[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/gam/jeners/v2y2009i3p738-768d5690.html
   My bibliography  Save this article

Valuation of Long-Term Investments in Energy Assets under Uncertainty

Author

Listed:
  • Luis M. Abadie

    (Bilbao Bizkaia Kutxa, Gran V´ıa 30, 48009 Bilbao, Spain)

Abstract
This paper aims to contribute to the development of valuation models for long-term investments while keeping an eye on market prices. The adopted methodology is rooted on the existence of markets for futures and options on commodities related to energy investments. These markets are getting ever-increasingly liquid with ever-longer maturities while trading contracts. We discuss the advantages of this approach relative to other alternatives such as the Net Present Value (NPV) or the Internal Rate of Return (IRR), despite a limited increase in the complexity of the models involved. More specifically, using the valuation methods well-known to energy-finance academics, the paper shows how to: break down an investment into its constituent parts, apply to each of them the corresponding risk premium, value annuities on assets with a deterministic or stochastic behavior, and value the options that are available to its owner, in order to get an overall value of the investment project. It also includes an application to improvement in coal consumption, where futures markets are used to get a numerical estimate of the parameters that are required for valuation. The results are then compared with those from traditional methodologies. Conclusions for this type of investments under uncertainty are derived.

Suggested Citation

  • Luis M. Abadie, 2009. "Valuation of Long-Term Investments in Energy Assets under Uncertainty," Energies, MDPI, vol. 2(3), pages 1-31, September.
    • Handle: RePEc:gam:jeners:v:2:y:2009:i:3:p:738-768:d:5690
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1996-1073/2/3/738/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1996-1073/2/3/738/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Moreira, Ajax & Rocha, Katia & David, Pedro, 2004. "Thermopower generation investment in Brazil--economic conditions," Energy Policy, Elsevier, vol. 32(1), pages 91-100, January.
    2. Luis M. Abadie & José M. Chamorro, 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 10-22, January.
    3. Erkka Näsäkkälä & Stein‐Erik Fleten, 2005. "Flexibility and technology choice in gas fired power plant investments," Review of Financial Economics, John Wiley & Sons, vol. 14(3-4), pages 371-393.
    4. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    5. Abadie, Luis M. & Chamorro, José M., 2008. "Valuing flexibility: The case of an Integrated Gasification Combined Cycle power plant," Energy Economics, Elsevier, vol. 30(4), pages 1850-1881, July.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Gordon Salahor, 1998. "Implications of Output Price Risk and Operating Leverage for the Evaluation of Petroleum Development Projects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 13-46.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Santos, Lúcia & Soares, Isabel & Mendes, Carla & Ferreira, Paula, 2014. "Real Options versus Traditional Methods to assess Renewable Energy Projects," Renewable Energy, Elsevier, vol. 68(C), pages 588-594.
    2. Christina E. Bannier, 2016. "Bewertungsmethoden in der Projektfinanzierung Erneuerbarer Energien [Valuation Methods for Renewable Energy Projects]," Schmalenbach Journal of Business Research, Springer, vol. 68(1), pages 75-110, April.
    3. Yang, Xiaolei & He, Lingyun & Xia, Yufei & Chen, Yufeng, 2019. "Effect of government subsidies on renewable energy investments: The threshold effect," Energy Policy, Elsevier, vol. 132(C), pages 156-166.
    4. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
    5. Yu, Chin-Hsien & Wu, Xiuqin & Lee, Wen-Chieh & Zhao, Jinsong, 2021. "Resource misallocation in the Chinese wind power industry: The role of feed-in tariff policy," Energy Economics, Elsevier, vol. 98(C).
    6. Yessenia Martínez-Ruiz, Diego Fernando Manotas-Duque, Howard Ramírez-Malule, 2021. "Análisis de opciones reales para la valoración financiera de proyectos de energía geotérmica en Colombia," Revista CEA, Instituto Tecnológico Metropolitano, vol. 7(15), pages 1-23, September.
    7. Sisodia, Gyanendra Singh & Soares, Isabel & Ferreira, Paula, 2016. "Modeling business risk: The effect of regulatory revision on renewable energy investment - The Iberian case," Renewable Energy, Elsevier, vol. 95(C), pages 303-313.
    8. Chul-Seung Hong & Eul-Bum Lee, 2018. "Power Plant Economic Analysis: Maximizing Lifecycle Profitability by Simulating Preliminary Design Solutions of Steam-Cycle Conditions," Energies, MDPI, vol. 11(9), pages 1-21, August.
