Real Options Approach Research Articles

Investment in CCUS under technical uncertainty considering investor's risk aversion: An exotic compound real-options approach

Carbon capture, utilization, and storage (CCUS) technology is effective and value-adding solution for reducing emissions. However, the development and commercialization of these technologies are challenging due to high investment costs and several uncertainties. This study develops a novel comprehensive real-options-based model to evaluate investment in CCUS projects considering the technical risk and the investor's risk aversion. This study proposed an exotic compound real options model that combines American and barrier options. First, applying the Poison process, the technical risk is explicitly modeled. Secondly, the investor's risk aversion is defined as a barrier level for the barrier option part of the proposed model. Thirdly, the value of the project is evaluated through the exotic compound real option. Finally, we assess the economic viability of the project under multiple scenarios. The results of implementing the model for a real case show that the integrated technical risk assessment and the barrier option appropriately address investors' risk aversion. Furthermore, the comparison indicates that the proposed compound real options model is more effective than the traditional NPV (Net Present Value). Regarding policymaking, the results reveal that setting an appropriate carbon tax that considers the costs of carbon capture would be more beneficial. Further, the model provides investors helpful guidance to make proper investment decisions for CCUS technology projects under uncertainties.

Sequential investment decisions for mining projects using compound multiple volatility real options approach

Managers evaluating investment decisions in mining projects have reported using the net present value approach (NPV). However, NPV has the drawback of collapsing variations from uncertainties in future project cash flows into a fixed expected project value today. Ignoring future uncertainties and contingencies can lead managers to make incorrect up-front binary decisions, such as investing in or abandoning the project now. The real options analysis approach (ROA) instead captures variations from uncertainties as volatilities in project value and allows flexibility in investment decisions to be contingent on information as it is revealed. Managers we consulted agreed that ROA is superior to NPV in principle, but too complex to apply in practice. The advanced mathematics and restrictive assumptions required by analytical ROAs make them especially impractical for real-world projects exposed to multiple uncertainties. Furthermore, real-world projects are often multistage and involve valuing a compound option, which is an option on an underlying option, for sequential investment decisions. Extant numerical compound ROAs have been applied to such projects but suffer from various drawbacks. Amongst other issues, they combine variations from multiple uncertainties into a consolidated volatility of project value. This conceals the impact of each source of uncertainty, resulting in inaccurate project valuation and incorrect investment decisions. We present an innovative compound multiple volatility real options approach (C-MVR) to value a multistage project while accommodating separate volatilities of project value arising from multiple uncertainties for making sequential investment decisions. The resultant value is termed the compound enhanced net present value. Implementing C-MVR for a real coal mining project demonstrates how other ROAs can be seen as inaccurate simplifications that produce erroneous investment decisions. C-MVR provides a rigorous and versatile approach that can be applied to many investment decisions across various industries.

Bus fleet decarbonization under macroeconomic and technological uncertainties: A real options approach to support decision-making

Fleet owners deal with various and critical uncertainties while planning bus fleet replacement, encompassing macroeconomic and technological factors, such as fuel and electricity prices, energy consumption, purchasing costs of electric batteries and powertrains, and bus salvage value upon resale. This paper proposes a Real Option-based framework to evaluate investment choices in different bus technologies over time (diesel, hybrid electric, compressed natural gas, and full-electric), where the proposed options usually involve replacing existing diesel fleets with alternatively powered buses. In particular, we provide a multi-option least squares Monte Carlo simulation to help fleet owners in making cost-effective investment decisions, resulting in potential cost savings of up to 10% of the annual total cost of ownership. By applying the proposed approach to different bus route types (inner-city, urban, suburban, commuter), the results show how the optimal investment choices for fleet replacement change over time. Initially, diesel buses or, at most, compressed natural gas buses are more cost-effective compared to electric technology. However, as electric technology becomes increasingly competitive, internal combustion buses are phased out. Inner-city and urban routes are better suited for the electric transition, whereas the transition may progress more slowly on other route types.Finally, we show that, under technological and macroeconomic uncertainties, the duration of contracts can strongly affect the investment decisions, in absence of specific guarantees on the new fleet.

