Real Options-Based Framework for Hydropower Plant Adaptation to Climate Change

Abstract

AbstractThe economic feasibility of hydropower depends on the level of energy production, which in turn depends on weather conditions. Changes in runoff volumes directly influence energy production. Therefore, decision makers should take into account different climate change scenarios when making investment decisions for existing hydropower plants. The authors propose a real options-based framework to assess economic benefit of adapting hydropower plants to climate change. The framework enables evaluation of climate change impacts to hydropower. A case study of South Korea shows that investment on adaptation projects creates additional benefit in the regions with increasing precipitation under future climate scenarios. The findings suggest that adaptation projects prevent energy spilling and improve the productivity of hydropower.