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Evaluation of hydropower upgrade projects - a real options approach

Author

Listed:
  • Elverhøi, Morten
  • Fleten, Stein-Erik
  • Fuss, Sabine
  • Heggedal, Ane Marte
  • Szolgayova, Jana
  • Troland, Ole Christian

Abstract

When evaluating whether to refurbish existing hydropower plants or invest in a new power plant, there are two important aspects to take into consideration. These are the capacity chosen for the production facilities and the timing of the investment. This paper presents an investment decision support framework for hydropower producers with production facilities due for restoration. The producer can choose between refurbishing existing power plants and investing in a new production facility. A real options framework is proposed to support the investment decision. Using a case from Norsk Hydro ASA, a Norwegian hydropower producer, we employ the framework to evaluate the investment opportunities. Our main contribution is an approach that combines hydropower scheduling and real options valuation, and the results from our analysis suggest feasible investment strategies for Norsk Hydro ASA.

Suggested Citation

  • Elverhøi, Morten & Fleten, Stein-Erik & Fuss, Sabine & Heggedal, Ane Marte & Szolgayova, Jana & Troland, Ole Christian, 2010. "Evaluation of hydropower upgrade projects - a real options approach," MPRA Paper 23005, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23005
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    File URL: https://mpra.ub.uni-muenchen.de/23005/1/MPRA_paper_23005.pdf
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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. Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard J. & Revdal, Ingemar, 2008. "Investment timing and optimal capacity choice for small hydropower projects," European Journal of Operational Research, Elsevier, vol. 190(1), pages 255-267, October.
    3. E. Nasakkala & J. Keppo, 2008. "Hydropower with Financial Information," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(5-6), pages 503-529.
    4. Chorn, L.G. & Shokhor, S., 2006. "Real options for risk management in petroleum development investments," Energy Economics, Elsevier, vol. 28(4), pages 489-505, July.
    5. Stein W. Wallace & Stein-Erik Fleten, 2002. "Stochastic programming in energy," GE, Growth, Math methods 0201001, University Library of Munich, Germany, revised 13 Nov 2003.
    6. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
    7. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
    8. Kjaerland, Frode, 2007. "A real option analysis of investments in hydropower--The case of Norway," Energy Policy, Elsevier, vol. 35(11), pages 5901-5908, November.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Kroniger, Daniel & Madlener, Reinhard, 2014. "Hydrogen storage for wind parks: A real options evaluation for an optimal investment in more flexibility," Applied Energy, Elsevier, vol. 136(C), pages 931-946.

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    More about this item

    Keywords

    Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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