based on the Empirical Production Uncertainty," Monash Econometrics and Business Statistics Working Papers 19/21, Monash University, Department of Econometrics and Business Statistics.

    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

    Statistics

    Access and download statistics

    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:eee:energy:v:231:y:2021:i:c:s0360544221012202. 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: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/energy .

    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.