A real options evaluation model for the diffusion prospects of new renewable power generation technologies

TitleA real options evaluation model for the diffusion prospects of new renewable power generation technologies
Publication TypeJournal Article
Year of Publication2008
AuthorsKumbaroğlu, G., R. Madlener, and M. Demirel
JournalEnergy Economics
Volume30
Pagination1882-1908
ISSN0140-9883
KeywordsDynamic programming, Investment planning, Learning curve, Real options, Renewable energy technology diffusion, Turkey
Abstract

This study presents a policy planning model that integrates learning curve information on renewable power generation technologies into a dynamic programming formulation featuring real options analysis. The model recursively evaluates a set of investment alternatives on a year-by-year basis, thereby taking into account that the flexibility to delay an irreversible investment expenditure can profoundly affect the diffusion prospects of renewable power generation technologies. Price uncertainty is introduced through stochastic processes for the average wholesale price of electricity and for input fuel prices. Demand for electricity is assumed to be increasingly price-sensitive, as the electricity market deregulation proceeds, reflecting new options of consumers to react to electricity price changes (such as time-of-use pricing, unbundled electricity services, and choice of supplier). The empirical analysis is based on data for the Turkish electricity supply industry. Apart from general implications for policy-making, it provides some interesting insights about the impact of uncertainty and technical change on the diffusion of various emerging renewable energy technologies.

URLhttps://www.sciencedirect.com/science/article/pii/S0140988306001241
DOI10.1016/j.eneco.2006.10.009