Optimal Strategies for Investment in Generation of Electric Energy through Real Options

Julia Cristina Noronha (), J. W. Marangon-Lima, T. G. Leite-Ferreira, C. Unsihuay and A. C. Zambroni de Souza

MPRA Paper from University Library of Munich, Germany

Abstract: The Brazilian electric sector has two market-environments for the energy supply: a regulated pool (ACR), with 64 power distribution companies, and the free market (ACL), including free-consumers and energy wholesalers. In the regulated market, the power generation competition is enforced via energy auctions, where the winning generator has to sign long-term standard power purchase agreements (PPA) simultaneously with all distributors at the bidding-price. In this work we use the Real Options Theory to valuate new hydraulic generation assets, which will be traded in the new energy auction. This approach models the uncertainties in setting up the cash flow for the investments and incorporates some possible managerial flexibility associated with the decision taken along the investment forecast. A real example is presented, in which we incorporated the flexibilities regarding the waiting to invest in a new hydro power plant and an abandon option, representing the transfer of concession rights. Since the project involves a multistage investment consisting of design, construction and operation phases, it can be treated as a sequential compound option. A binomial approach was elaborated to model this investment opportunity analysis.

Keywords: Power Generation Investments; Real Options; Investment Analysis (search for similar items in EconPapers)
JEL-codes: D81 G31 L5 Q4 (search for similar items in EconPapers)
Date: 2006-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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