using real option analysis for highly uncertain technology investments the case of wind energy technology this study examines the feasibility of using a theoretical model and empirical analysis methods to value renewable energy re investment from perspective of real option analysis roa based on use of a roa approach the re value is evaluated with respect to its ability to conform to the main sensitivity analysis of re investment as well as an empirical method devised to value re investment by using actual data the economic intuitiveness underlying the decision making process for re investment is elucidated while empirical analysis is performed to demonstrate the effectiveness of the options value embedded in current development planning in taiwan for wind energy in addition to revealing the advantages of re development when considering real option analytical results indicate that roa is a highly effective means of quantifying how investment planning uncertainty including managerial flexibility influences re development besides evaluating the value of current re investment this study demonstrates that results of the theoretical model empirical analysis and sensitivity analysis correlate well with each other restated the value of developing re increases when increasing the underlying price time to maturity risk free rate and volatility conversely the value of developing re decreases when increasing the exercise price

evidence of under investment in energy r d in the united states and the impact of federal policy investments in energy technology research and development r d and in associated human and institutional capacity are fundamental to our ability to respond to changing economic and environmental needs this paper uses data on r d investments and patent records to examine the relationship between expenditures on r d and innovation with a particular focus on the energy sector we observe that r d spending and patents both overall and in the energy sector have been highly correlated over the past two decades in the us in addition we observe that the r d intensity of the us energy sector is extremely low when compared to other sectors we argue that the data illustrates the critical role of public policy as evidenced by the impact of recent technology transfer related legislation on the total number and on the ownership of innovations resulting from federally sponsored r d we conclude that there has been a significant and sustained pattern of under investment in the us energy sector and that recent declines in energy r d exacerbate this situation innovation for the us energy infrastructure is also a significant driver of the international energy economy thus the spillover from us under investment detracts from the global capacity to respond to emerging risks such as global warming

optimizing the level of renewable electric r d expenditures using real options analysis abstract one of the primary objectives of the united states federal non hydro renewable electric r d program is to promote the development of technologies that have the potential to provide consumers with stable and secure energy supplies in order to quantify the benefits provided by continued federal renewable electric r d this paper uses real option pricing techniques to estimate the value of renewable electric technologies in the face of uncertain fossil fuel prices within the real options analysis framework the current value of expected future supply from renewable electric technologies net of federal r d expenditures is estimated to be 30 6 billion of this value 86 can be attributed to past federal r d efforts and 14 can be attributed to future federal r d efforts assuming continued federal r d funding at 300 million yr in addition real options analysis shows that the value of renewable electric technologies increases as current and future r d funding levels increase this indicates that the current level of federal renewable electric r d funding is sub optimal

valuation of projects for power generation with renewable energy a comparative study based on real regulatory options abstract this comparative study evaluates an investment project on renewable energy based on wind power we have conducted the study in three european union countries denmark finland and portugal we have modelled the main uncertainties that affect this kind of project such as the cost and production of electric power investment costs and consumer price index for each of these countries we have analysed the mechanisms of public support for wind energy we have identified the real options included in the regulatory frameworks of these three countries and assessed how they affect the expanded net present value of the project to this end we have used two different methods of option valuation the monte carlo method and the binomial method we have proved that the obtained results using both methods are quite similar finally we have evaluated the public incentives for wind energy offered in each of these three countries and concluded that in economic terms finland is the country with the strongest support for this kind of energy followed by denmark and in the last place portugal

real options approach to renewable energy investments in mongolia developing nations are seeking alternative energy for electricity and one attractive alternative is renewable energy this research analyzes changing investment environment for renewable energy with real options approach and explores its potential in developing economies through studying the case of mongolia under coal price uncertainty to evaluate comparative attractiveness of either continuing to use coal based infrastructures or switching to renewable energy we formulate social revenue functions for the two environments assuming that renewable energy has lower external costs and coal prices follow geometric brownian motion gbm or geometric mean reverting gmr processes we find the optimal trigger coal prices for switching technologies with some scenarios in electricity price and externality characterize when renewable energy investments become attractive in contrast to conventional wisdom we identify some situations where the value of having more decision opportunities does not exceed that of a now or never decision for switching technologies and welfare losses are incurred the optimal trigger prices are higher in gbm than in gmr and our result raises the possible risks for waiting to switch energy to avoid welfare losses in mongolia the government should increase electricity prices or switch to renewable energy earlier especially when people pay more for the removal of externalities

