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Energies 2009, 2(3), 738-768; doi:10.3390/en20300738

Valuation of Long-Term Investments in Energy Assets under Uncertainty

Bilbao Bizkaia Kutxa, Gran V´ıa 30, 48009 Bilbao, Spain
Received: 5 August 2009 / Accepted: 2 September 2009 / Published: 4 September 2009
(This article belongs to the Special Issue Energy Economics)
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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.
Keywords: energy assets; capital budgeting; real options; futures markets energy assets; capital budgeting; real options; futures markets
This is an open access article distributed under the Creative Commons Attribution License (CC BY) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Abadie, L.M. Valuation of Long-Term Investments in Energy Assets under Uncertainty. Energies 2009, 2, 738-768.

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