Real Options versus Traditional Methods to assess Renewable Energy Projects

• Type: Article in International Scientific Journal
• Date: 2014

Authors

Lúcia Santos (Author) Other; Isabel Soares (Author) FEP; Carla Mendes (Author) Other; Paula Ferreira (Author) Other

Journal

Title: Renewable Energy

Vol. 68

Pages: 588-594

ISSN: 0960-1481

Publisher: Elsevier

Indexing

ISI Web of Knowledge - 68 Citations

ISI Web of Science

Scopus - 84 Citations

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics

Other information

Authenticus ID: P-009-7PF

DOI: 10.1016/j.renene.2014.01.038

Abstract (EN): Several methods can be employed to evaluate investment in energy production. On one hand, traditional methods (Net Present Value (NPV) or Internal Rate of Return (IRR), for example) ignore certain project characteristics that may influence its evaluation, such as irreversibility, uncertainty and management flexibility. Nevertheless, the Real Option Approach (ROA) has an advantage over the application of traditional methods, since the prior uncertainties are taken into account. Thus, the main objective of this study is to apply ROA to a case-study (mini-hydro plant) through the use of the binomial tree developed by Cox, Ross and Rubinstein in 1979. This study concludes that the value of ROA is higher than the value of NPV because the investor can get better information and uncertainty is reduced when he has the option to defer the investment. In addition to providing a deep analysis on the major gaps in energy investment evaluation, this work contributes to a better understanding of the usefulness of ROA. (C) 2014 Elsevier Ltd. All rights reserved.

Language: English

Type (Professor's evaluation): Scientific