time to build option value and investment decisions a comment abstract we correct the analysis of the model of time to build in majd and pindyck 1987 journal of financial economics 18 7 27 for the omission of an essential optimality condition our analysis reveals an additional insight long times to build reduce the effects of increased project value volatility i e higher investment thresholds in comparison to standard real option models of investment under uncertainty where investment is instantaneous thus a naive npv rule can sometimes be an appropriate initial guide to investment

capital budgeting for interrelated projects a real options approach this paper explores the effect of project interrelationships on investment decisions and project values in a real options framework we examine in detail the mutually exclusive case where a firm may invest in the development stage of two projects and then may select only a single project to implement the firm can develop the projects in parallel or in sequence the choice of development policy depends on the relative values of the embedded options for each strategy sequential development is shown to be superior to parallel development when projects have highly correlated values and when they require a large commitment of capital for development are short term in nature and have relatively low volatility we also show that the optimal ordering of sequential projects does not always begin with the most profitable project

unintended consequences energy r d in a deregulated energy market abstract many advanced industrialized nations are substantially reducing their national public and private investments in energy research and development r d driven in part by changes occurring as a result of the deregulation of these nations energy sectors in particular funding for strategic energy r d aimed at developing future energy supply options eg fusion fission clean fossil energy renewable energy has been decreased substantially in both the public and private sectors in many of these nations these trends are now starting to be seen in the united states as it moves towards the deregulation of the nation s utilities the magnitude of the reductions in support for energy r d in the public and private sectors and the shift towards decidedly shorter term r d has profound implications for nations approaching deregulation though utility customers may be short term winners from the deregulation of utilities by paying less for energy a national failure to invest in energy r d is very likely to have long term negative impacts on national energy sectors the economies and environmental wellbeing

evaluation of r d investments in wind power in korea using real option abstract in recent years many countries put an emphasis on the development and deployment of renewable energy to cope with the global environmental crisis such as depletion of fossil energy climate convention to control emissions of greenhouse gases among the various new and renewable energy sources the korean government selected wind power energy as one of the core areas for r d investments in this paper we evaluate the economic value of the investment in wind power energy r d in korea and optimal deployment timing of wind power technology by using the real option approach the real option model adopted in this paper assumes that a decision maker has a compound option to abandon deployment or continue the r d as a result by using empirical data of korea it is found that there exists a considerable amount of positive economic value of investments in wind power energy r d

application of real options valuation for analysing the impact of public r d financing on renewable energy projects a company s perspective abstract this paper contrasts the financial benefit of grants given to research and development projects with the reduction in managerial flexibility they impose which implies a loss in the value of the project to quantify this loss of value real options analysis has been adopted as the most suitable framework to assess and quantify managerial flexibility this idea is illustrated by the case of a research and development project in renewable energy specifically concentrated solar power our results show that the value added by the grants is less than the nominal incentives received as a result of the loss of flexibility for managers they cannot apply certain options such as deferral nor can they abandon the project therefore a break even grant is proposed that equals the financial incentive with the loss of managerial flexibility under this break even point the grant should be rejected this paper will create awareness for both policy makers and private companies regarding a more accurate assessment of grants to research and development funding as well as provide insights to improve grant schemes without increasing the amount of public funds

variable capacity utilization ambient temperature shocks and generation asset valuation this paper discusses generation asset valuation in a framework where capital utilization decisions are endogenous we use real options approach for valuation of natural gas fueled turbines capital utilization choices that we explore include turning on off the unit operating the unit at increased firing temperatures overfiring and conducting preventive maintenance overfiring provides capacity enhancement which comes at the expense of reduced maintenance interval and increased costs of part replacement we consider the costs and benefits of overfiring in attempt to maximize the asset value by optimally exercising the overfire option in addition to stochastic processes governing prices we incorporate an exogenous productivity shock ambient temperature we consider how variation in ambient temperature affects the asset value through its effect on gas turbine s productivity

