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

real options analysis of investment in solar vs wind energy diversification strategies under uncertain prices and costs in this paper we study a community or firm considering to diversify its investment in two distinct renewable energy technologies namely wind and solar pv electricity we assume technological learning curves as a function of cumulative capital investment a real options approach is applied as it takes into account uncertainty about prices and learning as well as irreversibility associated with investment decisions we investigate three different cases dealing with uncertainty about future electricity prices and uncertainty about the speed with which learning drives the costs of wind and solar electricity down we assess the minimum threshold for the stochastic price and the maximum electricity production cost that makes it optimal for the firm to invest in the two technologies the results show that the learning rate affects the option to invest in but reducing critical threshold for exercising it the greater the amount of capital invested the more learning stimulates earlier exercising of the option to invest the firm will then anticipate the option to invest and exercise it for lower critical threshold values if all capital is invested in one technology if capital investment is diversified the option should be exercised at a higher critical threshold more uncertainty in energy prices or technology costs postpones the option to invest although investing in both solar and wind may be profitable under particular conditions of price and cost uncertainty the theoretically optimal strategy is generally investing in only one technology that is solar or wind depending on their relative initial costs and learning rates this suggests that the practice in most countries of diversifying renewable energy may reflect a mistaken strategy

renewable energy policy evaluation using real option model the case of taiwan abstract this study presents a policy benefit evaluation model that integrates cost efficiency curve information on renewable power generation technologies into real options analysis roa methods the proposed model evaluates quantitatively the policy value provided by developing renewable energy re in the face of uncertain fossil fuel prices and re policy related factors the economic intuition underlying the policy making process is elucidated while empirical analysis illustrates the option value embedded in the current development policy in taiwan for wind power in addition to revealing the benefits that re development provides when considering real options analytical results indicate that roa is a highly effective means of quantifying how policy planning uncertainty including managerial flexibility influences re development in addition to assessing the policy value of current re development policy this study also compares policy values in terms of internalized external costs and varying feed in tariff fit simulation results demonstrate that the re development policy with internalized co2 emission costs is appropriate policy planning from sustainability point of view furthermore relationship between varying fit and policy values can be shown quantitatively and appropriate fit level could be determined accordingly

the ban on indexed bonds 1933 77 in a recent article in this review nissan liviatan and david levhari attempt to explain the phenomenon that in spite of recent marked inflationary trends the important capital markets have not developed a significant free private enterprise market for cost of living linked bonds p 366 they note that the familiar theoretical complete dominance of indexed bonds over nonindexed bonds holds unambiguously only in an economy in which there are no nominal assets they demonstrate that borrowers may in theory insist on hedging the inflation risk on their nonindexed cash balances by issuing some nonindexed bonds at a discount that makes them attractive in spite of the risk they impose on lenders their model leads them to conclude that indexed bonds might not completely dominate nonindexed bonds however they do not claim that their model explains the phenomenon they set out to explain why is it that the free market to use their expression has come up with virtually no indexed bonds at all fortunately a simple explanation for the nonexistence of indexed bonds in the united states was provided two years

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

compound real options valuation of renewable energy projects the case of a wind farm in serbia abstract renewable energy sources have become a very important issue due to environmental and sustainability concerns in addition most renewable energy electricity generation res e projects are characterized by considerable uncertainty and sequential decision making these projects net present value npv is very often close to zero which renders them a good candidate for the application of real options valuation methodology of investment project appraisal this paper examines the real options valuation of a potential onshore wind farm project in serbia the binomial tree model spans a 15 year period consisting of a 2 year investment period and a 13 year operating period the first 12 years of which are protected by feed in tariffs according to local renewable energy regulations the authors examine a multi phased compound nested path dependent real option consisting of mutually exclusive options a sequential option to invest as well as expand repower contract and abandon options volatility which is calculated by means of a monte carlo simulation according to the logarithmic present value returns approach shows predominant sensitivity to the capacity factor simulated with the rescaled weibull s probability distribution the final binomial tree results show that the proposed sequence of options increases project value by transforming higher risk and lower return in the initial discounted cash flow model to lower risk and higher return in the ro model this paper contributes to the existing literature in at least two ways it presents in depth analysis of the real option application to the res e project and provides decision makers with sophisticated tool for improving strategic thinking capital budgeting and decision making processes

