Real Option Valuation of an Emerging Renewable Technology Design in Wave Energy Conversion
Round 1
Reviewer 1 Report
Comments and Suggestions for AuthorsI think the article is interesting, although it presents sequential investment options that are well known. However, I think the authors would have to make important changes for publication.
Although I make some particular suggestions, I would like to say that the article does not seem like a scientific article, but rather a technical dissemination article.
In my opinion, the abstract should be improved, concisely explaining the motivation, the objectives of the research, the methodology used, a minimum preview of the results and the limitations found.
The introduction could also be improved, better explaining the context of the research, objectives, etc.
I think that the authors should include section number 2 dedicated to the "state of the art". In a scientific article it is obligatory to provide a summary of all the previously published works on the subject, proving the timeliness, relevance and innovation of this new contribution.
Line 50: March 2014
In line 64 the authors say "since the returns appear normal": have the authors performed a normality test? In a scientific article all statements must be accredited.
The authors say that the process up to 2020 appears to be stationary. This is often the case, which is why energy prices are often represented as a mean-reversion process. It is therefore surprising that they use a GBM. As is known, the increments of GBM are never stationary. I think the authors are confusing price changes with returns.
I think that equation (6) should be better explained. Although it is an economic article, I think it is worth explaining the physical model a little.
The discount rate is important. I think that its attainment should be better justified.
Line 238. If the evolution of the energy price were a random walk (which is not the case) equation (2) has an explicit solution depending on time. I do not understand why the authors set the price at 100 euros and the growth rate at 6%. In my opinion, they are mistaken, because they do not take volatility into account. In any case, as I have already commented, the evolution of the price over time responds to a mean reversion process.
Considering the investment costs per MW, it should be justified whether this solution is realistic, for example when compared to offshore wind installations.
The part I liked the most was the valuation of options. I think it should be better explained why risk-neutral valuation is used.
Author Response
Please see the attachment.
Author Response File: 
Author Response.pdf
Reviewer 2 Report
Comments and Suggestions for AuthorsThis manuscript conducts a real option valuation that includes the uncertain market price of electricity and demonstrate the probability that the project’s embedded option value can turn a negative net present value wave energy project to a positive expected value. The writing style/English of this manuscript is clear and understandable. The structure follows a logical form that promotes readability and understanding of the text. Further, this manuscript clearly highlights its contributions and I appreciate the novelty of their contributions. Although the manuscript deals with an interesting problem, the manuscript has some shortcomings. My revision suggestions:
This research is interesting, if possible, I suggest authors to give one/two paragraph to briefly introduce future work / research direction.
Although the writing style/English of the paper is clear and understandable, there are many English errors and weaknesses. Please correct carefully.
I recommend a minor revision.
Author Response
Please see the attachment.
Author Response File: Author Response.pdf
Reviewer 3 Report
Comments and Suggestions for AuthorsDear Authors,
Please find attached the reviewer comments. If the major review comments are addressed, I recommended being accepted based on editor’s decision with careful assessing and that can meet the MDPI journal level.
Thank you very much!
With Love and Regards
Comments for author File: Comments.pdf
Author Response
Please see the attachment.
Author Response File: Author Response.pdf
Round 2
Reviewer 1 Report
Comments and Suggestions for AuthorsI think the authors have improved the article considerably. However, there are still some aspects that, in my opinion, deserve further reflection.
Line 94 and following
In my opinion it is clear that the process is not normal. Heavy tails precisely suggest that the normal process cannot correctly explain these data.
The authors have followed a path that solves the problem, but I think the solution should not be to eliminate the values ​​that do not suit us... right?
I agree with the authors that long-term electricity price modelling is a complex issue. Some authors such as Florian Ziel (Probabilistic Mid and Long Term Electricity Price Forecasting) detail the multiple methods used.
In the case at hand, if there were no jump between the years 20 and 21, I think the mean reversion process would work well. Many authors use the mean reverting jump diffusion model to deal with these situations.
I think this is an important issue in the article, because all the assessments made are based on how the price of electricity evolves. In the long term, an MGB is not bounded.
However, if we assume that it may be a methodological article, this aspect may be of little relevance, although it is true that it may affect the assessments made and the conclusions reached.
Comment 9
In financial assets, a new asset can always be valued using replication and arbitrage arguments. In a real asset this is not always possible. I understand that you use the "market asset disclaimer" approach to take the NPV of the project without options as a proxy for the value of the project. This seems correct to me. However, the growth rate considered and the discount rate used must be carefully chosen, because each project is unique. I believe that the path you have followed by taking values ​​from other works is not adequate.
Furthermore, as you know, when we talk about the NPV of the project (not the shareholder's) the discount rate used is the WACC, which takes into account the financial leverage of the project. I believe this aspect is not mentioned in the paper.
Author Response
Please see the attachment.
Author Response File: Author Response.pdf
Reviewer 3 Report
Comments and Suggestions for AuthorsDear Authors,
You have improved it very well. If the Editors accept it, I am ok with the article to be published.
Thank you very much
With Love and Regards
Author Response
Please see the attachment.
Author Response File: Author Response.pdf
