Caminha-Noronha, J. C. and Marangon-Lima, J. W. and Leite-Ferreira, T. G. and Unsihuay, C. and Zambroni de Souza, A. C. (2006): Optimal Strategies for Investment in Generation of Electric Energy through Real Options.
Download (656kB) | Preview
The Brazilian electric sector has two market-environments for the energy supply: a regulated pool (ACR), with 64 power distribution companies, and the free market (ACL), including free-consumers and energy wholesalers. In the regulated market, the power generation competition is enforced via energy auctions, where the winning generator has to sign long-term standard power purchase agreements (PPA) simultaneously with all distributors at the bidding-price. In this work we use the Real Options Theory to valuate new hydraulic generation assets, which will be traded in the new energy auction. This approach models the uncertainties in setting up the cash flow for the investments and incorporates some possible managerial flexibility associated with the decision taken along the investment forecast. A real example is presented, in which we incorporated the flexibilities regarding the waiting to invest in a new hydro power plant and an abandon option, representing the transfer of concession rights. Since the project involves a multistage investment consisting of design, construction and operation phases, it can be treated as a sequential compound option. A binomial approach was elaborated to model this investment opportunity analysis.
|Item Type:||MPRA Paper|
|Original Title:||Optimal Strategies for Investment in Generation of Electric Energy through Real Options|
|English Title:||Optimal Strategies for Investment in Generation of Electric Energy through Real Options|
|Keywords:||Power Generation Investments, Real Options, Investment Analysis|
|Subjects:||L - Industrial Organization > L5 - Regulation and Industrial Policy
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy
|Depositing User:||Julia Cristina Caminha Noronha|
|Date Deposited:||20. Oct 2009 09:13|
|Last Modified:||08. Jan 2014 13:16|
 K. Rocha, F. A. Alcaraz. Garcia, "Do Ranking das Distribuidoras ao risco de Crédito no Pool– A Remuneração de Investimentos em Energia Elétrica no Brasil", IPEA, Texto Para Discussão 1086, April 2005, p. 32.
 L. E. Brandão, J. S. Dyer, "Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation", Operations Research: Recent Advances in Decision Making under Uncertainty, September 2003, p. 26
 A. Moreira, K. Rocha, P. David, “Thermopower generation investment in Brazil—economic conditions”, Energy Policy 32 (2004) 91–100
 E. H. Matsumura, “Thermal Power Plant Investment in the Brazilian Centralized Hydrothermal Power System”, Brazilian Meeting on Econometric, July 19, 2004. p. 1-25.
 M. Pereira, L. A Barroso, J. Rosenblatt, “Supply adequacy in the Brazilian power market”, Proceedings of the IEEE General Meeting, Denver, 2004 p. 1-6.
 P. Batista, E. Haiama, and R.E. Santo, "Utilities Sector Rating: Overweight New Energy Auction", Pactual Intraday Notes, December 19th , 2005.
 T. Copeland, V. Antikarov, Real Options: A Practitioner’s Guide, Thompson, 2003, p. 220.  T. Copeland, P. Bufano, “A Real-World Way to Manage Real Options”, Harvard Business Review, March 2004, p. 13.
 J. W. Marangon Lima; J. C. Caminha Noronha, T. Leite Ferreira, P. E. Steele dos Santos, J. Miranda Filho, "Investimentos em Distribuição: Uso de Opções Reais no Novo Paradigma Criado pela Lei 10848/04", Brasília, Proc. of XVI SENDI, 2004.
 A. K. Dixit, R. S. Pindyck, Investment Under Uncertainty, Princeton University Press, New Jersey: Wiley, 1991, p. 81.
 F. Black, M. Scholes, "The Pricing of Options and Corporate Liabilities", Journal of Political Economy 81, p. 637-659, 1973.