optimal design of subsidy to stimulate renewable energy investments the case of china this paper proposes a real options model for estimating the optimal subsidy for renewable energy power generation project by using stochastic process to describe the market price of electricity co2 price and investment cost two indicators i e project value and threshold value are used to derive the optimal subsidy the least squares monte carlo simulation method is used to solve the model the proposed model is used to empirically evaluate the optimal level of subsidy for solar photovoltaic power generation in china the results show that carbon emission trading scheme helps reduce subsidy unit generating capacity market price of electricity co2 price and the volatility of investment cost are negatively related with subsidy whereas investment cost and the volatility of electricity price and co2 price are positively related with subsidy it is suggested that chinese governments take some measures e g promoting technological progress establishing a nationwide carbon emission trading market promoting the competition in renewable energy industry as well as maintaining the stability of co2 price and electricity price to reduce the required subsidy

the public s value for developing ocean energy technology in the republic of korea a contingent valuation study abstract ocean energy is a type of renewable energies and is considered as having a potential power of providing a substantial amount of energy although some forms of ocean energy are developed there is a need for further technological advances to better utilize ocean energy government should take observable actions to compensate for the costs of developing the technology this paper attempts to apply a contingent valuation cv method to obtaining at least a preliminary evaluation of the benefits that ensue from the development of the technology that commercializes ocean energy in the republic of korea overall the cv survey was successfully carried out to elicit the willingness to pay wtp for ocean energy the wtp was statistically significantly estimated from one and one half bounded spike model and the monthly mean wtp estimates was krw 1003 usd 0 9 per household the estimates of the annual benefits to relevant residents amounted to krw 206 4 billion usd 183 8 million

the learning curve and optimal production under uncertainty this article examines the implications of the learning curve in a world of uncertainty we consider a competitive firm whose costs decline with cumulative output because the price of the firm s output evolves stochastically future production and cumulative output are unknown and are contingent on future prices and costs we derive an optimal decision rule that maximizes the firm s market value produce when the price exceeds a critical level which is a declining function of cumulative output we show how the shadow value of cumulative production the total value of the firm and the decision to produce depend on the volatility of the price and other parameters uncertainty increases the critical price required for the firm to produce but also increases the value of thefirm thus during periods of high volatility firms facing a learning curve ought to be producing less but are worth more

real options theory applied to electricity generation projects a review abstract real options ro theory is well known for enhancing the value of projects under uncertainty this is achieved by modelling the flexibility that managers possess to adjust the projects in response to changes in their environments based on this ro theory could be used to tackle current energy and environmental issues by enhancing the value of electricity generation projects egp especially renewable energy projects rep the potential of ro theory to increase the value of egp and rep has been a driver for new research in the topic however existing literature is still scarce diverse and tends to neglect the state of the art of ro theory e g ro in the design of projects ro studies tend to ignore the use of ro in the design of projects as they are difficult to formulate without the help of experts on the projects designs this paper aims to encourage novel research in the application of ro theory to egp and rep for this purpose a critical review of ro theory its state of the art and its applications to egp and rep is presented this review identifies current areas of interest and gaps in knowledge in this research area it is concluded that new and novel ro research should address the state of the art of ro theory and uncertainties that are exclusive for specific types of projects this future research will require the involvement of electrical engineers specialised in the design of egp and rep

u s energy research and development declining investment increasing need and the feasibility of expansion investment in energy research and development in the u s is declining despite calls for an enhancement of the nation s capacity for innovation to address environmental geopolitical and macroeconomic concerns we examine investments in research and development in the energy sector and observe broad based declines in funding since the mid 1990s the large reductions in investment by the private sector should be a particular area of concern for policy makers multiple measures of patenting activity reveal widespread declines in innovative activity that are correlated with research and development r d investment notably in the environmentally significant wind and solar areas trends in venture capital investment and fuel cell innovation are two promising cases that run counter to the overall trends in the sector we draw on prior work on the optimal level of energy r d to identify a range of values which would be adequate to address energy related concerns comparing simple scenarios based on this range to past public r d programs and industry investment data indicates that a five to ten fold increase in energy r d investment is both warranted and feasible

do consumers discount the future correctly a market based valuation of residential fuel switching abstract dsm and energy efficiency options are generally evaluated using engineering oriented discounted cash flow procedures which value all cost and benefit streams using a single arbitrary discount rate usually the firm s weighted average cost of capital wacc the wacc based approach ignores financial risk and hence leads to unreliable results in a recent paper in this journal hassett and metcalf depart from this tradition they reflect financial risk by simulating the total variability of returns from energy saving investments their findings indicate that dsm projects are potentially risky suggesting that the net benefits must be discounted at significantly higher rates thus lowering their present values this paper presents a market based evaluation of a particular dsm option residential fuel switching using the capital asset pricing model capm under the capm approach a risk adjusted market based discount rate is estimated for each cost stream fuel maintenance and avoided outlays for electricity the market based results which reflect the systematic risk of each cost stream suggest that fuel switching is probably not cost effective because it is considerably more risky than indicated by a wacc based analysis this supports hassett and metcalf s conclusion that consumers who reject dsm projects are not necessarily acting irrationally

