Evaluating India’s energy targets using real options approach

Abstract

Purpose The authors formulate India’s energy targets in light of pushing for renewable energy sources and reducing the dependence on imported coal. Share of imported coal in electricity generation has been approximately 10 per cent in recent years. While investments in renewables have grown in recent years as seen in installed capacities, coal-fired electricity generation has grown because of rising demand for electricity. The purpose of this study is to find a planner solution when high global coal prices force greater investments in renewable energies. Design/methodology/approach The authors use real options approach where global coal prices are the stochastic variable. They present an optimal stopping problem and solving the problem backward, the revenues from continuing with the current energy generation mix and those from replacing imported coal with wind and solar is compared for each period. Findings The “trigger price” for global coal prices when it is optimal for the social planner to invest in additional wind and solar capacities is found. Trigger prices is the threshold when investment must be undertaken whatever be the future evolution of coal prices; this gives the problem a value of waiting. India cannot afford to wait to invest if faced with strict short-term goals. Originality/value The work evaluates India’s domestic targets and its Paris Agreement goals in light of using more of wind and sun and replacing imported coal. Various data sources (government reports, research articles) are consulted to predict shares of electricity from various sources in future and the authors find the operating costs and the investment costs associated with switching to renewables.

Economic policy uncertainty and other determinants of corporate cash holdings of Australian energy companies

“…Using the real options model with stochastic prices and the ability to delay investments, Koch et al (2017) find similar results when examining the investment behaviors of energy firms under alternative scenarios of prices and policy regimes. The value of real options (waiting to invest in renewable energy) is also documented by Das Gupta and Mosiño (2020). Energy firms may also face financing constraints during times of uncertain economic policies.…”

Problems of adoption of solar power and subsequent switching behavior: an exploration in India

“…Even though solar power emerged in India as an alternative source of electricity around 2010, the real growth in usage rate started only since 2014 once a new government came to power and announced significant subsidies to adopt solar power. Researchers have identified the need to shift to alternative energy sources as it would also reduce the dependence on imported coal and help the nation at the macro-level (Gupta and Mosiño, 2020). The Indian consumers face several obstacles to adopting solar power alternatives that include high initial installation cost, low incentives and lack of information (Sathaye et al, 2001;Kumar et al, 2020).…”

Tackling uncertain future scenarios with real options: A review and research framework

“…Thus, scholars distinguish between the RO valuation, which applies formal models to estimate RO value, and RO reasoning, which identifies RO value conceptually, applying logic and heuristics (Trigeorgis & Reuer, 2017). Real option theory is applied to many practical decision situations in many industries, such as construction (Ribeiro et al, 2020), energy (Gupta & Mosiño, 2020), finance (Méndez-Suárez & Crespo-Tejero, 2021), healthcare (Gunter McGrath and Nerkar, 2004) or tourism (Piñeiro-Chousa et al, 2021), and many more. Also, risky endeavors, such as internationalization, can be subject to real option argumentation (Belderbos et al, 2020;Hunt et al, 2021;Ioulianou et al, 2021).…”