A comprehensive analysis of real options in solar photovoltaic projects: A cluster-based approach

Solar photovoltaic (PV) projects are pivotal in addressing climate change and fostering a sustainable energy future. However, the complex landscape of renewable energy investments, characterized by high upfront costs, market uncertainties, and evolving technologies, demands innovative evaluation methods. The Real Options Approach has emerged as a powerful tool, offering strategic flexibility in decision-making under uncertainty. This paper comprehensively analyzes the application of real options for evaluating solar photovoltaic projects in 2008–2023. Analysis of document descriptors (author keywords, index keywords, and noun phrases extracted from titles and abstracts) reveals that the dominant research topics in the last ten years (2014–2023) include investment optimization, strategic analysis, energy policy, optimization of energy generation and investments in wind energy. These descriptors are used to analyze the evolution of research interests on a two-year basis and reveal the yearly evolution of the research topics. Finally, the concept of emergence is used to unveil emerging research trends, providing valuable insights for researchers and practitioners in the renewable energy sector. Ultimately, this work contributes to a deeper understanding of how real options analysis empowers decision-makers to make informed choices in advancing clean and sustainable energy solutions.

Investment decision analysis of shipping desulfurization project based on a fuzzy real option approach

ABSTRACT This study addresses shipping companies’ compliance with the International Maritime Organization’s 2020 sulfur emission limits, providing guidance for investment decisions in desulfurization projects. The paper uses a novel RCFM model, integrating real option theory (R), shipping cycle theory (C), fuzzy set theory (F), and Monte Carlo simulation (M). Key findings are: (1) During high oil price volatility, traditional binary tree models show computational distortions corrected by Monte Carlo simulation, whereas in lower volatility, the fuzzy binary tree model offers reliable investment intervals. (2) Investment in desulfurization depends on remaining vessel life and fuel price differences. For example, during the recovery period, for vessels with a remaining life of less than 5 years, investing in a desulfurizer is profitable if the fuel price difference exceeds $550/t and using low-sulfur fuel is advisable if below $400/t. For vessels of remaining life of 5-9 years, invest in a desulfurizer if the difference exceeds $500/t and use low-sulfur fuel if below $300/t. For over 9 years, invest in a desulfurizer if the difference exceeds $450/t and use low-sulfur fuel if below $200/t.

Renewable energy in sustainable agricultural production: real options approach to solar irrigation investment under uncertainty

Renewable energy in sustainable agricultural production: real options approach to solar irrigation investment under uncertainty

Independent institution or cooperative institution? China’s deposit insurance institution model and the Honey Badger Algorithm

In the context of public deposit insurance organizational models, several interesting questions arise: Why does China's Deposit Insurance Corporation consistently lean toward the cooperative institution model, which is closely aligned with the central bank? Despite fervent advocacy for the independent institution model by the IADI and the U.S. Why does the unwavering stance exist? Is the choice of the cooperative institution model an "ignorant solution" or an "optimal solution" in China? Our work answers these questions for the first time, and we argue that it is the "optimal solution" that policymakers can choose after careful deliberation, not due to stupidity or inexperience. Based on the Honey Badger Algorithm, real options approach and expected loss pricing model, our work verifies the significant advantages of the cooperative institution model over the independent institution model in China. This pivotal distinction, primarily overlooked in the extant literature, suggests that universally accepted perspectives may not be ubiquitously relevant across all national contexts.

Integrated geo-techno-economic and real options analysis of the decision to invest in a medium enthalpy deep geothermal heating plant. A case study in Northern Belgium

Deep geothermal energy (DGE) is a renewable energy source that is considered to cause a low global warming impact. The potential of DGE for heating is widespread and interest in deep geothermal heating (DGH) has been growing in Europe to help achieving the decarbonization of the heating mix. Nevertheless, despite its large potential, DGH development in Europe remains underexplored. DGH investments are hindered by the risks born by geological and market uncertainties. However, various flexibility options inherent to the development process, such as the option to abandon or defer, could partly mitigate these risks. To account for managerial flexibility in the investment analysis, this study suggests a novel real options (RO) framework. The RO model splits DGH development into five phases, and considers several compound options and geological and market uncertainties to investigate the timing and value of DGH development at the Campine Basin in Northern Belgium. The RO model is coupled to a geo-techno-economic model and is solved using the Least Squares Monte Carlo algorithm. The RO analysis finds a 51% probability of abandonment and an average deferral time for the development of 12 years. The abandon option mitigates the risk of large financial losses in case of inadequate geological conditions. The defer option allows the investors to wait for more favorable market conditions before investing, to increase the project value. The results show that DGH development in the investigated area is not economically desirable. However, the investors' flexibility increases the project value by 12.16 million EUR, compared to a conventional techno-economic analysis. The implementation of supporting policy measures improves the economic performance of the plant. The consideration of flexibility leads to supporting policy measures with 3–4 times lower governmental expenditure, compared to a conventional techno-economic analysis. This study shows that a RO approach is more suitable to investigate DGH investments than static techno-economic methods. The inclusion of flexibility allows for identifying development pathways that increase the project value and for designing more cost-efficient supporting policy schemes.

