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Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach

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Listed:
  • Knaut, Andreas

    (RWTH Aachen University)

  • Madlener, Reinhard

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Rosen, Christiane

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Vogt, Christian

    (E.ON Energy Research Center)

Abstract

In this paper we investigate the economic viability of geothermal district heating networks using both net present value (NPV) and real options analysis (ROA). We give an introduction to geothermal energy technologies and review the relevant ROA literature focusing on applications in similar fields, such as oil projects. The similarities and differences of oil and geothermal projects are discussed and summarized. The investment structure of geothermal projects is analyzed concerning costs and uncertainties in the different investment stages. We develop a method to assess the impact of temperature uncertainty with ROA. Investments in geothermal projects are evaluated applying a binomial and a trinomial lattice approach. A novel real options model for the evaluation of normally distributed uncertainty is developed for binomial lattices. Using data obtained from a Dutch project in The Hague, we find positive option values for both lattice approaches, compared to negative values for the common NPV calculation. Drilling and production costs are found to have a significant impact on the option value.

Suggested Citation

  • Knaut, Andreas & Madlener, Reinhard & Rosen, Christiane & Vogt, Christian, 2012. "Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach," FCN Working Papers 11/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2012_011
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    References listed on IDEAS

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    Cited by:

    1. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2018. "The nexus between natural gas spot and futures prices at NYMEX: Do weather shocks and non-linear causality in low frequencies matter?," The Journal of Economic Asymmetries, Elsevier, vol. 18(C), pages 1-1.
    2. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Yessenia Martínez-Ruiz, Diego Fernando Manotas-Duque, Howard Ramírez-Malule, 2021. "Análisis de opciones reales para la valoración financiera de proyectos de energía geotérmica en Colombia," Revista CEA, Instituto Tecnológico Metropolitano, vol. 7(15), pages 1-23, September.
    4. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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