The chapter provides evidence of consistency between real option theory and aggregate investment behaviour and offers a trustworthy level of the forward electricity price as trigger for an investment. Chapter 6: This study calculates the switching option values of operational flexibility gained when adding nuclear, coal fired and gas fired power plants to a mainly hydro based operator restricted by long term industry contracts. By switching to thermal in some parts of the year the operator is able to save more water in magazine reservoirs for peak price periods.
The switching option value is highest for nuclear and lowest for gas fired thermal generation. If thermal capacity is rented from another operator the option value is depending on the agreed price. Hence, from the viewpoint of flexibility, the least profitable alternative is gas-fired thermal generation — paradoxically the only thermal generation actually implemented in the Norwegian power system.
The study shows that option values may in some situations be significant and should be taken into consideration either 1 in assessment of own thermal investments, or 2 in negotiations with thermal operators of option contracts. The results can also to a certain extent be applied for justifying Governmental subsidies at system level. Description Doctoral thesis Ph.
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Majd S, Pindyck R Time to build, option value and investment decisions. ORNL Review 42 2. Pindyck RS The long-run evolution of energy prices. Energy J 1—27 Google Scholar.
Pindyck RS Optimal timing problems in environmental economics. Reinaud J Emissions trading and its possible impacts on investment decisions in the power sector. Swedish Government Budget Bill Higher carbon dioxide tax for reduced traffic emissions. Wickart M, Madlener R Optimal technology choice and investment timing: A stochastic model of industrial cogeneration vs. Personalised recommendations. Yao, Yanhua.
Real options analysis of investment in carbon capture and sequestration technology | SpringerLink
In many instances, oil companies struggle with decisions on petroleum investment. The difficulty partially stems from uncertainties in many of the inherent variables. Conventional investment methods often fail to properly identify available opportunities.
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Real Options Valuation involves a methodology for evaluating the value of an opportunity, leading to a strategic decision in an uncertain environment.
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