Investment timing and optimal capacity choice for small hydropower projects

Bøckman, Thor; Fleten, Stein-Erik; Juliussen, Erik; Langhammer, Håvard and Revdal, Ingemar (2006): Investment timing and optimal capacity choice for small hydropower projects. Unpublished.

Abstract

This paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices. We present a real options-based method with continuous scaling, and we find that there is a unique price limit for initiating the project. If the current electricity price is below this limit it is never optimal to invest, but above this limit investment is made according to the function for optimal size. The connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant, based on all the important choices for such a plant. The main results of the spreadsheet are simulated production size and the investment costs, which are in turn used for finding the value of the real option and the price limit. The method is illustrated on three different Norwegian small hydropower projects.

• Item Type: MPRA Paper
• Additional Information: To appear in European Journal of Operational Research
• Institution: Norwegian University of Science and Technology (NTNU)
• Language: English
• Keywords: OR in Energy; Real Options; Continuous Scaling; Project Evaluation; Hydropower
• Subjects: Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q25 - Water; Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing

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