Valuation of a Hydro-Electric Power Project in Emerging Markets: An Application of Real Options

Richard Ottoo

The African Finance Journal, 2012, vol. 14, issue 1, 1-36

Abstract: We apply a contingent-claims technique and demonstrate how to value an emerging market hydro electric power investment under uncertainty. The investment project depends on reliable weather conditions and the capacity of a river to drive the water turbines. Uganda’s Bujagali dam project located at the source of the Nile River is the focus of our study. We identify four mutuallyexclusive real options and incorporate the correlation of returns on rainfall and cash flows as well as a premium for lack of transparency in the estimation of project risk. We document a leverage effect and a volatility effect on project value.

Keywords: Valuation; Real Options; Cost of Capital; Project Finance; Investment; Emerging Markets; Hydro-Electricity (search for similar items in EconPapers)
JEL-codes: G13 G24 G31 G32 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:afj:journl:v:14:y:2012:i:1:p:1-36

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