Optimal investment strategies in decentralized renewable power generation under uncertainty

Stein-Erik Fleten, Karl Magnus Maribu and Ivar Wangensteen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.

Keywords: Real options; Renewable electricity technologies; Electricity markets; Stochastic price; Distributed generation (search for similar items in EconPapers)
JEL-codes: G13 Q2 Q42 (search for similar items in EconPapers)
Date: 2005-03, Revised 2006-06
New Economics Papers: this item is included in nep-ene and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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https://mpra.ub.uni-muenchen.de/218/1/MPRA_paper_218.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/7647/1/MPRA_paper_7647.pdf revised version (application/pdf)

Related works:
Journal Article: Optimal investment strategies in decentralized renewable power generation under uncertainty (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:218

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