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

application of the modified tobin s q to an uncertain energy saving project with the real options concept abstract this paper is to develop a modified tobin s q evaluation method which successfully combines the evaluation criteria of the traditional tobin s q and the real options this study provides flexible thinking for decision making criteria that is it clearly provides decision makers with a reference in choosing enter or exit strategies such as quantitative indicators references the proposed model introduces two variables stochastic process in continuous time and explores the impact of the occurrence of unexpected events on the project value so that it can more authentically response to the project value the studied issue deals with the firms that have not established energy saving equipment yet it attempts to figure out the optimal timing to adopt an energy saving investment project when it is beneficial and the optimal timing to terminate it when the continuous operation of that business is unprofitable the future discounted benefit cost ratio q follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment except for the evaluation of energy saving equipment investment project the proposed model can be applied to other related project evaluation issues such as energy saving co 2 emission reduction or general investment projects

an entry and exit model on the energy saving investment strategy with real options this paper presents an improved decision model based on the real options approach presented by ansar and sparks 2009 for the firms that have not yet established energy saving equipment under the entry and exit strategies furthermore the proposed model takes account of the inevitable equipment renewal and the occurrence of unexpected events under the poisson jump process the timing for terminating an investment when continuous operations of that business are unprofitable is also explored to realize the optimal timing of implementing the energy saving strategy the future discounted benefit b follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment a numerical analysis is followed by a sensitivity study of various parameters to better realize their impacts on the entry and exit thresholds the results show that for the jump case the higher probability of occurrence of unfavorable events will result in a higher entry threshold and lower exit threshold investors are forced to request higher benefit thresholds to cover the higher probability of losses brought by unfavorable events

a real option analysis of investments in hydropower the case of norway abstract this paper presents a valuation study of hydropower investment opportunities in the norwegian context according to nve norwegian water resources and energy directorate the regulator there is a potential of 39 twh not yet developed generation in a normal year is approximately 120 twh by using the conceptual real option framework of dixit and pindyck 1994 investment under uncertainty princeton university press princeton nj one can estimate the value of investment opportunities to nok 11 million gwh eur 1 4 million gwh furthermore the optimal trigger price for initiating an investment based on electricity forward prices is calculated to nok 0 32 kwh eur 0 04 kwh the analysis shows consistency between real option theory and aggregate investment behaviour in norwegian hydropower

uruguay round commitments on domestic support their implications for developing countries abstract this paper examines the basic provisions of the uruguay round agreement on agriculture on domestic support and their relative importance especially from the perspective of developing countries it gives some indication of the extent to which difficulties may arise from differences in interpretation and implementation of certain provisions which may result in contentious issues in the future further the paper focuses on the implications of the commitments made for food and agricultural policy in developing countries in particular it discusses in some detail the compatability of the new disciplines with agricultural and food policies normally pursued by developing countries although by and large developing countries have provided small amounts of direct price support to agriculture in the past the paper concludes that in general the agreement on agriculture per se is not likely to present serious constraints to them in pursuing their agricultural and food policies on production consumption and domestic market stabilization in most cases constraints are likely to come from budgetary austerity and commitments that countries have made under structural adjustment programmes

has government any role in money abstract recent interest in monetary reform has been sparked by the emergence of a world irredeemable paper money system in light of this interest we review the current validity of four good reasons friedman advanced in 1960 to rationalize government intervention we conclude that the forces that produced government involvement in the past will persist deregulation of financial intermediaries is desirable on grounds of market efficiency though it is an open question whether government should continue as lender of last resort we expect that the present world fiat money standard will neither degenerate into hyperinflation nor revert to a commodity standard

impact of the 1996 us fair act on the common agricultural policy in the world trade organisation context the decoupling issue abstract the united states us federal agriculture improvement and reform fair act of 1996 represents a watershed not only from a domestic point of view but also from the perspective of the next round of international agricultural negotiations in particular it will force the european union eu to reform its agricultural policy so that compensatory payments for support price cuts are included in the green box or at least are much more decoupled than at present us exports of several agricultural products including maize pork and poultry meat barring a prolonged global economic downturn should increase substantially over the 7 year period of the act and beyond accordingly the us will certainly attempt to ensure that trade barriers with the eu and subsidised competition from the eu in third markets are kept to a minimum though the 1999 eu proposals for a new reform of the common agricultural policy cap represent a courageous step in the right direction they are likely to be insufficient to comply with future world trade organisation wto commitments in particular with regard to the decoupling of direct aid payments we have made a number of proposals for an internal support policy which explicitly recognises that european farmers have several functions that require specific forms of public intervention and which should comply with future wto requirements

distortions in world food markets in the wake of gatt evidence and policy implications abstract although the principle of trade liberalization has gained wide acceptance in recent years many policy makers in developing countries especially in latin america are exploring temporary import restrictions in the form of additional tariff protection to insulate domestic farmers from the impact of depressed prices until the uruguay round accord leads to higher world market prices for agricultural products the paper argues that there is little reason to believe that current world market prices will rise substantially in real terms even with the uruguay round accord fully implemented this finding suggests that additional tariff protection would not make economic sense

