Valuation of wind energy projects: A real options approach

Abstract

This paper addresses the valuation of an operating wind farm and the …nite-lived option to invest in such a farm under di¤erent reward and/or support schemes. They range from a feed-in tari¤ to a premium on top of electricity market price, to a transitory subsidy to capital expenditure. The availability of futures contracts on electricity with ever longer matu- rities allows to undertake valuations based on market data. The model considers two sources of uncertainty, namely the future electricity price (which shows seasonality) and the level of wind generation (which is in- termittent in addition to seasonal). Lacking analytical solutions we resort to a trinomial lattice (which supports mean reversion in prices) combined with Monte Carlo simulation at each of the nodes in the lattice. Our data set refers to the UK. The numerical results show the impact of a number of factors involved in the decision to invest: the subsidy per unit of elec- tricity generated, the initial lump-sum subsidy, the investment option’s maturity, and price volatility.