Valuation of Patent-Based Collaborative Synergies under Strategic Settings with Multiple Uncertainties: Rainbow Real Options Approach

Recent years have seen increasing initiatives involving more applications of real options to value the strategizing process. These initiatives, referred to as Real Option Theory (ROT), imply greater inclusiveness of simple and advanced real options in strategizing processes. While substantial theoretical groundwork on ROT has been laid in corporate finance, and both qualitative and quantitative studies on ROT in business management journals are appearing on an increasing basis, there remain significant opportunities for more research on strategic synergism in patent-based acquisitions. In this vein, the current paper aims to explore a rainbow real options application (real options that are exposed to two sources of uncertainty) to measure patent-based collaborative synergies in high-tech mergers and acquisitions. Having conducted the deviant case study of ZOOX start-up’s acquisition by Amazon.com in 2020, this paper justifies the proposition of the employability of rainbow real options for the valuation of network and relational synergies in highly risky patent-based acquisitions with multiple uncertainties.

The effect of regime change on entrepreneurship: A real options approach with evidence from US gubernatorial elections

Although political turnover is said to be a healthy component of the business environment, the literature is equivocal about the effects of regime change on early-stage entrepreneurial activity. I present incumbent displacement—the electoral defeat of an incumbent political party's candidate—as a source of regime change, and I analyze how this affects business formation through the lens of real options theory. I test my theory using US gubernatorial elections from 2004 to 2022, leveraging a Regression Discontinuity design to compare changes in business formation trends following elections where a challenger party candidate wins or loses by a close margin. I find that regime change reduces venture creation activity for growth-oriented ventures specifically. I also find evidence of a partial rebound in subsequent months—suggestive that some entrepreneurs delay entry while others permanently abandon their ventures.

A real options approach to renewable energy module end-of-life decisions under multiple uncertainties: Application to PV and wind in China

The issue of large-scale retirements of renewable energy modules has attracted considerable attention from governments and the public worldwide. Using the Chinese wind and photovoltaic industries as examples, this paper, for the first time, employs a real options approach to explore the optimal time for energy firms to retire their power plants and to predict the future trend of renewable energy wastage from a bottom-up perspective. The results show that the optimal retirement time for the four subdivided categories ranges from 16 to 23 years. The later the investments are made, the earlier the decommissioning time comes and the lower the project returns. Furthermore, wind projects have been found to generate more revenue than PV projects for the same size, and the gap continues to widen. Offshore wind technology always has the longest optimal service life (18.62 years in 2022) and the greatest project returns (10.84 million CNY in 2022). Annual utilization hours, the renewable electricity price and the waste price can accelerate the retirement of plants and generate more revenue for energy companies, while the initial investment cost has a completely opposite effect. The first wave of PV retirements will occur in 2035 at 305.82 GW, while onshore wind will be in 2036 at 530.77 GW and offshore wind will not explode until 2040 at 65.84 GW. An assessment of potential policies suggests that for every 100 CNY increase in incentive strength, the retirement wave arrives 1 year earlier. In contrast, for every 100 CNY increase in the strength of penalties, the retirement wave is delayed by 1 year. In addition, we verify that the size of the plants does not affect the forecast of the retirement trend, indicating that the assumptions about installed capacity do not cause bias.

When contract clauses conflict: The Salvador light rail vehicle concession

Infrastructure concession contracts may include clauses that allow for capacity expansion, term extensions, or even risk management strategies such as cap and floor schemes. These clauses provide project managers with the flexibility required to adapt their operational strategies as new information is revealed in time and limit investor risk. However, when contracts include combinations of these clauses, determining their overall impact on the objectives of the contract and the project is non-trivial and require the combined analysis of these effects. While the literature on the valuation of infrastructure projects tends to focus on a single type of flexibility at a time, we analyze the combined interaction between these clauses and their impact on the overall value of the project under the real options approach. Using the Salvador Light Rail Vehicle (LRV) concession project as a numerical example, our results suggest that these clause interactions can have non-intuitive results and negatively affect the stated objectives of both parties in the contract. We also show how policy makers can use this information to improve the value of the project to society and reduce the risk to the government.

