Abstract
We address the valuation of an operating wind farm and the finite-lived option to invest in it under different reward/support schemes: a constant feed-in tariff, a premium on top of the electricity market price (either a fixed premium or a variable subsidy such as a renewable obligation certificate or ROC), and a transitory subsidy, among others. Futures contracts on electricity with ever longer maturities enable market-based valuations to be undertaken. The model considers up to three sources of uncertainty: the electricity price, the level of wind generation, and the certificate (ROC) price where appropriate. When analytical solutions are lacking, we resort to a trinomial lattice combined with Monte Carlo simulation; we also use a two-dimensional binomial lattice when uncertainty in the ROC price is considered. Our data set refers to the UK. The numerical results show the impact of several factors involved in the decision to invest: the subsidy per MWh generated, the initial lump-sum subsidy, the maturity of the investment option, and electricity price volatility. Different combinations of variables can help bring forward investments in wind generation. One-off policies, e.g., a transitory initial subsidy, seem to have a stronger effect than a fixed premium per MWh produced.
Highlights
Smart grids in the EU are defined as “electricity networks that can intelligently integrate the behaviour and actions of all users connected to it—generators, consumers and those that do both—in order to efficiently deliver sustainable, economic and secure electricity supplies” [1]
This model is equivalent to a mean-reverting process with seasonality when kW(Wm − Wt)∆t = Wm − Wt, which amounts to kW∆t = 1, i.e., when the reversion speed kW is so high that the process reverts to Wm quickly
When the future value of the investment depends on the realizations of two stochastic processes we develop a two-dimensional binomial lattice which avoids the possibility of there being negative probabilities
Summary
Smart grids in the EU are defined as “electricity networks that can intelligently integrate the behaviour and actions of all users connected to it—generators, consumers and those that do both—in order to efficiently deliver sustainable, economic and secure electricity supplies” [1]. We follow the real options approach (ROA) to address the present value of an investment in a wind farm and the optimal time to invest under a number of different payment settings [19,20,21]. The ROA-based value captures a crucial dimension (namely, the option to delay an irreversible investment in RES) in a decentralized, deregulated market setting; as such, it should be embodied in the total value of RES Following this approach, Adkins and Paxson [24] consider a perpetual opportunity to construct a renewable energy facility at a fixed investment cost. We make room for seasonal behavior in the price of electricity and in wind load factor They turn out to be correlated to some degree (according to market data and observed measurements), and we treat them as such; this has been typically overlooked elsewhere despite its impact on project value.
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