IDEAS home Printed from https://ideas.repec.org/a/eee/rensus/v138y2021ics1364032120308054.html
   My bibliography  Save this article

Hedging renewable energy investments with Bitcoin mining

Author

Listed:
  • Bastian-Pinto, Carlos L.
  • Araujo, Felipe V. de S.
  • Brandão, Luiz E.
  • Gomes, Leonardo L.

Abstract

Renewable energy sources such as wind power are increasing their share of the world energy matrix. In Brazil, the regulator promotes reverse bid auctions where the winner agrees to begin production a number of years ahead under a long-term contract. If a wind farm project chooses to anticipate construction, it can sell its energy in the short-term market but becomes subject to electricity price volatility. In order to create incentives for early investment, we propose that wind farm investors can hedge electricity price risk by simultaneously investing in a cryptocurrency mining facility that uses electricity as input to produce newly minted Bitcoins. As electricity and Bitcoin prices are uncorrelated, the ability to switch between these outputs allows the wind farm to maximize revenues and minimize losses. We develop a numerical application under the real options approach to determine the financial impact of the investment in a Bitcoin facility for the wind energy producer that will allow it to optimally switch outputs depending on the relative future prices of electricity and Bitcoins. The short-term energy price and Bitcoin price/mining-difficulty ratio are modeled as distinct stochastic diffusion processes. The results indicate that the option to switch outputs significantly increases the generator's revenue while simultaneously decreasing the risk of anticipating the construction. These findings, which can also be applied to other renewable energy sources, may be of interest to both the energy generator as well as the system regulator as it creates an incentive for early investment in sustainable and renewable energy sources.

Suggested Citation

  • 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).
  • Handle: RePEc:eee:rensus:v:138:y:2021:i:c:s1364032120308054
    DOI: 10.1016/j.rser.2020.110520
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1364032120308054
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.rser.2020.110520?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. 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. Myers, Stewart C. & Majd, Saman., 1983. "Calculating abandonment value using option pricing theory," Working papers 1462-83., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. 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.
    5. Kim, Kyung-Taek & Lee, Deok-Joo & Park, Sung-Joon, 2014. "Evaluation of R&D investments in wind power in Korea using real option," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 335-347.
    6. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    7. Suwal, Naresh & Huang, Xianfeng & Kuriqi, Alban & Chen, Yingqin & Pandey, Kamal Prasad & Bhattarai, Khem Prasad, 2020. "Optimisation of cascade reservoir operation considering environmental flows for different environmental management classes," Renewable Energy, Elsevier, vol. 158(C), pages 453-464.
    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. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    10. Mark Cassano & Gordon Sick, 2013. "Valuation of a spark spread: an LM6000 power plant," The European Journal of Finance, Taylor & Francis Journals, vol. 19(7-8), pages 689-714, September.
    11. 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.
    12. Andoni, Merlinda & Robu, Valentin & Flynn, David & Abram, Simone & Geach, Dale & Jenkins, David & McCallum, Peter & Peacock, Andrew, 2019. "Blockchain technology in the energy sector: A systematic review of challenges and opportunities," Renewable and Sustainable Energy Reviews, Elsevier, vol. 100(C), pages 143-174.
    13. de Oliveira, Denis Luis & Brandao, Luiz E. & Igrejas, Rafael & Gomes, Leonardo Lima, 2014. "Switching outputs in a bioenergy cogeneration project: A real options approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 36(C), pages 74-82.
    14. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    15. Max J. Krause & Thabet Tolaymat, 2018. "Quantification of energy and carbon costs for mining cryptocurrencies," Nature Sustainability, Nature, vol. 1(11), pages 711-718, November.
    16. 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.
    17. 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.
    18. 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.
    19. Fangyuan Zhao & Xin Guo & Wai Kin (Victor) Chan, 2020. "Individual Green Certificates on Blockchain: A Simulation Approach," Sustainability, MDPI, vol. 12(9), pages 1-32, May.
    20. Di Silvestre, Maria Luisa & Gallo, Pierluigi & Guerrero, Josep M. & Musca, Rossano & Riva Sanseverino, Eleonora & Sciumè, Giuseppe & Vásquez, Juan C. & Zizzo, Gaetano, 2020. "Blockchain for power systems: Current trends and future applications," Renewable and Sustainable Energy Reviews, Elsevier, vol. 119(C).
    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. Li, Zijian & Meng, Qiaoyu, 2022. "Time and frequency connectedness and portfolio diversification between cryptocurrencies and renewable energy stock markets during COVID-19," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    2. Peng, Qiao & Liu, Weilong & Zhang, Yong & Zeng, Shihong & Graham, Byron, 2023. "Generation planning for power companies with hybrid production technologies under multiple renewable energy policies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 176(C).
    3. Borge-Diez, David & Icaza, Daniel & Trujillo-Cueva, Diego Francisco & Açıkkalp, Emin, 2022. "Renewable energy driven heat pumps decarbonization potential in existing residential buildings: Roadmap and case study of Spain," Energy, Elsevier, vol. 247(C).
    4. Ali, Fahad & Khurram, Muhammad Usman & Sensoy, Ahmet & Vo, Xuan Vinh, 2024. "Green cryptocurrencies and portfolio diversification in the era of greener paths," Renewable and Sustainable Energy Reviews, Elsevier, vol. 191(C).
    5. Lei, Heng & Xue, Minggao & Ye, Jing, 2024. "The nexus between ReFi, carbon, fossil energy, and clean energy assets: Quantile time–frequency connectedness and portfolio implications," Energy Economics, Elsevier, vol. 132(C).
    6. Anwer, Zaheer & Farid, Saqib & Khan, Ashraf & Benlagha, Noureddine, 2023. "Cryptocurrencies versus environmentally sustainable assets: Does a perfect hedge exist?," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 418-431.
    7. Rui Ai & Yuhang Zheng & Serhat Yüksel & Hasan Dinçer, 2023. "Investigating the components of fintech ecosystem for distributed energy investments with an integrated quantum spherical decision support system," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-28, December.