The Internet of Things (IoT): Applications, Investments, and Challenges for Enterprises

The rise of the Internet of Things (IoT) has triggered changes, in industries offering improved efficiency data informed decision making and fresh business models. This document explores the world of IoT looking into its uses investment prospects and obstacles faced by businesses. By conducting a review of existing literature, we shed light on the state of IoT technologies by analyzing recent studies and publications. Our approach involves an examination of trends in adoption strategies for evaluating investments and the main challenges encountered during IoT implementation. We delve into the range of applications for IoT in sectors like retail, manufacturing and healthcare spotlighting technologies and successful case studies. Additionally, we evaluate investment opportunities in technologies by comparing methods such as Net Present Value (NPV) and Real Option Approach to assess investments. The document also addresses hurdles related to data management issues, privacy risks, security vulnerabilities and the complexities of interconnected networks. We wrap up with a summary of insights from our research findings along with recommendations, for enterprises looking to navigate the evolving landscape of IoT.

Market valuation of international patenting using a real option approach: the moderating role of uncertainty

ABSTRACT The article assesses the option value embedded in a firm’s patent assets relying on the Tobin's q market value model. In particular, novel empirical evidence on the market valuation of patent strategies is provided with regard to the universe of R&D reporting firms in France, Germany, Italy, and the U.K. The international patent applications filed under the Patent Cooperation Treaty are found to enhance the option value effect significantly more than IP protection pursued through a national patenting strategy. Furthermore, the paper reports that conditions of uncertainty regarding the firm and the market positively moderate the relative impact of the international patent application on market value and that the two sources of uncertainty mutually reinforce the moderating effect. These extended findings with uncertainty are in line with the real option theoretical framework, claiming that the bigger the uncertainty in the decision-making process, the larger the real option value effect. The paper concludes by discussing some relevant managerial implications, that take into the account not only the prosecution and maintenance costs of a firm’s IP protection strategy but also the relative flexibility in the decision-making process.

Evaluation of tieback developments for marginal oil fields with timing flexibility

The average size of new oil discoveries on the Norwegian Continental Shelf (NCS) is steadily decreasing. As standalone developments are often not economically viable for marginal fields, tiebacks to existing production facilities are considered in many cases. At the same time, many production facilities in mature production areas have spare capacity due to depleted reservoirs. In this paper we evaluate tieback development concepts for a marginal field having the choice between two hosts with different characteristics. We develop a model that allows to (1) evaluate the tieback development concepts; (2) determine the optimal choice of host facility for the field operator; and (3) optimize the timing of development taking into account oil, gas price and CAPEX uncertainty using a real options approach. In order to be able to reflect how the capacity constraints of a host affects the production potential of the field over time, we incorporate a production optimization model as part of the methodology. We apply the model to a real case on the NCS. We identify characteristics that drive the optimal choice of hosts. Specifically, we show how lifetime extension, reduction of CAPEX and additional spare capacity individually and in combination affect the competitiveness of one host over another therewith, providing valuable insight for tariff negotiations and portfolio planning. Apart from that we find that timing flexibility is of high importance in case of high downside risk. This makes our approach particularly relevant for marginal oil field development which are often characterized by prominent uncertainties.

Enterprise Value Assessment Based on Real Option Approach: The Case of SEMCORP

As the core power source of new energy vehicles, the lithium battery industry has ushered in a high-speed development, and has become the most widely used battery technology system. Due to the industry's high technical barriers, imperfect system, high volatility risk and other characteristics of the lithium battery enterprise value the overall assessment of the difficulty of ordinary investors to make a more accurate judgment. As an important representative of the lithium new energy materials industry, SEMCORP is in a golden development period. Based on the research results of previous researchers on enterprise value assessment, this paper examines the value assessment of n SEMCORP. Specifically, this paper applies a two-stage growth model to calculate the present value and evaluates the potential value separately with the help of an option pricing model to obtain its overall value. After analyzing, conclude that SEMCORP 's shares are overvalued. This paper can provide decision-making references for the investment and financing of Chinese lithium new energy materials enterprises, as well as further enriching the application of enterprise value assessment methods.

