Valuation of Wind Energy Turbines Using Volatility of Wind and Price

Doron Greenberg,Michael Byalsky,Asher Yahalom

doi:10.3390/electronics10091098

Abstract

The limitedness of the nonrenewable local energy resources in Israel, even in the background of the later gas fields’ findings, continues to force the state to devote various efforts towards ‘green’ energy development. These efforts include installations, both for the solar and for wind energy, thus improving the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique has been widely applied in many studies for the valuation of renewable energy investment projects. Taking into account the above background, we apply, in this study, the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel, which is the context of our work. We hypothesize that due to nature of wind energy production uncertainties, the ROA method is better than the alternative. The novelty of this paper includes the following: real world wind statistics of the Merom Golan site in Israel (velocity 3.73 m/s, with a standard deviation of 2.03 m/s), a realistic power generation estimation (power generation of 1205.84 kW with a standard deviation of about 0.5% in annual value which is worth about 1.3 M$ per annum), and an economic model to evaluate the profitability of such a project. We thus discuss the existing challenges of diversifying renewable energy sources in Israel by adding wind installations. Our motivation is to introduce a method which will allow investors and officials to take into account uncertainties when deciding in investing in such wind installations. The outcomes of the paper, which are obtained using the method of Weibull statistics and the Black–Scholes ROA technique, include the result that market price volatility adds to the uncertainties much more than any wind fluctuations, provided that the analysis is integrated over a long enough time.

Highlights

Even during prolonged global economic crisis, the worldwide wind power ascent continues
In the “Results” section we describe the Weibull fit for the site of installation, deriving the relevant parameters; we introduce the economic model in terms of its parameters and emphasize the difference between the discounted cash flow (DCF) and real options analysis (ROA) methods for evaluation
The corresponding Weibull probability density function (PDF) for the wind speed distribution at the Merom Golan site, together with their distribution histogram, is shown below at Figure 1. (The authors are willing to share their data set in Excel format with those who wish to replicate the results of this research)

Summary

Introduction

Even during prolonged global economic crisis, the worldwide wind power ascent continues. The world’s wind power capacity, according to the Global Wind Energy Council (GWEC) report, added 39.1 GW in 2010, growing by 24% during the year, 40.6 GW in 2011, growing by 20.5% per year, and 44.8 GW in 2012 (18.8% growth during the year: 78% growth in the last three years). The total installations at the end of 2012 provide up to 282.6 GW. Wind energy is a significant participant in the world’s energy market. The main markets of wind energy are situated in Asia, North America, and Europe, each of which installs 13–15 GW of new capacity each year. About half a million people are employed, corresponding to the European Wind Energy Association (EWEA) publication, by the wind industry around the world [2]

Objectives

Methods

Results

Discussion

Conclusion