    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. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    2. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    3. 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.
    4. 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).
    5. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    6. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    7. Insley, M.C. & Wirjanto, T.S., 2010. "Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming," Journal of Forest Economics, Elsevier, vol. 16(2), pages 157-176, April.
    8. Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
    9. Kou, Ying & Luo, Meifeng, 2018. "Market driven ship investment decision using the real option approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 714-729.
    10. 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.
    11. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    12. Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
    13. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    14. Shackleton, Mark B. & Tsekrekos, Andrianos E. & Wojakowski, Rafal, 2004. "Strategic entry and market leadership in a two-player real options game," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 179-201, January.
    15. 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.
    16. Miranda, Oscar & Brandão, Luiz E. & Lazo Lazo, Juan, 2017. "A dynamic model for valuing flexible mining exploration projects under uncertainty," Resources Policy, Elsevier, vol. 52(C), pages 393-404.
    17. repec:dau:papers:123456789/1046 is not listed on IDEAS
    18. Akamatsu, Takashi & Nagae, Takeshi, 2011. "A network of options: Evaluating complex interdependent decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 714-729, May.
    19. Chuang-Chang Chang & Miao-Ying Chen, 2012. "Re-examining the investment-uncertainty relationship in a real options model," Review of Quantitative Finance and Accounting, Springer, vol. 38(2), pages 241-255, February.
    20. Rainer Niemann & Caren Sureth, 2002. "Taxation under Uncertainty – Problems of Dynamic Programming and Contingent Claims Analysis in Real Option Theory," CESifo Working Paper Series 709, CESifo.
    21. Collan, Mikael, 2004. "Giga-Investments: Modelling the Valuation of Very Large Industrial Real Investments," MPRA Paper 4328, University Library of Munich, Germany.

    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:rensus:v:138:y:2021:i:c:s1364032120308054. 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.elsevier.com/wps/find/journaldescription.cws_home/600126/description#description .

    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.