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Optimal investment strategies in decentralized renewable power generation under uncertainty

Author

Listed:
  • Fleten, Stein-Erik
  • Maribu, Karl Magnus
  • Wangensteen, Ivar

Abstract

This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.

Suggested Citation

  • Fleten, Stein-Erik & Maribu, Karl Magnus & Wangensteen, Ivar, 2005. "Optimal investment strategies in decentralized renewable power generation under uncertainty," MPRA Paper 218, University Library of Munich, Germany, revised Jun 2006.
    • Handle: RePEc:pra:mprapa:218
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2006. "Irreversible investment in alternative projects," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 425-448, June.
    3. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    4. Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268.
    5. Ang, B.W. & Huang, J.P. & Poh, K.L., 1999. "Break-even price of distributed generation under uncertainty," Energy, Elsevier, vol. 24(7), pages 579-589.
    6. Thomas E. Hoff, 1997. "Using Distributed Resources to Manage Risks Caused by Demand Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 63-84.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Real options; Renewable electricity technologies; Electricity markets; Stochastic price; Distributed generation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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