Real Options Valuation of Wind Energy Based on the Empirical Production Uncertainty

Didier Nibbering, Coos van Buuren and Wei Wei ()

No 19/21, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: Using a real options approach, we analyze the valuation of wind energy projects and associated investment decisions while accounting for both price and production uncertainty. We propose a new approach to explicitly incorporate production uncertainty into the valuation. Specifically, we account for the production risk using a stochastic process for wind speed, a cubic spline model for the conversion of wind speed to wind electricity, and a Bayesian procedure for estimating and forecasting the wind electricity processes. In a case-study on a comprehensive dataset of a Dutch offshore wind farm, we evaluate the financial consequences of ignoring production risk for different levelized costs of energy values. We find that fixing the production at a capacity factor value leads to substantial underestimation of the real options value, and relying on theoretical instead of empirical power curves leads to overestimation.

Keywords: OR in energy; wind electricity; production uncertainty; real options; hierarchical Bayesian model (search for similar items in EconPapers)
JEL-codes: C11 G11 Q42 (search for similar items in EconPapers)
Pages: 43
Date: 2021
New Economics Papers: this item is included in nep-ene and nep-ore
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