Investment timing decisions in hydropower adaptation projects using climate scenarios: A case study of South Korea

Abstract

Climate change alters the energy production of existing hydropower plants. Old-established facilities of hydropower are insufficient to handle changes in runoff under climate change. These facilities should be retrofitted and adapted to climate change. Adaptation of hydropower to climate change has two purposes: first, to fully utilize future water resources for maximizing electricity generation; and second, to generate profits in return of investment costs. Investment in the adaptation depends on issues such as climate scenarios, investment costs, and timing of implementation. Since future climate scenarios are intrinsically time-dependent, investment timing is the biggest issue. We propose the Adaptive Investment Model (AIM) to determine the timing of investment, using real options valuation. AIM comprises four steps: identification of hydropower adaptation to climate change (step 1), calculation of key variables (step 2), real options valuation (ROV) (step 3), and decision-making (step 4). This model allows investors to assess the economic feasibility and suggests optimal investment timing for adaptation to climate change. A case study involving the Chuncheon hydropower plant in South Korea demonstrated that AIM could generate an effective adaptation strategy.