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Energies 2014, 7(5), 3218-3255; doi:10.3390/en7053218

Valuation of Wind Energy Projects: A Real Options Approach

Basque Centre for Climate Change (BC3), Alameda Urquijo 4-4º, 48008 Bilbao, Spain
Department of Financial Economics II, University of the Basque Country UPV/EHU, Avenida Lehendakari Aguirre 83, 48015 Bilbao, Spain
Author to whom correspondence should be addressed.
Received: 30 January 2014 / Revised: 9 April 2014 / Accepted: 4 May 2014 / Published: 19 May 2014
(This article belongs to the Special Issue Smart Grids: The Electrical Power Network and Communication System)
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We address the valuation of an operating wind farm and the finite-lived option to invest in it under different reward/support schemes: a constant feed-in tariff, a premium on top of the electricity market price (either a fixed premium or a variable subsidy such as a renewable obligation certificate or ROC), and a transitory subsidy, among others. Futures contracts on electricity with ever longer maturities enable market-based valuations to be undertaken. The model considers up to three sources of uncertainty: the electricity price, the level of wind generation, and the certificate (ROC) price where appropriate. When analytical solutions are lacking, we resort to a trinomial lattice combined with Monte Carlo simulation; we also use a two-dimensional binomial lattice when uncertainty in the ROC price is considered. Our data set refers to the UK. The numerical results show the impact of several factors involved in the decision to invest: the subsidy per MWh generated, the initial lump-sum subsidy, the maturity of the investment option, and electricity price volatility. Different combinations of variables can help bring forward investments in wind generation. One-off policies, e.g., a transitory initial subsidy, seem to have a stronger effect than a fixed premium per MWh produced.
Keywords: wind farms; uncertainty; electricity; load factor; futures markets; real options wind farms; uncertainty; electricity; load factor; futures markets; real options
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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MDPI and ACS Style

Abadie, L.M.; Chamorro, J.M. Valuation of Wind Energy Projects: A Real Options Approach. Energies 2014, 7, 3218-3255.

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