Abstract
This study analyses the value of a switching option in a flexible biorefinery plant that produces ethanol and sugar juice in a single plant using energy beets. A real-options approach is used to compute threshold prices and optimal switching decision rules for switching between sugar and ethanol production modes. The analysis shows that it is economically optimal to keep producing ethanol then switching to sugar juice, given the stochastic price parameters of the two products.
Highlights
This study analyses the value of a switching option in a flexible biorefinery plant that produces ethanol and sugar juice in a single plant using energy beets
Because we assume that the switching option decision is made on an annual basis, the real-options switching threshold prices are calculated after converting monthly drift and volatility parameters to annual equivalents, assuming that both the drift rate and variance of the increments of a Brownian motion are linear in time
If juice Psà is if the equal optimal threshold price (PsÃ) is greater than $2.17 per to $2.17 per gallon the biorefinery owner is indifferent to switching between the two modes of production
Summary
This study analyses the value of a switching option in a flexible biorefinery plant that produces ethanol and sugar juice in a single plant using energy beets. The Value of Switching Production Options 147 exchanged This operational flexibility enhances the biorefinery’s ability to cope with output price uncertainty and volatility, the profitability and economic viability of the energy beet biorefinery investment decision is uncertain given several economic factors, including the interaction of the price of energy beets, ethanol, and sugar juice, as well as the competitive environment in which ethanol and sugar are produced. The purpose of this paper is to design a real-options framework to quantify the real-option value of a flexible biorefinery and evaluate optimal decision rules for switching between the ethanol and sugar modes of production in a single facility. The study implements a real-options pricing approach to compute the threshold prices that signal biorefinery owners to switch between sugar juice and ethanol production, based on current and perspective biochemical processing technology and expected prices for the two outputs in the U.S Northern Plains product and input markets. GBM results are compared with mean reversion (MR) process results
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