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Investment timing and optimal capacity choice for small hydropower projects

Author

Listed:
  • Bøckman, Thor
  • Fleten, Stein-Erik
  • Juliussen, Erik
  • Langhammer, Håvard
  • Revdal, Ingemar
Abstract
This paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices. We present a real options-based method with continuous scaling, and we find that there is a unique price limit for initiating the project. If the current electricity price is below this limit it is never optimal to invest, but above this limit investment is made according to the function for optimal size. The connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant, based on all the important choices for such a plant. The main results of the spreadsheet are simulated production size and the investment costs, which are in turn used for finding the value of the real option and the price limit. The method is illustrated on three different Norwegian small hydropower projects.

Suggested Citation

  • Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard & Revdal, Ingemar, 2006. "Investment timing and optimal capacity choice for small hydropower projects," MPRA Paper 2693, University Library of Munich, Germany, revised 31 Dec 2006.
    • Handle: RePEc:pra:mprapa:2693
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    OR in Energy; Real Options; Continuous Scaling; Project Evaluation; Hydropower;
    All these keywords.

    JEL classification:

    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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