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.

Download Full-text

Valuation of Wind Energy Projects: A Real Options Approach

Energies ◽

10.3390/en7053218 ◽

2014 ◽

Vol 7 (5) ◽

pp. 3218-3255 ◽

Cited By ~ 27

Author(s):

Luis Abadie ◽

José Chamorro

Keyword(s):

Wind Energy ◽

Real Options ◽

Real Options Approach ◽

Energy Projects

Download Full-text

A Real Options Approach to Valuate Solar Energy Investment with Public Authority Incentives: The Italian Case

Energies ◽

10.3390/en13164181 ◽

2020 ◽

Vol 13 (16) ◽

pp. 4181

Author(s):

Antonio Di Bari

Keyword(s):

Solar Energy ◽

Real Options ◽

Real Option ◽

Net Present Value ◽

Option Value ◽

Present Value ◽

Energy Investment ◽

The Real ◽

Real Options Approach ◽

Real Option Value

Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.

Download Full-text

Production Tax Credits and Wind Energy Investment: A Real Options Approach with Regime Shifts

SSRN Electronic Journal ◽

10.2139/ssrn.1933542 ◽

2010 ◽

Author(s):

M. Scott Wilson

Keyword(s):

Wind Energy ◽

Real Options ◽

Regime Shifts ◽

Tax Credits ◽

Energy Investment ◽

Real Options Approach ◽

Production Tax

Download Full-text

Valuation of Wind Energy Turbines Using Volatility of Wind and Price

10.20944/preprints202101.0190.v1 ◽

2021 ◽

Author(s):

Doron Greenberg ◽

Michael Byalsky ◽

Asher Yahalom

Keyword(s):

Wind Energy ◽

Real Options ◽

Net Present Value ◽

Discounted Cash Flow ◽

Energy Investment ◽

Real Options Analysis ◽

The Real ◽

Investment Projects ◽

Managerial Flexibility ◽

Renewable Energy Investment

The limitedness of the nonrenewable local energy resources in Israel, even in background of the later gas fields’ findings, continues to force the state to devote various efforts for the ‘green’ energy development. These efforts include installations both in the solar and in the wind energy, with a purpose to improve the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique is widely applied in many studies for valuation of renewable energy investment projects. Hence, we apply in this study the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel.

Download Full-text

Valuation of Wind Energy Turbines Using Volatility of Wind and Price

Electronics ◽

10.3390/electronics10091098 ◽

2021 ◽

Vol 10 (9) ◽

pp. 1098

Author(s):

Doron Greenberg ◽

Michael Byalsky ◽

Asher Yahalom

Keyword(s):

Power Generation ◽

Renewable Energy ◽

Standard Deviation ◽

Wind Energy ◽

Real Options ◽

Green Energy ◽

Energy Sources ◽

Energy Investment ◽

Real Options Analysis ◽

The Real

The limitedness of the nonrenewable local energy resources in Israel, even in the background of the later gas fields’ findings, continues to force the state to devote various efforts towards ‘green’ energy development. These efforts include installations, both for the solar and for wind energy, thus improving the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique has been widely applied in many studies for the valuation of renewable energy investment projects. Taking into account the above background, we apply, in this study, the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel, which is the context of our work. We hypothesize that due to nature of wind energy production uncertainties, the ROA method is better than the alternative. The novelty of this paper includes the following: real world wind statistics of the Merom Golan site in Israel (velocity 3.73 m/s, with a standard deviation of 2.03 m/s), a realistic power generation estimation (power generation of 1205.84 kW with a standard deviation of about 0.5% in annual value which is worth about 1.3 M$ per annum), and an economic model to evaluate the profitability of such a project. We thus discuss the existing challenges of diversifying renewable energy sources in Israel by adding wind installations. Our motivation is to introduce a method which will allow investors and officials to take into account uncertainties when deciding in investing in such wind installations. The outcomes of the paper, which are obtained using the method of Weibull statistics and the Black–Scholes ROA technique, include the result that market price volatility adds to the uncertainties much more than any wind fluctuations, provided that the analysis is integrated over a long enough time.

Download Full-text