dynamic r d investment policies this paper examines dynamic r d investment policies and the valuation of r d programs in a contingent claims framework we incorporate the following characteristics of r d programs into our model learning by doing collateral learning between different projects in the program interaction between project cash flows periodic reevaluations of the program different intensities of investment capital rationing constraints and competition we show that a firm may invest in multiple projects even if only one can be implemented after development is complete furthermore the firm may significantly alter its funding policy over time for example it may simultaneously develop multiple projects for a period of time then focus on a lead project and potentially resume funding of a backup project if the lead project fails to deliver on its early promise we show how a firm can forecast expected r d spending through time for an optimally executed r d program while project volatility plays an important role in determining r d program value we find that for high volatility projects the optimal investment policy is not very sensitive to changes in or misestimation of volatility in considering whether to accelerate development of a project a firm should balance the adverse effects of increased costs and the loss of investment flexibility against the positive effects of rapid uncertainty resolution and accelerated cash flows in the presence of a budget constraint that prevents the firm from simultaneously accelerating projects and developing projects in parallel we find that if one project significantly dominates another early in the development stage the option to accelerate the lead project is likely to be more valuable than the option to exchange projects thus the backup project would be shelved in order to commit extra resources to development of the lead project finally competition from other firms leads to more parallel investment in the early development stages of projects less parallel investment in the latter stages of development and lower overall investment

factors influencing the likelihood of regulatory changes in renewable electricity policies abstract the renewable electricity literature has expanded in recent years from the analysis of policies focused on research and development rd the coherence of the policies the size and variety of the coalitions supporting and opposing renewable electricity and the brussels effect the importance of these factors is evaluated in the case of three major markets of renewable electricity germany the netherlands and denmark

uncertainty networks and real options abstract two pervasive features of industries experiencing rapid technological progress are uncertainty with regard to the technological feasibility and marketabilility of an innovation and networks the dense web of research alliances and joint ventures linking firms to each other this paper connects the two disparate phenomena using the notion of real options it visualizes firms as nodes and the links connecting them as call options that give each pair of interlinked firms the right but not the obligation to sink additional resources into a project at some future date conditional on favorable technical market information the formation of networks is endogenous as firms establish links with others by appraising their value using option pricing methods our model explains the following why networks are particularly ubiquitous in industries that are subject to high uncertainty why networks often display an interconnected hubs and spokes architecture why small or peripheral spoke firms often sink resources into relatively higher risk higher return investment projects and those too with only large or hub firms and why so many research alliances are continuously formed and dissolved our paper also outlines the conditions under which ex ante symmetric firms end up ex post forming complex asymmetric networks

quantifying the impact of r d on pv project financing costs abstract energy technology research and development r d typically focuses on advancing the performance and reducing equipment and installation costs however such r d can also have significant indirect impacts on other factors incorporating the impact that r d activities have on financing costs can provide a more complete picture of the consequences of these decisions and may allow policymakers to make better decisions in this paper we discuss some historical examples of r d impacting financing costs in the solar energy sector summarize the areas of r d that can impact financing and describe methodological approaches that can be used to quantify the impact of r d on financing costs and as a result the levelized cost of energy lcoe we estimate that r d driven reductions in financing costs in the solar sector from current levels to low risk levels could reduce lcoe approximately 25 alternatively without the r d advances needed to prevent future risks and complications financing costs in the solar sector could increase by as much as 115

