Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach

Andreas Knaut, Reinhard Madlener, Christiane Rosen () and Christian Vogt ()
Additional contact information
Christiane Rosen: E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), http://www.eonerc.rwth-aachen.de/fcn
Christian Vogt: E.ON Energy Research Center, Postal: Institute for Applied Geophysics and Geothermal Energy (GGE), RWTH Aachen University, Mathieustrasse 10, 52074 Aachen, Germany, http://www.eonerc.rwth-aachen.de/gge

No 11/2012, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: In this paper we investigate the economic viability of geothermal district heating networks using both net present value (NPV) and real options analysis (ROA). We give an introduction to geothermal energy technologies and review the relevant ROA literature focusing on applications in similar fields, such as oil projects. The similarities and differences of oil and geothermal projects are discussed and summarized. The investment structure of geothermal projects is analyzed concerning costs and uncertainties in the different investment stages. We develop a method to assess the impact of temperature uncertainty with ROA. Investments in geothermal projects are evaluated applying a binomial and a trinomial lattice approach. A novel real options model for the evaluation of normally distributed uncertainty is developed for binomial lattices. Using data obtained from a Dutch project in The Hague, we find positive option values for both lattice approaches, compared to negative values for the common NPV calculation. Drilling and production costs are found to have a significant impact on the option value.

Keywords: Geothermal energy; Real options; District heating; Investment under uncertainty (search for similar items in EconPapers)
Pages: 46 pages
Date: 2012-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.fcn.eonerc.rwth-aachen.de/global/show_document.asp?id=aaaaaaaaaagvvwo Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2012_011

Access Statistics for this paper

More papers in FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) Contact information at EDIRC.
Bibliographic data for series maintained by Hendrik Schmitz ().