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Investing in biogas: Timing, technological choice and the value of flexibility from input mix

Luca Di Corato () and Michele Moretto

Energy Economics, 2011, vol. 33, issue 6, 1186-1193

Abstract: In a stochastic dynamic frame, we study the technology choice problem of a continuous co-digestion biogas plant where input factors are substitutes but need to be mixed together to provide output. Given any initial rule for the composition of the feedstock, we consider the possibility of revising it if economic circumstances make it profitable. Flexibility in the mix is an advantage under randomly fluctuating input costs and comes at a higher investment cost. We show that the degree of flexibility in the productive technology installed depends on the value of the option to profitably re-arrange the input mix. Such option adds value to the project in that it provides a device for hedging against fluctuations in the input relative convenience. Accounting for such value we discuss the trade-off between investment timing and profit smoothing flexibility.

Keywords: Real options; Flexibility; Technological choice; Renewable energy; Biomass; Anaerobic digestion (search for similar items in EconPapers)
JEL-codes: C61 D24 Q42 (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Investing in biogas: timing, technological choice and the value of flexibility from inputs mix (2011) Downloads
Working Paper: Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix (2009) Downloads
Working Paper: Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix (2009) Downloads
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