Renewable Electricity Transition: A Case for Evaluating Infrastructure Investments through Real Options Analysis in Brazil

Anna Carolina Martins (), Marcelo Pereira and Roberto Pasqualino
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Anna Carolina Martins: Institute of Economics, University of Campinas, Campinas 13083-970, Brazil
Roberto Pasqualino: Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge CB3 9EL, UK

Sustainability, 2023, vol. 15, issue 13, 1-24

Abstract: This paper explores the uncertainty of expected returns by adopting the real options analysis method for the financial evaluation of renewable energy projects in Brazil. Energy transition is key to meeting climate targets, and real options analysis can play a pivotal role in evaluating renewable energy projects to meet those targets. The impact of the volatility of the chosen variables on the viability of the project is studied using Monte Carlo simulation in the R software. The results indicate that the lower the option value the higher the volatility of the project, leading to lower likelihood of the project being financed. The resulting model represents a simple instrument that can be incorporated in larger modelling frameworks (e.g., agent-based simulation) to assess the impact of real option analysis on different markets and environmental and socio-political conditions. These findings represent a strong case for the adoption of systems modelling to inform policy to support global energy transition, as the application of this method can make a renewable energy project financially more attractive in comparison to those relying on carbon intensive energy sources.

Keywords: renewable energy; finance; volatility; real option analysis; Monte Carlo Simulation (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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