Evaluation of hydropower upgrade projects - a real options approach

Morten Elverhøi, Stein-Erik Fleten, Sabine Fuss, Ane Marte Heggedal, Jana Szolgayova and Ole Christian Troland

MPRA Paper from University Library of Munich, Germany

Abstract: When evaluating whether to refurbish existing hydropower plants or invest in a new power plant, there are two important aspects to take into consideration. These are the capacity chosen for the production facilities and the timing of the investment. This paper presents an investment decision support framework for hydropower producers with production facilities due for restoration. The producer can choose between refurbishing existing power plants and investing in a new production facility. A real options framework is proposed to support the investment decision. Using a case from Norsk Hydro ASA, a Norwegian hydropower producer, we employ the framework to evaluate the investment opportunities. Our main contribution is an approach that combines hydropower scheduling and real options valuation, and the results from our analysis suggest feasible investment strategies for Norsk Hydro ASA.

Keywords: Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets (search for similar items in EconPapers)
JEL-codes: G13 G31 Q4 (search for similar items in EconPapers)
Date: 2010-05-07
New Economics Papers: this item is included in nep-ene and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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