Project investment evaluation in renewable energy for electricity generation using real option model

In dealing with energy market many factors playing role; as the day goes by, with this tumultuous market and increase in competition, the role of even small factor may bring huge difference in the end results of decisions. These new environments cause decision makers like managers, national governments, development banks and in general all the stake holders involved in the market, to confront with complex dilemma. In this thesis, my main focus will be from the perspective of project managers and investors on decision making in renewable electricity generation projects. Some of these factors are related to market which project investors do not have active role to change them, like: increase of electricity demand, the expected growth (or decline) rates of EU Member State economies, changes in the consumption patterns and the introduction of new technologies, deregulated and privatized electricity market, uncertain future carbon price, uncertain government policy on climate change. On the other hand, project managers can look at “the half full of glass” by using constructive side of the uncertainty and by creating options, making the project investment worthy. Conventionally for evaluating projects, in literature the use of Discount Cash Flow (DCF) or methods based on DCF were widely held. However as mentioned before, the market paradigm has been changed dramatically and traditional methods are not effective on their own. For instance DCF could not fully respond to risk and uncertainty. In recent years, Real Option Analysis (ROA) has been applied in many fields like information technology, real estate, oil field development and so forth. The common aspect of these fields are intrinsic uncertainty association. The ROA propose the novel approach that quantitatively considers risk and value of using and creating of managerial options.