    9. Yongma Moon, 2014. "Optimal Time to Invest Energy Storage System under Uncertainty Conditions," Energies, MDPI, vol. 7(4), pages 1-19, April.
    10. Moon, Yongma & Baran, Mesut, 2018. "Economic analysis of a residential PV system from the timing perspective: A real option model," Renewable Energy, Elsevier, vol. 125(C), pages 783-795.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fleten, Stein-Erik & Näsäkkälä, Erkka, 2003. "Gas fired power plants: Investment timing, operating flexibility and abandonment," MPRA Paper 217, University Library of Munich, Germany, revised Jun 2006.
    2. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.
    3. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," LIDAM Discussion Papers CORE 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Pringles, Rolando & Olsina, Fernando & Garcés, Francisco, 2015. "Real option valuation of power transmission investments by stochastic simulation," Energy Economics, Elsevier, vol. 47(C), pages 215-226.
    5. Luis M. Abadie & José M. Chamorro, 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 10-22, January.
    6. Ozorio, Luiz de Magalhães & Bastian-Pinto, Carlos de Lamare & Baidya, Tara Keshar Nanda & Brandão, Luiz Eduardo Teixeira, 2013. "Investment decision in integrated steel plants under uncertainty," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 55-64.
    7. Sebastian Sund & Lars H. Sendstad & Jacco J. J. Thijssen, 2022. "Kalman filter approach to real options with active learning," Computational Management Science, Springer, vol. 19(3), pages 457-490, July.
    8. Elias, R.S. & Wahab, M.I.M. & Fang, L., 2016. "The spark spread and clean spark spread option based valuation of a power plant with multiple turbines," Energy Economics, Elsevier, vol. 59(C), pages 314-327.
    9. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
    10. Samis, Michael & Davis, Graham A. & Laughton, David & Poulin, Richard, 2005. "Valuing uncertain asset cash flows when there are no options: A real options approach," Resources Policy, Elsevier, vol. 30(4), pages 285-298, December.
    11. Nemat Safarov & Colin Atkinson, 2016. "Natural gas-fired power plants valuation and optimisation under Levy copulas and regime-switching," Papers 1607.01207, arXiv.org, revised Jul 2016.
    12. Tatiana Ponomarenko & Eugene Marin & Sergey Galevskiy, 2022. "Economic Evaluation of Oil and Gas Projects: Justification of Engineering Solutions in the Implementation of Field Development Projects," Energies, MDPI, vol. 15(9), pages 1-22, April.
    13. Shaton, Katerina, 2015. "Value of Flexibility in Gas Pipeline Investments," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Kersten, Wolfgang & Blecker, Thorsten & Ringle, Christian M. (ed.), Innovations and Strategies for Logistics and Supply Chains: Technologies, Business Models and Risk Management. Proceedings of the Hamburg Internationa, volume 20, pages 333-357, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.
    14. Fleten, Stein-Erik & Näsäkkälä, Erkka, 2010. "Gas-fired power plants: Investment timing, operating flexibility and CO2 capture," Energy Economics, Elsevier, vol. 32(4), pages 805-816, July.
    15. Glover, Kristoffer J. & Hambusch, Gerhard, 2016. "Leveraged investments and agency conflicts when cash flows are mean reverting," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 1-21.
    16. Rios, Daniel & Blanco, Gerardo & Olsina, Fernando, 2019. "Integrating Real Options Analysis with long-term electricity market models," Energy Economics, Elsevier, vol. 80(C), pages 188-205.
    17. Briest, Gordon & Lauven, Lars-Peter & Kupfer, Stefan & Lukas, Elmar, 2022. "Leaving well-worn paths: Reversal of the investment-uncertainty relationship and flexible biogas plant operation," European Journal of Operational Research, Elsevier, vol. 300(3), pages 1162-1176.
    18. J. Muñoz & J. Contreras & J. Caamaño & P. Correia, 2011. "A decision-making tool for project investments based on real options: the case of wind power generation," Annals of Operations Research, Springer, vol. 186(1), pages 465-490, June.
    19. Unterschultz, James R., 2000. "New Instruments For Co-Ordination And Risk Sharing Within The Canadian Beef Industry," Project Report Series 24046, University of Alberta, Department of Resource Economics and Environmental Sociology.
    20. Guedes, José & Santos, Pedro, 2016. "Valuing an offshore oil exploration and production project through real options analysis," Energy Economics, Elsevier, vol. 60(C), pages 377-386.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jeners:v:2:y:2009:i:3:p:738-768:d:5690. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.