Fleten, Stein-Erik and Maribu, Karl Magnus and Wangensteen, Ivar (2005): Optimal investment strategies in decentralized renewable power generation under uncertainty. Forthcoming in: Energy
Download (285kB) | Preview
This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.
|Item Type:||MPRA Paper|
|Original Title:||Optimal investment strategies in decentralized renewable power generation under uncertainty|
|Keywords:||Real options; Renewable electricity technologies; Electricity markets; Stochastic price; Distributed generation|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing
Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q42 - Alternative Energy Sources
Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation
|Depositing User:||Stein-Erik Fleten|
|Date Deposited:||07. Oct 2006|
|Last Modified:||13. Feb 2013 11:20|
 The International Energy Agency (IEA). Distributed generation in liberalized electricity markets. Paris: OECD; 2002.  Ang BW, Huang JP, Poh KL. Break-even price of distributed generation under uncertainty. Energy 1999;24:579–89.  Hoff TE. Using distributed resources to manage risk caused by demand uncertainty. Energy J 1997; 63–83[DR Special Issue].  Dixit A, Pindyck RS. Investment under uncertainty. New Jersey: Princeton University Press; 1994.  Trigeorgis L. Real options: managerical flexibility and strategy in resource allocation. Boston: MIT Press; 1996.  Lucia J, Schwartz ES. Electricity prices and power derivatives— evidence from the Nordic power exchange. Rev Derivatives Res 2002;5:5–50.  Schwartz ES, Smith JE. Short-term variations and long-term dynamics in commodity prices. Manage Sci 2000;46(7):893–911.  Pindyck RS. The dynamics of commodity spot and futures markets: a primer. Energy J 2000;22(3):2–29.  Willis HL, Scott WG. Distributed power generation. New York: Marcel Dekker; 2000.  Dixit A. Choosing among alternative discrete investment projects under uncertainty. Econom Lett 1993;41:265–8.  De´ camps J- P, Mariotti T, Villeneuve S. Irreversible investment in alternative projects. Economic Theory 2006;28:425–48.  Dias MAG, Rocha K, Teixeira JP. The optimal investment scale and timing: a real option approach to oilfield development. In: Proceedings of the eighth annual international conference, Montreal, Canada, 2004. See also: http://www.realoptions.org  Awerbush S. Investing in photovoltaics: risk, accounting and the value of new technology. Energy Policy 2000;28:1023–35.
Available Versions of this Item
- Optimal investment strategies in decentralized renewable power generation under uncertainty. (deposited 07. Oct 2006) [Currently Displayed]