Investment benefit analysis of coal-to-hydrogen coupled CCS technology in China based on real option approach

As a zero-carbon energy, hydrogen energy is widey recognized as playing an important role in reducing carbon emissions and addressing climate change. Considering the resource and industrial conditions in China, the coal-to-hydrogen coupled with carbon capture and storage (CTHCCS) may be a necessary choice in the early stage of low-carbon hydrogen energy development. This study used real option models to analyze the investment benefits of the representative CTHCCS technology at the national and regional levels in the current and future development scenarios in China, and discusses the impact of uncertainties in carbon price, technological progress, and policy incentives on the CTHCCS investment. The results show that (1) The opportunity for immediate investment in the CTHCCS is not available in China unless the cost of carbon capture and storage (CCS) technology decreases and the carbon price increases significantly. (2) The current CTHCCS investment critical carbon price is 353.3 RMB/t, which will decrease by 45.0%, 73.9% and 57.3% when using the initial investment subsidy, carbon emission reduction subsidy and clean fuel subsidy, respectively. (3) The CTHCCS presents a relatively high investment benefit in Xinjiang, Inner Mongolia, and Shaanxi, highlighting that these areas are key pioneers for “blue hydrogen” production in China.

Investment of hydrogen refueling station based on compound real options

As the development of hydrogen refueling stations (HRS) is key to the hydrogen industry, it is necessary to study the investment feasibility for potential investors in order to stimulate its investment. We view the HRS investment as a two-stage decision-making process, distinguishing characteristics of off-site HRS from those of on-site HRS. Investors can first decide whether or when to invest in an off-site HRS, and then can accordingly decide whether or when to upgrade from an existing off-site HRS to an on-site HRS, by retrofitting off-site HRS with on-site hydrogen production device. We select natural gas reforming as the technology of on-site hydrogen production device, not only because natural gas reforming is cheaper and maturer, but also because this type of retrofit has been applied in a real case. Since the investment in HRS entails multiple uncertainties, we use a compound real options approach for conducting an appraisal of HRS investment. Accordingly, we use the Chinese case to present a new perspective to the sequential analysis of HRS investment decision-making. Four various scenarios are set for a case study, including one benchmark scenario reflecting the current Chinese hydrogen policies, and three comparative scenarios reflecting potentially improved policies, such as increasing operational subsidy, implementing preferential taxation and stimulating demand. The results show the current scenario is not beneficial to invest in HRS building on the proposed analytical framework and the data collected from the case of China. Furthermore, the increase in demand plays the leading role in improving the probability of HRS investment, followed by the implementation of preferential taxation and increasing operational subsidies. Additionally, the on-site HRS shows its superiority over off-site HRS, because all scenarios suggest upgrading to on-site HRS should be executed immediately once the initial off-site HRS is constructed. Therefore, in the context of Chinese hydrogen market and the selected on-site technology of natural gas reforming, it is necessary to create a more favorable business environment for the layout of on-site HRS.

Short Review of Solar Energy Markets and Policies for Smart Cities Development

This paper presents a meticulous review of the solar energy markets and their instrumental role in driving the growth of smart cities. Drawing from extensive research, the review delves into urban metamorphoses spurred by the burgeoning growth of megacities, highlighting the significance of sociotechnical systems, evolved institutional practices, and energy material flows. The study identifies seven pivotal models for smart city energy governance, encompassing distributed energy resources, energy storage, microgrids, demand response, smart measuring systems, energy harvesting, and green technological innovations. A comparative analysis of urban developments in cities such as Singapore, Shanghai, and the greater Jakarta area reveals diverse trajectories in energy system evolution and business model shifts. The surging growth of solar energy, underpinned by technological breakthroughs, cost efficiencies, and robust governmental policies, is also explored. Although solar energy has been bolstered by a myriad of fiscal and regulatory incentives, it faces persistent challenges like technical impediments, financial barriers, and regulatory obstacles. The paper also introduces an innovative compound Real Options Approach (ROA) for appraising solar energy projects within smart cities, arguing its efficacy over the traditional Expected Net Present Value methods by recognizing managerial adaptability. In summation, this review accentuates the imperative of enduring policy support to amplify solar energy adoption worldwide, setting the stage for a sustainable smart city future.

A Real Options Approach to Investment Decisions in Renewable Energy

A Real Options Approach to Investment Decisions in Renewable Energy