Evaluation of Investments in Wind Energy Projects, under Uncertainty. State of the Art Review

The use of renewable energy sources, especially wind energy, has been widely developed, mostly during the last decade. The main objective of the present study is to conduct a literature review focused on the evaluation under uncertainty of wind energy investment using the real options approach to find out whether public opposition (NIMBY projects) has been contemplated, and if so, what have been the flexible strategies applied for its intervention. Overall, 97 publications were analyzed, identifying 20 different models or approaches, which were grouped into eight categories: 1. Real options, 2. Optimization, 3. Stochastics, 4. Financial evaluation, 5. Probabilistic, 6. Estimation, 7. Numerical prediction, and 8. Others. The real options approach, present in 32% of the studies, was the most popular. Twenty-eight types of uncertainties were identified, which were grouped, for better analysis, into nine categories. In total, 62.5% of the studies included the price of electricity as a source of uncertainty; 18.8%, the velocity of wind; and 15.6%, the feed-in rates-subsidy. Both random and non-random techniques were applied to assess the real options and to model the uncertainties. When evaluating real options, the Monte Carlo simulation technique was the most preferred, with 16 (51.6%) applications, followed by non-randomized techniques, decision tree, and dynamic programming, with eight (25.8%) applications each. There is a marked tendency to use stochastic processes to model uncertainty, particularly geometric Brownian motion, which was used in 61.3% (19) of the studies in the sample. When searching for “real options AND (nimby OR public opposition)”, no study was found, which shows the possibility of developing research on this aspect to determine its impact on investments in wind energy projects.

Climate Change and Coffee Farm Relocation in Ethiopia: A Real-Options Approach

Climate change and emerging pests and diseases may negatively affect coffee yields and revenues in Ethiopian regions at low altitudes. Hence, the relocation of coffee farms to regions at higher altitudes has been suggested in order to assure sustainability and resilience for Ethiopian coffee production. In this paper, we study how sunk establishment costs, uncertain net returns and policy-induced incentives may affect the timing and value of a coffee farm relocation. This is done by developing a real-options model taking into account the relevant drivers of the farmer’s decision to relocate. We then present an empirical analysis examining a hypothetical relocation. We show that relocation is a rather attractive opportunity even though the presence of volatile net returns and relatively high establishment costs may induce its postponement. Thus, we determine the optimal amount of subsidy needed in order to foster the relocation process.

Optimized Expansion Strategy for a Hydrogen Pipe Network in the Port of Rotterdam with Compound Real Options Analysis

The port of Rotterdam is the largest seaport in Europe. To maintain its position, the harbor will have to anticipate global transitions such as transferring to sustainable energy. Hydrogen is seen as a promising energy carrier; however, future demand is uncertain. The current research investigates decision making under uncertainty and values flexibility. Compound real options analysis is applied to optimize the time-variant expansion strategies for a hydrogen pipe network. The trade-off between early investments and missed revenues when not investing in time determines the optimized expansion strategy. Moreover, the real options approach also provides the levelized unit price for hydrogen distribution, to cover the life cycle costs of the optimal expansion strategy. Finally, this real options approach offers flexibility to a decision maker as it allows for enhancing future decisions. The academic contribution of this research is a distinct perspective on a compound real options approach where the optimal strategic path is the key result of interest. This in contrast to other real options applications in the literature which focus on option value, exchange with limiting the options or do not visualize a strategic path. Moreover, this research demonstrates how stepwise expansion and decision making under uncertainty facilitate transitions such as the transition toward clean energy.

Investigating a real-options approach to modelling public policy investments, and implications for public administration

<p>This thesis investigates the application of real-options modelling to policy investment coordination problems across government departments, with the aim of informing high-level institutional and system design choices in public administration. This analysis is motivated by recent and ongoing reforms to the legislative framework underpinning New Zealand's public service which, unlike the last major public administration reforms of the 1980s, are not expressly driven by or obviously supported by economic theory. We find that a simple real-options framework allows for a compelling illustration of the coordination problems that the current reforms are in part aiming to solve, and supports analysis of the types of mechanism that might be employed to address them. Such mechanisms include the promotion of structural integration, the broadening or alignment of departmental policy objectives, a relaxation of public finance restrictions, and joint decision-making over policy investments.</p>