A decision-making tool for project investments based on real options: the case of wind power generation

J. Muñoz (), J. Contreras, J. Caamaño and P. Correia

Annals of Operations Research, 2011, vol. 186, issue 1, 465-490

Abstract: This paper presents how to apply a decision-making tool based on real options to assess the investment in a wind energy plant. The work shows six case studies where the main model’s parameters are analyzed. The uncertainty coming from wind regimes is simulated by using Weibull distributions and the volatility of market prices is obtained from the mean reverting process of the Ornstein-Uhlenbeck type, also known as Geometric Mean Reversion (GMR). From these and other values, such as investment and maintenance costs, the Net Present Value (NPV) curve, made up of different values of NPV in different periods of the investment is calculated, as well as its average volatility. Having the key parameters of the model, a real options valuation method is applied. The volatility, strength of reversion and long-term trend of the NPV curve reflecting different periods are inserted into a trinomial investment option valuation tree. From this, it is possible to calculate the probabilities of investing right now (exercise), deferring the investment (wait), or not investing at all (abandon). This powerful decision-making tool allows wind energy investors to decide whether to invest in many different scenarios. Copyright Springer Science+Business Media, LLC 2011

Keywords: Real options; Risk management; Monte Carlo; Wind energy (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (25)

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DOI: 10.1007/s10479-011-0856-9

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