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Real Options Approach as a Decision-Making Tool for Project Investments: The Case of Wind Power Generation

  • José I. Muñoz
  • Javier Contreras
  • Javier Caamaño
  • Pedro F. Correia
Chapter
Part of the Energy Systems book series (ENERGY)

Abstract

This chapter develops a decision-making tool to invest in renewable power plants using a real options approach. The model is validated for a wind energy plant. To build a base for the investment model, market prices and wind regimes are obtained from Geometric Brownian Motion (GBM) and Weibull models, respectively. Then, considering these and other values, such as investment, maintenance and operation costs, the Net Present Value (NPV) is obtained. As a result, an NPV curve is drawn by shifting the initial time of investment. From the NPV curve obtained, a trinomial lattice is built and applied to a real options valuation method. From this model, it is possible to estimate the probabilities of investing right now, deferring, or not investing at all. This decision tool allows wind energy investors to decide whether to invest or not in different scenarios. Several realistic case studies are presented to illustrate the decision-making method.

Keywords

Investments assessment net present value curves real options risk management stochastic modelling trinomial trees 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • José I. Muñoz
    • 1
  • Javier Contreras
    • 1
  • Javier Caamaño
    • 2
  • Pedro F. Correia
    • 3
  1. 1.E.T.S. de Ingenieros IndustrialesUniversity of Castilla – La ManchaCiudad RealSpain
  2. 2.E.T.S. de Ingenieros IndustrialesUniversity of País VascoBilbaoSpain
  3. 3.Instituto Superior TécnicoTechnical University of LisboaLisbonPortugal

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