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

real options analysis for renewable energy investment decisions in developing countries abstract renewable energy projects in developing countries should provide clean energy supply as well as support sustainable economic development to this end risks arising from uncertainties such as rapidly changing technologies and host government conditions should be carefully addressed however traditional methods for economic assessment are not adequate to support decision making regarding investments in renewable energy this paper proposes a real options analysis framework as a tool to assess renewable energy investment in developing countries a case study involving a hydropower project in indonesia was conducted to validate and verify the proposed framework this framework is expected to help host countries and investors assess renewable energy projects with high volatility and risk

a tax induced clientele for index linked corporate bonds this paper analyzes the circumstances under which tax considerations favor or disfavor the use of index linked corporate bonds using a model similar to miller s investors choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns it is concluded that the absence of indexlinked bonds in the u s cannot be attributed solely to tax reasons however following the 1986 tax reform act the tax code is expected to disfavor the use of index linked bonds the absence of index linked i l bonds in the u s is puzzling index linked bonds are common in countries that have experienced persistently high and or volatile rates of inflation both the periodic interest payments and the principal of an i l bond are linked to a price index this design provides protection against inflation induced changes in the nominal interest rate and prevents erosion of the bond s real value during inflationary periods anticipated or unanticipated the theoretical literature on i l bonds has focused primarily on the risk reduction aspect see for example sarnat 9 fischer 3 and siegel and warner 11 the recurrent theme of these studies is that the introduction of i l bonds reduces inflationary risks to both debtors and creditors these studies argue that in a portfolio context i l bonds provide investors protection against a risk that cannot be fully hedged otherwise fischer 4 conjectured that a possible reason for the absence of i l bonds in the u s may be the tax treatment of the returns on these bonds 2 from a tax point of view i l bonds differ from nominal bonds bonds hereafter in two respects first the returns on i l bonds consist of a combination of interest income and capital gains whereas the returns on nominal bonds consist in a steady state of interest income only second while the compensation for the inflation induced erosion in the real value of the principal of a nominal bond is part of the periodic interest payments and hence is taxed every period the corresponding compensation on an i l bond is realized and taxed only when the bond is sold thus holding i l bonds allows a tax deferment that is not possible when nominal bonds are held

interest rates and expected inflation 1831 1914 a rational expectations approach irving fisher argued that interest rates contain a premium for expected inflation and assembled a mass of data both historical and statistical in nature to support his argument 5 6 7 as a research paradigm his argument has proven useful in explaining the behavior of interest rates during the post war period however his original empirical analysis was never persuasive and contemporary studies using modern statistical techniques fail to find the fisher effect in the data fisher used this article examines yet one more time the behavior of interest rates and inflation during basically the 19th century this study is different from other contemporary studies in four important ways first a consumer price index as is required by fisher s theory and not a wholesale price index is used to measure inflation second expected inflation is modeled using a rational expectations approach expected inflation is not simply proxied by a weighted average of past inflation third the fisher effect is included in a reduced form model with other determinants of interest rates the fisher effect is therefore tested

market in efficiency in valuing electric utilities the case of norwegian generating companies after deregulation of the energy market in norway a number of mergers and acquisitions of hydropower generating companies have taken place however valuation of these companies has proved controversial from an ex post perspective there is support for the criticism that generation assets have been sold too cheaply this article presents a simple valuation model providing evidence of how value has evolved on the basis of these results we discuss the valuation from an ex ante perspective and in the light of the market efficiency hypothesis of fama 1970 1991

the uruguay round and agricultural policies in developing countries and economies in transition abstract this paper reviews changes in the global trade policy environment as a result of the uruguay round agreement on agriculture and their potential impact on developing countries and economies in transition the agreement is except in a few cases not likely to present these countries with major policy adjustment problems in latin america unilateral reforms have proceeded further than required by the agreement in africa countries that have experienced structural adjustment are liberalizing faster than the agreement requires in asia the situation is mixed but in general agricultural trade liberalization appears to be moving more slowly especially when compared to latin america progress in reducing quantitative restrictions has been show in eastern europe and the cis the progression and completeness of liberalization varies widely though gatt notions of tariffication and tariff bindings have strengthened the position of reformers in those countries that are members of the wto while the short term impact of the agreement may be modest the bringing of agriculture under the rules of gatt should help prevent reintroducing non tariff restrictions in the future however given that much of the food imports particularly in parts of asia are still conducted by parastatals if state trading in gatt legal it is hard to anticipate how strong discipline on trade distorting support could be brought about

pumped storage project a short to long term investment analysis including climate change abstract new renewable energy needs flexibility which can be provided by storage hydropower climate change affects the potential of this technology in both a negative and a positive way on one hand by altering runoff and on the other hand by creating new investment opportunity this paper provides an economic and financial analysis of a future project in a pumped storage facility that may be initiated in the swiss alps following the glacier retreat the area released may be considered for building a new reservoir a complete and integrated model is developed based on the tools of analysis provided by econometrics finance and operational research the results show that under the present market conditions such an investment is not profitable unexpectedly the sensitivity analysis shows that most of the time higher price volatility reduces annual revenue furthermore the project s lifetime only has a marginal impact on the net present value the value of the concession which is the right to use water is also assessed on the basis of a real option analysis including a long term horizon its present value is substantial even if the project is currently unprofitable in the discussion we go beyond the swiss case study and highlight the implications for energy policy and market design

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

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