Abstract
This paper deals with the optimal timing of power generation investments in the second year of the global COVID-19 pandemic. The research applies the real options methodology during the investment decision-making process and takes, besides a proper uncertainty assessment, the project embedded flexibilities into account. Timing flexibility is discussed thoroughly, and the issue of optimal exercise, the timing of the highest potential value creation is examined through a static and dynamic lens. The authors' initial hypothesis presumed uncertainty as the most influential parameter measured by the project's standard deviation. Timing flexibility, optimal timing is analyzed compared to and concerning this volatility. Static and real options-based dynamic investment timing models are being tested in the power generation industry. Of particular interest of the research is whether results could prove the phenomena of renewable technologies being the safe haven of energy investments after the sector became highly volatile due to the COVID-19 pandemic. Results show that the timing of real options and the value will have a positive relationship. Still, the most exciting finding is that time and timing have a more substantial effect on the created value than uncertainty and further embedded growth potential (more flexibility).Keywords: real options, timing, flexibility, power generation, uncertainty JEL Classifications: G11, C41DOI: https://doi.org/10.32479/ijeep.11815
Highlights
One of the central premises of corporate economics is the decisionmaking process around real asset investments
The paper deals in its section with the current state and a quick outlook of the energy sector, introduce the basics of static and dynamic real asset investment timing, applying them to the most significant types of power generation technologies in the Hungarian energy system
Power generation technologies, that are to be installed or potentially extended in the Hungarian energy system will be analyzed with the real option methodology focusing on the dynamic timing optimization of the chosen real option types
Summary
One of the central premises of corporate economics is the decisionmaking process around real asset investments. Some aspects of explicit investor behavior are complicated to fit the conventional theorem Most companies make their real asset investment decisions based on the future cash flows arising from the project being evaluated. According to the „time value of money” concept, proved already in the 16th century by Martin de Azpilcueta (14911568), the positive cash flows occurring closer to the present are more valuable than positive cash flows obtained in the distant future This effect of timing of cash flows on investment policy and decision-making is more complex and significant than the concept itself. Without an optimal real asset investment policy, and dealing with timing and its effect on the existing real asset portfolio and future investment opportunities, companies could end up underinvesting Threatening is it in sectors with long research and development phases, long real asset life, mostly irreversible investments in a highly volatile flexibilities (opportunities) embedded environment (pharmaceutical industry, info-communication sector, energy sector). The paper deals in its section with the current state and a quick outlook of the energy sector, introduce the basics of static and dynamic real asset investment timing, applying them to the most significant types of power generation technologies in the Hungarian energy system
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