Abstract
BackgroundThe Philippines is making a significant stride to become energy independent by developing more sustainable sources of energy. However, investment in renewable energy is challenged by competitive oil prices, very high investment cost for renewable energy, and high local electricity prices. This paper evaluates the attractiveness of investing in renewable energy sources over continue using oil for electricity generation.MethodsThis paper uses the real options approach to analyze how the timing of investment in renewable energy depends on volatility of diesel price, electricity price, and externality for using oil.ResultsThe result presents a positive net present value for renewable energy investment. Under uncertainty in oil prices, dynamic optimization describes how waiting or delaying investment in renewables incurs loses. Decreasing the local electricity price and incorporating negative externality favor investment in renewable energy over continuing the use of oil for electricity generation.ConclusionsReal options approach highlights the flexibility in the timing of making investment decisions. At the current energy regime in the Philippines, substituting renewable energy is a better option than continue importing oil for electricity generation. Policies should aim at supporting investment in more sustainable sources of energy by imposing externality for using oil or decreasing the price of electricity.
Highlights
The Philippines is making a significant stride to become energy independent by developing more sustainable sources of energy
Applying Real options approach (ROA), this study aims to evaluate whether investing in Renewable energy (RE) is a better option than continue using diesel for electricity generation by considering various uncertainties in diesel fuel price, local electricity prices, and imposing externality tax for using diesel
Using real options approach under uncertainty in diesel prices, we identify the option values, trigger prices of diesel, and value of waiting to invest in RE
Summary
The Philippines is making a significant stride to become energy independent by developing more sustainable sources of energy. Investment in renewable energy is challenged by competitive oil prices, very high investment cost for renewable energy, and high local electricity prices. This paper evaluates the attractiveness of investing in renewable energy sources over continue using oil for electricity generation. Environmental problems associated with emissions from fossil fuel, along with limited supply, volatile prices, and energy security, prompted developed and developing countries to find more reliable and sustainable sources of energy. In the Philippines, the development and optimal use of RE resources is an essential part of the country’s low emission strategy and is vital to addressing climate change, energy security, and access to energy [3].
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