IDEAS home Printed from https://ideas.repec.org/p/bcc/wpaper/2012-11.html
   My bibliography  Save this paper

Valuation of wind energy projects: A real options approach

Author

Listed:
  • Luis M. Abadie
  • José M. Chamorro

Abstract

This paper addresses the valuation of an operating wind farm and the finite-lived option to invest in such a farm under diferent reward and/or support schemes. They range from a feed-in tarif to a premium on top of electricity market price, to a transitory subsidy to capital expenditure. The availability of futures contracts on electricity with ever longer maturities allows to undertake valuations based on market data. The model considers two sources of uncertainty, namely the future electricity price (which shows seasonality) and the level of wind generation (which is intermittent in addition to seasonal). Lacking analytical solutions we resort to a trinomial lattice (which supports mean reversion in prices) combined with Monte Carlo simulation at each of the nodes in the lattice. Our data set refers to the UK. The numerical results show the impact of a number of factors involved in the decision to invest: the subsidy per unit of electricity generated, the initial lump-sum subsidy, the investment option’s maturity, and price volatility.

Suggested Citation

  • Luis M. Abadie & José M. Chamorro, "undated". "Valuation of wind energy projects: A real options approach," Working Papers 2012-11, BC3.
  • Handle: RePEc:bcc:wpaper:2012-11
    as

