Lobatto-Milstein Numerical Method in Application of Uncertainty Investment of Solar Power Projects

Mahmoud A. Eissa and Boping Tian
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Mahmoud A. Eissa: Department of Mathematics, Harbin Institute of Technology, Harbin 150001, China
Boping Tian: Department of Mathematics, Harbin Institute of Technology, Harbin 150001, China

Energies, 2017, vol. 10, issue 1, 1-19

Abstract: Recently, there has been a growing interest in the production of electricity from renewable energy sources (RES). The RES investment is characterized by uncertainty, which is long-term, costly and depends on feed-in tariff and support schemes. In this paper, we address the real option valuation (ROV) of a solar power plant investment. The real option framework is investigated. This framework considers the renewable certificate price and, further, the cost of delay between establishing and operating the solar power plant. The optimal time of launching the project and assessing the value of the deferred option are discussed. The new three-stage numerical methods are constructed, the Lobatto3C-Milstein (L3CM) methods. The numerical methods are integrated with the concept of Black–Scholes option pricing theory and applied in option valuation for solar energy investment with uncertainty. The numerical results of the L3CM, finite difference and Monte Carlo methods are compared to show the efficiency of our methods. Our dataset refers to the Arab Republic of Egypt.

Keywords: stochastic differential equation; numerical simulation; real option; renewable energy; Egypt (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (8)

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