Valuing Managerial Flexibility
This chapter shows how portfolio values differ from NPVs when decisions are taken under conditions of managerial flexibility. Applying the Portfolio Strategic Options approach, the certainty of payoffs is traded off against the prospect of variable, albeit higher, returns when prices are high. Through a discovery process with adaptive actions, technology choices are better aligned to the managers’ risk-payoff preferences by choosing from amongst these generic supply strategies: (a) indexing energy costs and power prices to achieve predictability in payoffs; (b) increasing renewables with the expectation of rising prices; or (c) hedge payoffs by balancing fossil fuels-based supplies with renewables. This dynamic approach guides managerial actions to recognise the realities of inherently volatile energy markets and adaptively profit from uncertainties.
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