    Download full text from publisher

    File URL: http://www.bc3research.org/index.php?option=com_wpapers&task=downpubli&iddoc=55&repec=1&Itemid=279
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lion Hirth, 2013. "The Market Value of Variable Renewables. The Effect of Solar and Wind Power Variability on their Relative Price," RSCAS Working Papers 2013/36, European University Institute.
    2. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23, March.
    3. Fagiani, Riccardo & Barquín, Julián & Hakvoort, Rudi, 2013. "Risk-based assessment of the cost-efficiency and the effectivity of renewable energy support schemes: Certificate markets versus feed-in tariffs," Energy Policy, Elsevier, vol. 55(C), pages 648-661.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Klessmann, Corinna & Nabe, Christian & Burges, Karsten, 2008. "Pros and cons of exposing renewables to electricity market risks--A comparison of the market integration approaches in Germany, Spain, and the UK," Energy Policy, Elsevier, vol. 36(10), pages 3646-3661, October.
    6. Snyder, Brian & Kaiser, Mark J., 2009. "A comparison of offshore wind power development in europe and the U.S.: Patterns and drivers of development," Applied Energy, Elsevier, vol. 86(10), pages 1845-1856, October.
    7. Reuter, Wolf Heinrich & Szolgayová, Jana & Fuss, Sabine & Obersteiner, Michael, 2012. "Renewable energy investment: Policy and market impacts," Applied Energy, Elsevier, vol. 97(C), pages 249-254.
    8. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2012. "Learning or lock-in: Optimal technology policies to support mitigation," Resource and Energy Economics, Elsevier, vol. 34(1), pages 1-23.
    9. Dinica, Valentina, 2006. "Support systems for the diffusion of renewable energy technologies--an investor perspective," Energy Policy, Elsevier, vol. 34(4), pages 461-480, March.
    10. 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.
    11. Hirth, Lion, 2013. "The market value of variable renewables," Energy Economics, Elsevier, vol. 38(C), pages 218-236.
    12. Scorah, Hugh & Sopinka, Amy & van Kooten, G. Cornelis, 2012. "The economics of storage, transmission and drought: integrating variable wind power into spatially separated electricity grids," Energy Economics, Elsevier, vol. 34(2), pages 536-541.
    13. Prässler, Thomas & Schaechtele, Jan, 2012. "Comparison of the financial attractiveness among prospective offshore wind parks in selected European countries," Energy Policy, Elsevier, vol. 45(C), pages 86-101.
    14. Sun, Xiaojing & Huang, Diangui & Wu, Guoqing, 2012. "The current state of offshore wind energy technology development," Energy, Elsevier, vol. 41(1), pages 298-312.
    15. Schaber, Katrin & Steinke, Florian & Hamacher, Thomas, 2012. "Transmission grid extensions for the integration of variable renewable energies in Europe: Who benefits where?," Energy Policy, Elsevier, vol. 43(C), pages 123-135.
    16. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    17. Ignacio J. Perez-Arriaga & Carlos Batlle, 2012. "Impacts of Intermittent Renewables on Electricity Generation System Operation," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    18. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    19. Möst, Dominik & Keles, Dogan, 2010. "A survey of stochastic modelling approaches for liberalised electricity markets," European Journal of Operational Research, Elsevier, vol. 207(2), pages 543-556, December.
    20. Gross, Robert & Blyth, William & Heptonstall, Philip, 2010. "Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs," Energy Economics, Elsevier, vol. 32(4), pages 796-804, July.
    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. Mahmoud A. Eissa & Boping Tian, 2017. "Lobatto-Milstein Numerical Method in Application of Uncertainty Investment of Solar Power Projects," Energies, MDPI, vol. 10(1), pages 1-19, January.
    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. Winkler, Jenny & Gaio, Alberto & Pfluger, Benjamin & Ragwitz, Mario, 2016. "Impact of renewables on electricity markets – Do support schemes matter?," Energy Policy, Elsevier, vol. 93(C), pages 157-167.
    4. Andreas Welling, 2017. "Green Finance: Recent developments, characteristics and important actors," FEMM Working Papers 170002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    5. Fagiani, Riccardo & Hakvoort, Rudi, 2014. "The role of regulatory uncertainty in certificate markets: A case study of the Swedish/Norwegian market," Energy Policy, Elsevier, vol. 65(C), pages 608-618.
    6. Kitzing, Lena, 2014. "Risk implications of renewable support instruments: Comparative analysis of feed-in tariffs and premiums using a mean–variance approach," Energy, Elsevier, vol. 64(C), pages 495-505.
    7. English, J. & Niet, T. & Lyseng, B. & Palmer-Wilson, K. & Keller, V. & Moazzen, I. & Pitt, L. & Wild, P. & Rowe, A., 2017. "Impact of electrical intertie capacity on carbon policy effectiveness," Energy Policy, Elsevier, vol. 101(C), pages 571-581.
    8. Romano, Teresa & Fumagalli, Elena, 2018. "Greening the power generation sector: Understanding the role of uncertainty," Renewable and Sustainable Energy Reviews, Elsevier, vol. 91(C), pages 272-286.
    9. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    10. Christoph Wolter & Henrik Klinge Jacobsen & Lorenzo Zeni & Georgios Rogdakis & Nicolaos A. Cutululis, 2020. "Overplanting in offshore wind power plants in different regulatory regimes," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 9(3), May.
    11. Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.
    12. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    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. Castro-Santos, Laura & Martins, Elson & Guedes Soares, C., 2016. "Cost assessment methodology for combined wind and wave floating offshore renewable energy systems," Renewable Energy, Elsevier, vol. 97(C), pages 866-880.
    15. Pahle, Michael & Schill, Wolf-Peter & Gambardella, Christian & Tietjen, Oliver, 2016. "Renewable Energy Support, Negative Prices, and Real-time Pricing," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 37, pages 147-169.
    16. Auer, Benjamin R., 2016. "How does Germany's green energy policy affect electricity market volatility? An application of conditional autoregressive range models," Energy Policy, Elsevier, vol. 98(C), pages 621-628.
    17. 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.
    18. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    19. Kyritsis, Evangelos & Andersson, Jonas & Serletis, Apostolos, 2017. "Electricity prices, large-scale renewable integration, and policy implications," Energy Policy, Elsevier, vol. 101(C), pages 550-560.
    20. Soini, Vesa, 2021. "Wind power intermittency and the balancing power market: Evidence from Denmark," Energy Economics, Elsevier, vol. 100(C).

    More about this item

    Keywords

    wind farms; electricity; stochastic load factor; futures mar- kets; real options.;
    All these keywords.

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

    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:bcc:wpaper:2012-11. 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: Sergio Henrique Faria (email available below). General contact details of provider: https://www.bc3research.org/ .

    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.