Abstract
Recently, there has been a growing interest in the production of electricity from renewable energy sources (RES). The RES investment is characterized by uncertainty, which is long-term, costly and depends on feed-in tariff and support schemes. In this paper, we address the real option valuation (ROV) of a solar power plant investment. The real option framework is investigated. This framework considers the renewable certificate price and, further, the cost of delay between establishing and operating the solar power plant. The optimal time of launching the project and assessing the value of the deferred option are discussed. The new three-stage numerical methods are constructed, the Lobatto3C-Milstein (L3CM) methods. The numerical methods are integrated with the concept of Black–Scholes option pricing theory and applied in option valuation for solar energy investment with uncertainty. The numerical results of the L3CM, finite difference and Monte Carlo methods are compared to show the efficiency of our methods. Our dataset refers to the Arab Republic of Egypt.
Highlights
IntroductionA great deal of effort is being put into researching and developing renewable energy (RE)
A great deal of effort is being put into researching and developing renewable energy (RE)technologies
We demonstrate the efficiency of numerical method on the real options framework by comparing with finite difference methods (FDM) and Monte Carlo (MC) methods
Summary
A great deal of effort is being put into researching and developing renewable energy (RE). A real options framework is modeled for use in RE investment using stochastic differential equation (SDEs). Following this approach, Abadie et al [15] addressed the value of an operating wind farm and the real option to investment in it under different support schemes. The split-step theta (SSθ) methods, which generalize the SSBE method when θ = 1, were discussed in [20,21] These numerical methods are A-stable for linear SDEs, these methods have a strong convergence order of 0.5. As far as the authors know, no implicit split-step numerical methods have a strong convergence order of 1.0 and are A-stable for SDEs. Numerical methods are needed for real option valuation in cases where analytic solutions are either unavailable or not comparable. A comparison between the L3CM, FDM and MC methods is presented to explain the efficiency of the new numerical methods
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