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A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies

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  • Gürkan Kumbaroglu

    (Department of Industrial Engineering, Bogaziçi University, 34342 Bebek, Istanbul, Turkey)

  • Reinhard Madlener

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Mustafa Demirel

    (Department of Industrial Engineering, Bogaziçi University, 34342 Bebek, Istanbul, Turkey)

Abstract

This study presents an investment planning model that integrates learning curve information on renewable power generation technologies into a dynamic programming formulation featuring real options analysis. The model recursively evaluates a set of investment alternatives on a year-by-year basis, thereby taking into account that the flexibility to delay an irreversible investment expenditure can profoundly affect the diffusion prospects of renewable power generation technologies. Price volatility is introduced through stochastic processes for the average electricity price and for input fuel prices. Demand for peak-load capacity is assumed to be increasingly price-elastic, as the electricity market deregulation proceeds, and linearly dependent on the extent of market opening. The empirical analysis is based on data for the Turkish electricity supply industry. Apart from general implications for policymaking, it provides some interesting insights about the impact of uncertainty on the diffusion of various emerging renewable energy technologies.

Suggested Citation

  • Gürkan Kumbaroglu & Reinhard Madlener & Mustafa Demirel, 2004. "A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies," CEPE Working paper series 04-35, CEPE Center for Energy Policy and Economics, ETH Zurich.
    • Handle: RePEc:cee:wpcepe:04-35
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