Sustainable energy development under uncertainty based on the real options theory approach

Marhabi, A. Azari; Arasteh, Abdollah; Paydar, Mohammad Mahdi

doi:10.1007/s13762-021-03763-8

Cited by 7 publications

(6 citation statements)

References 19 publications

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“…Carbon pricing is a prime example of a systemic policy that can simultaneously shift the choices of consumers, producers, investors, and innovators in all sectors to a low-carbon transformation (van den Bergh & Botzen, 2020). If policymakers can increase the CO2 prices in percentages for several years, and if investors are certain about this increase, it will encourage investment in sustainable energy sources (Azari Marhabi et al, 2021). Carbon taxes are another policy lever in jurisdictions that seek to accelerate decarbonization, climate change mitigation, and energy transition goals (Abdul-Salam, 2022).…”

Section: Discussionmentioning

confidence: 99%

“…For example, Assereto and Byrne (2021) considered the uncertainty in electricity prices to assess the economic feasibility and the timing of investment in utility-scale solar in Ireland. In another study, Azari Marhabi et al (2021) proposed a real options-based tool for policymakers to further manipulate the choice of investors in renewable resources to produce electricity under uncertainty in government policies. On the other hand, Zhang et al (2022) complicated these by combining real options with portfolio optimization to evaluate the optimal renewable energy investment portfolio strategy, investment value, and conditional value at risk under uncertain changes in electricity price, fuel price, carbon price, investment cost, and renewable energy certificate price.…”

Section: Introductionmentioning

confidence: 99%

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Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Batac

Collera

Villanueva³

et al. 2022

Int. J. Renew. Energy Dev.

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Investment in sustainable energy sources is one of the climate mitigation strategies that can significantly reduce greenhouse gas emissions in the energy sector. However, in developing countries, investment is challenged by high capital expenditures and several uncertainties. This paper aims to provide decision support for investment in sustainable energy projects by evaluating the comparative attractiveness of shifting energy sources from fossil fuels to renewables and nuclear. Applying the real options approach (ROA), we calculate the value of the flexibility to postpone the investment decision and identify the optimal timing (described here as the trigger price of coal) for shifting to sustainable energy sources. We consider various uncertainties, such as coal and electricity prices, negative externality of using fossil fuels, and the risk of a nuclear accident, which are modelled using geometric Brownian motion, Poisson process, and Bernoulli probability. Applying the ROA model in the case of the Philippines, results find that investing in sustainable energy is a better option than continuing to use coal for electricity generation. However, contrary to conventional option valuation result that waiting is a better strategy, we found that delaying or postponing the investment decisions may lead to possible opportunity losses. Among the available sustainable energy sources, geothermal is the most attractive with trigger prices of coal equal to USD 49.95/ton, followed by nuclear (USD 58.55/ton), wind (USD 69.48/ton), solar photovoltaic (USD 72.04/ton), and hydropower (USD 111.14/ton). We find that the occurrence of jump (extreme) prices of coal, raising the current feed-in-tariff, and considering negative externalities can decrease the trigger prices, which favor investments in sustainable energies. Moreover, the risk of a nuclear disaster favors investment in renewable energy sources over nuclear due to the huge damage costs once an accident occurs. Results provide bases for policy recommendations toward achieving a more secure and sustainable energy sector for developing countries that are too dependent on imported fossil fuels.

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Batac

Collera

Villanueva³

et al. 2022

Int. J. Renew. Energy Dev.

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“…However, their mathematical complexity does not allow for closed-form analytical solutions; simulation approaches must be used instead. GBMs with Poisson jumps have been used to model panel costs [98,114], electricity price [25,26,41], CO 2 price [23], and green certificates price [54].…”

Section: Jump Processes: Markov and Poisson Modelsmentioning

confidence: 99%

Economic and Regulatory Uncertainty in Renewable Energy System Design: A Review

et al. 2023

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Renewable energy is increasingly mobilizing more investment around the globe. However, there has been little attention to evaluating economic and regulatory (E&R) uncertainties, despite their enormous impact on the project cashflows. Consequently, this review analyzes, classifies, and discusses 130 articles dealing with the design of renewable energy projects under E&R uncertainties. After performing a survey and identifying the selected manuscripts, and the few previous reviews on the matter, the following innovative categorization is designed: sources of uncertainty, uncertainty characterization methods, problem formulations, solution methods, and regulatory frameworks. The classification reveals that electricity price is the most considered source of uncertainty, often alone, despite the existence of six other equally influential groups of E&R uncertainties. In addition, real options and optimization arise as the two main approaches researchers use to solve problems in energy system design. Subsequently, the following aspects of interest are discussed in depth: how modeling can be improved, which are the most influential variables, and potential lines of research. Conclusions show the necessity of modeling E&R uncertainties with currently underrepresented methods, suggest several policy recommendations, and encourage the integration of prevailing approaches.

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“…The ROA has already been applied in a variety of business and finance contexts such as Ewald and Taub [19], Huang et al [20], Ioulianou et al [21], and Yeo and Lee [22]. This model has also been applied to investment decisions in different sectors including energy [23][24][25], agriculture and forestry [26][27][28], transport [29,30], and other climate mitigation and adaptation technologies [16,[31][32][33]. In this paper, the ROA is applied to the decision to postpone or invest immediately in energy transition technologies considering the uncertainty in oil prices brought by the international conflicts.…”

Section: Real Options Backgroundmentioning

confidence: 99%

Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

Agaton

2022

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Geopolitical conflicts, involving a major player in the world market, affect the prices of oil and commodities, particularly in oil-importing countries. Consequently, the unprecedented changes in oil prices impact investments in energy transition projects. This study aims to analyze the dynamics of investment decisions in energy transition under uncertainties in geopolitical risks. This research applies the Black-Scholes-based real options valuation to value the flexibility in postponing energy transition investments considering the repercussions of the Russia-Ukraine war. Applying the proposed model to the case of the Philippines, the valuation result with a net present value of USD 231 million for a 1 GW capacity shows that energy transition is a viable project when the cost savings from using fossil fuels to renewables are considered. On the other hand, real options valuation finds a higher flexibility value of USD 990 million, which implies a better decision to postpone the project. The uncertainty in geopolitical conflicts further increases this value causing a longer waiting period to implement the energy transition project. Sensitivity analysis shows that the results are robust to changes in the explanatory variables. Results provide policy implications on making an oil-importing country energy self-sufficient and robust from economic and geopolitical shocks.

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Sustainable energy development under uncertainty based on the real options theory approach

Cited by 7 publications

References 19 publications

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Economic and Regulatory Uncertainty in Renewable Energy System Design: A Review

Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

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