IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v312y2024ics0360544224033905.html
   My bibliography  Save this article

Hybrid offshore wind projects. Social desirability vs. incentives to invest

Author

Listed:
  • Sørheim, Hanna
  • Linnerud, Kristin

Abstract

To unlock the full potential of offshore wind requires investment in a more integrated offshore grid infrastructure combining generation and interconnection between countries in so-called hybrid projects. Taking the perspective of a social planner, these projects may result in more efficient allocation of scarce resources. Alas, the distribution of this welfare gain may result in disagreement on what grid design is the most attractive, what markets should be connected and whether and when to invest. To examine these dilemmas, we apply real options theory to investments projects with different grid design and market characteristics. We compare the incentives to invest in a) only the wind farm and b) both the wind farm and the grid infrastructure, assuming the project value of the last alternative can serve as a proxy for social welfare. Solutions are derived using a simulation approach called least squares Monte Carlo method. We find: 1) Non-stationary stochastic prices and/or decreasing costs may make it socially optimal as well as commercially beneficial to postpone even profitable investments. 2) Connecting markets is socially desirable but may reduce the offshore wind investor's project value. 3) Connecting markets with different characteristics is socially desirable but reduce the offshore wind investors' project value.

Suggested Citation

  • Sørheim, Hanna & Linnerud, Kristin, 2024. "Hybrid offshore wind projects. Social desirability vs. incentives to invest," Energy, Elsevier, vol. 312(C).
    • Handle: RePEc:eee:energy:v:312:y:2024:i:c:s0360544224033905
    DOI: 10.1016/j.energy.2024.133612
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544224033905
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2024.133612?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. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Matthäus, David & Schwenen, Sebastian & Wozabal, David, 2021. "Renewable auctions: Bidding for real options," European Journal of Operational Research, Elsevier, vol. 291(3), pages 1091-1105.
    3. Barroso, Manuel Monjas & Iniesta, José Balibrea, 2014. "A valuation of wind power projects in Germany using real regulatory options," Energy, Elsevier, vol. 77(C), pages 422-433.
    4. Yu-Fu Chen & Michael Funke, 2015. "Going Offshore: Investments in German Wind Energy under Uncertainty," CESifo Working Paper Series 5408, CESifo.
    5. Lena Kitzing & Sascha T. Schröder, 2012. "Regulating Future Offshore Grids: Economic Impact Analysis on Wind Parks and Transmission System Operators," RSCAS Working Papers 2012/65, European University Institute.
    6. Kim, Kyeongseok & Kim, Byungil & Kim, Hyoungkwan, 2018. "A decision-making model for the analysis of offshore wind farm projects under climate uncertainties: A case study of South Korea," Renewable and Sustainable Energy Reviews, Elsevier, vol. 94(C), pages 853-860.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    8. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    9. Linnerud, Kristin & Andersson, Ane Marte & Fleten, Stein-Erik, 2014. "Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects," Energy, Elsevier, vol. 78(C), pages 154-164.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    2. 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.
    3. Chen, Siyuan & Zhang, Qi & Wang, Ge & Zhu, Lijing & Li, Yan, 2018. "Investment strategy for underground gas storage facilities based on real option model considering gas market reform in China," Energy Economics, Elsevier, vol. 70(C), pages 132-142.
    4. 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.
    5. Gkousis, Spiros & Welkenhuysen, Kris & Harcouët-Menou, Virginie & Pogacnik, Justin & Laenen, Ben & Compernolle, Tine, 2024. "Integrated geo-techno-economic and real options analysis of the decision to invest in a medium enthalpy deep geothermal heating plant. A case study in Northern Belgium," Energy Economics, Elsevier, vol. 134(C).
    6. Mo, Jian-Lei & Schleich, Joachim & Zhu, Lei & Fan, Ying, 2015. "Delaying the introduction of emissions trading systems—Implications for power plant investment and operation from a multi-stage decision model," Energy Economics, Elsevier, vol. 52(PB), pages 255-264.
    7. Arvesen, Ø. & Medbø, V. & Fleten, S.-E. & Tomasgard, A. & Westgaard, S., 2013. "Linepack storage valuation under price uncertainty," Energy, Elsevier, vol. 52(C), pages 155-164.
    8. Abdullah Almansour & Margaret Insley, 2016. "The Impact of Stochastic Extraction Cost on the Value of an Exhaustible Resource: An Application to the Alberta Oil Sands," The Energy Journal, , vol. 37(2), pages 61-88, April.
    9. 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.
    10. Linnerud, Kristin & Andersson, Ane Marte & Fleten, Stein-Erik, 2014. "Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects," Energy, Elsevier, vol. 78(C), pages 154-164.
    11. Schwartz, Eduardo S., 2002. "Patents and R& D as Real Options," University of California at Los Angeles, Anderson Graduate School of Management qt86b1n43k, Anderson Graduate School of Management, UCLA.
    12. Luis M. Abadie & José M. Chamorro, 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 10-22, January.
    13. Mo, Jian-Lei & Agnolucci, Paolo & Jiang, Mao-Rong & Fan, Ying, 2016. "The impact of Chinese carbon emission trading scheme (ETS) on low carbon energy (LCE) investment," Energy Policy, Elsevier, vol. 89(C), pages 271-283.
    14. Tubetov, Dulat & Maart, Syster Christin & Musshoff, Oliver, 2012. "Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125218, International Association of Agricultural Economists.
    15. Haehl, Christian & Spinler, Stefan, 2018. "Capacity expansion under regulatory uncertainty:A real options-based study in international container shipping," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 113(C), pages 75-93.
    16. Lei Zhu & ZhongXiang Zhang & Ying Fan, 2011. "An evaluation of overseas oil investment projects under uncertainty using a real options based simulation model," Economics Study Area Working Papers 121, East-West Center, Economics Study Area.
    17. Zhang, M.M. & Wang, Qunwei & Zhou, Dequn & Ding, H., 2019. "Evaluating uncertain investment decisions in low-carbon transition toward renewable energy," Applied Energy, Elsevier, vol. 240(C), pages 1049-1060.
    18. Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2017. "Stepwise investment and capacity sizing under uncertainty," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(2), pages 447-472, March.
    19. repec:ehu:ikerla:6484 is not listed on IDEAS
    20. Zhang, M.M. & Zhou, D.Q. & Zhou, P. & Chen, H.T., 2017. "Optimal design of subsidy to stimulate renewable energy investments: The case of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 71(C), pages 873-883.
    21. Yi Yang & Jianan Wang & Youhua Chen & Zhiyuan Chen & Yanchu Liu, 2020. "Optimal procurement strategies for contractual assembly systems with fluctuating procurement price," Annals of Operations Research, Springer, vol. 291(1), pages 1027-1059, August.

    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:312:y:2024:i:c:s0360544224033905. 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.