economic and socio economic assessment methods for ocean renewable energy public and private perspectives this paper provides a comprehensive review of the current state of the art of the economics and socio economics of ocean renewable energy ore the many ways in which the viability and impacts of an ore project are assessed and an analysis of the current weaknesses issues or inappropriateness of the metrics and methodologies used in their definition and presentation the outcomes of this paper are anticipated to benefit the ore and wider renewable sector as a whole the review revealed that for the most part the current study of economics and socio economics of ore remain separate and discrete areas of research the economic methods utilised appear to be comprehensive but are limited to project or private investor level the methods identified for socioeconomic assessment fall between traditional and now routine environmental assessment approaches and more novel holistic approaches such as ecosystem services and life cycle assessment the novel section of the paper explored the connectivity between the economics and socio economics of ore in relation to project developments and policy planning a visualisation method was created of concentric rings intersected by related axis of economic socio economic and environment and enabled the examination of the benefits arising from the connectivity between the two spheres the concept of sustainable development process and the integration of environmental assessment for ore was also explored and how it responds to differing stakeholder aspirations and interpretations the analysis revealed that there was a divergence between public and private economic and socioeconomic assessments for ore environmental assessment is primarily a public responsibility but with significant inputs from the private developer involved while economic assessments are conducted primarily by the developer and or investor at their own behest however the two spheres of economic and socio economic for ore are highly connected and synergistic and must be examined in a holistic manner

project management under risk using the real options approach to evaluate flexibility in r d managerial flexibility has value in the context of uncertain r d projects as management can repeatedly gather information about uncertain project and market characteristics and based on this information change its course of action this value is now well accepted and referred to as real option value we introduce in addition to the familiar real option of abandonment the option of corrective action that management can take during the project the intuition from options pricing theory is that higher uncertainty in project payoffs increases the real option value of managerial decision flexibility however r d managers face uncertainty not only in payoffs but also from many other sources we identify five example types of r d uncertainty in market payoffs project budgets product performance market requirements and project schedules how do they influence the value from managerial flexibility we find that if uncertainty is resolved or costs revenues occurafter all decisions have been made more variability may smear out contingencies and thus reduce the value of flexibility in addition variability may reduce the probability of flexibility ever being exercised which also reduces its value this result runs counter to established option pricing theory intuition and contributes to a better risk management in r d projects our model builds intuition for r d managers as to when it is and when it is not worthwhile to delay commitments for example by postponing a design freeze thus maintaining flexibility in r d projects

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

quantifying the value of investing in distributed natural gas and renewable electricity systems as complements applications of discounted cash flow and real options analysis with stochastic inputs abstract one energy policy objective in the united states is to promote the adoption of technologies that provide consumers with stable secure and clean energy recent work provides anecdotal evidence of natural gas ng and renewable electricity re synergies in the power sector however few studies quantify the value of investing in ng and re systems together as complements this paper uses discounted cash flow analysis and real options analysis to value hybrid ng re systems in distributed applications focusing on residential and commercial projects assumed to be located in the states of new york and texas technology performance and operational risk profiles are modeled at the hourly level to capture variable re output and ng prices are modeled stochastically as geometric ornstein uhlenbeck ou stochastic processes to capture ng price uncertainty the findings consistently suggest that ng re hybrid distributed systems are more favorable investments in the applications studied relative to their single technology alternatives when incentives for renewables are available in some cases ng only systems are the favorable investments understanding the value of investing in ng re hybrid systems provides insights into one avenue towards reducing greenhouse gas emissions given the important role of ng and re in the power sector

valuing chinese feed in tariffs program for solar power generation a real options analysis newhuadu business school research fund china sustainable energy program g 1305 18257 national social science foundation of china 12zd059 ministry of education 10gbj013

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

monopolistic competition and the q theory of investment abstract in this paper we analyse the implications for q models of investment of replacing the assumption of perfect competition in the output market with the assumption of monopolistic competition the structural investment equation that can be derived in this case has a richer dynamic structure than the conventional one and it contains in addition to present and future q output as an explanatory variable in the applied section we discuss the extent to which monopolistic competition helps in providing a remedy for the empirical weaknesses of q models the estimates are obtained using aggregate data for u k industrial and commercial companies for the period 1951 1979

wind power reliability valuation in a hydro dominated power market the colombian case abstract the design of market mechanisms that remunerates the reliability provided by a generator in a power market is a task that aims to ensure the normal operation of the system for the case of a hydro dominated system when wind power is introduced and operated under the merit order effect it is possible to assess the effect of the displacement of hydro generation due to wind generation over the system s reliability in terms of firm energy taking this into account a model that valuates the firm energy provided by wind power in a hydro dominated system is proposed this model considers the effect of wind power over the system s reservoirs and the market price of electricity and valuates the firm energy as the net savings of the system related to the increase in the firm energy of the system when wind power is introduced the results show that wind power under merit order effect increases the firm energy of the system and decreases the market price of electricity being the net savings in comparison to the corresponding hydro only system the reliability income that should be perceived by the wind power generator