Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

Abstract

Investment in sustainable energy sources is one of the climate mitigation strategies that can significantly reduce greenhouse gas emissions in the energy sector. However, in developing countries, investment is challenged by high capital expenditures and several uncertainties. This paper aims to provide decision support for investment in sustainable energy projects by evaluating the comparative attractiveness of shifting energy sources from fossil fuels to renewables and nuclear. Applying the real options approach (ROA), we calculate the value of the flexibility to postpone the investment decision and identify the optimal timing (described here as the trigger price of coal) for shifting to sustainable energy sources. We consider various uncertainties, such as coal and electricity prices, negative externality of using fossil fuels, and the risk of a nuclear accident, which are modelled using geometric Brownian motion, Poisson process, and Bernoulli probability. Applying the ROA model in the case of the Philippines, results find that investing in sustainable energy is a better option than continuing to use coal for electricity generation. However, contrary to conventional option valuation result that waiting is a better strategy, we found that delaying or postponing the investment decisions may lead to possible opportunity losses. Among the available sustainable energy sources, geothermal is the most attractive with trigger prices of coal equal to USD 49.95/ton, followed by nuclear (USD 58.55/ton), wind (USD 69.48/ton), solar photovoltaic (USD 72.04/ton), and hydropower (USD 111.14/ton). We find that the occurrence of jump (extreme) prices of coal, raising the current feed-in-tariff, and considering negative externalities can decrease the trigger prices, which favor investments in sustainable energies. Moreover, the risk of a nuclear disaster favors investment in renewable energy sources over nuclear due to the huge damage costs once an accident occurs. Results provide bases for policy recommendations toward achieving a more secure and sustainable energy sector for developing countries that are too dependent on imported fossil fuels.

Diesel to Solar Irrigation System: Economic, Environmental, and Social Acceptability Analyses by Small-Scale Farmers of Calapan, Oriental Mindoro

“…This supports previous studies that, considering the full life cycle of an irrigation system, solar PV-powered systems are economically viable and profitable alternatives over diesel-powered systems [23,31,32]. Additionally, decreasing prices for PV panels due to higher demand and technology learning and the increasing and stochastic diesel prices [30,33] may further improve the cost-effectiveness of solar PV irrigation systems.…”

“…Still, it should be noted that this value is exclusive to using solar panels for irrigation purposes only. Since the Philippines is located just above the equator and has a good solar irradiance at 128-2,032/m2, which is equivalent to 4.5 -5.5 kWh a day [30], and irrigation is not year-round, excess solar energy could be generated, which can be shared or used for other purposes [10] and eventually shorten the PBP.…”

“…Although there are some limitations to this technology like high capital costs, other technical aspects such as high head water pumping, batteries or huge storage reservoirs, and environmental aspects like ambient temperature, solar radiation intensity, wind speed, dust collection, and minimum annual rainfall, still, the advantages of solar PV pumping outweigh these cons. However, unlike the countries involved in the study mentioned above, the Philippines receives higher solar irradiance that can be translated to a power generating capacity of 4.5 to 5.5 kWh/m2 in 24 hours [30], which can sustain a solar PV system to irrigate a rice field. Moreover, results showed that the willingness of some farmers complemented their awareness of the advantages of owning a solar PV system, which included a longer life cycle, no noise pollution, and its potential to be automated or accessed remotely.…”

Success Factors and Challenges: Implications of Real Options Valuation of Constructed Wetlands as Nature-Based Solutions for Wastewater Treatment

“…On the other hand, a "real option" is the right, but not the obligation, to undertake real (tangible) project initiatives, such as postponing, expanding/contracting, or shutting down/restarting capital investment based on market, technological, and/or economic conditions [27]. While it is more commonly associated with financial assets, it can also be applied to projects in various industries and sectors [22,[28][29][30][31], including environmental projects such as CWs that provide nature-based wastewater treatment.…”

“…For instance, the "now-or-never" decision using the net present value (NPV) does not consider the uncertainties in CWs and the flexibility of managing decisions regarding the adoption of CW projects. Nevertheless, real options valuation (ROV) addresses these issues by incorporating risks and uncertainties, as well as management flexibility in making irreversible investment decisions [22]. Using ROV, a project planner has the option to postpone a CW project to a later period if the investment environment is not favorable at the moment.…”