Lobatto-Milstein Numerical Method in Application of Uncertainty Investment of Solar Power Projects

Abstract

Abstract:Recently, there has been a growing interest in the production of electricity from renewable energy sources (RES). The RES investment is characterized by uncertainty, which is long-term, costly and depends on feed-in tariff and support schemes. In this paper, we address the real option valuation (ROV) of a solar power plant investment. The real option framework is investigated. This framework considers the renewable certificate price and, further, the cost of delay between establishing and operating the solar power plant. The optimal time of launching the project and assessing the value of the deferred option are discussed. The new three-stage numerical methods are constructed, the Lobatto3C-Milstein (L3CM) methods. The numerical methods are integrated with the concept of Black-Scholes option pricing theory and applied in option valuation for solar energy investment with uncertainty. The numerical results of the L3CM, finite difference and Monte Carlo methods are compared to show the efficiency of our methods. Our dataset refers to the Arab Republic of Egypt.

Use coal or invest in renewables: a real options analysis of energy investments in the Philippines

“…This paper acknowledges other uncertainties that affect investment decisions particularly to renewable energy. These include inflation that affects estimates of future cash flow; changes in FiT rates and market price of electricity; FiT subsidies and other government incentives; technological innovation that could lower the investment cost for RES; and environmental policy by imposing externality tax and green energy certificates (Eissa and Tian 2017;Kitzing et al 2017;Zhang et al 2017;Byrnes et al 2016;Eryilmaz and Homans 2016;Kamjoo et al 2016;Arnold and Yildiz 2015). The proposed ROA could be extended by incorporating these uncertainties to make a better investment strategy and comparison among various energy sources.…”

“…Recent applications of ROA, particularly in renewable energy investments, include Eissa and Tian (2017) who investigated the real options framework for solar power project considering the renewable certificate price and cost of delay between establishing and operating the solar power plant; Kim et al (2017) who assessed the renewable energy investment in developing countries with a case study involving a hydropower project in Indonesia; Kitzing et al (2017) who evaluated offshore wind energy investments in Baltic Sea under uncertainties in feed-in tariffs (FiT), feed-in premiums, and tradable green certificates; Loncar et al (2017) who used a compound real options valuation method to examine a potential onshore wind farm project in Serbia;and Zhang et al (2017) on estimating the optimal subsidy for renewable energy power generation project in China by using stochastic process to describe the market price of electricity, CO 2 price, and investment cost. Further, Barrera et al (2016) analyzed the impact of public research and development (R&D) financing on renewable energy projects, specifically on concentrated solar power; Eryilmaz and Homans (2016) examined the investment decisions of US renewable energy producers considering the uncertainties in federal government's continuation of the production tax credit policy and the market prices for renewable electricity credits; Fleten et al (2016) studied whether investors in renewable energy projects in Norway exert discretion about the timing of investment decisions when they face uncertainties in electricity price and subsidy; Ritzenhofen and Spinler (2016) assessed the impact of adjustments in FiT schemes on investment in renewable energy sources; Sisodia et al (2016) evaluated the investment strategies in wind-generated energy projects in Portugal under the risk in regulatory changes in Spain; and Wesseh et al (2016) evaluated whether the feed-in-tariffs outweigh the cost of wind energy projects in China.…”

Multi-stage compound real options valuation in residential PV-Battery investment

“…In recent years, ROV has been frequently applied for valuation of distribution and transmission network investments, including transmission network expansion [10,11], distributed generation [12], and renewable generation including hydropower [13], wind generation [14][15][16][17][18], solar generation [19][20][21][22][23] and large scale battery storage systems [24]. A common feature of these studies is that they determine the value to execute one or several independent options embedded in a network investment in the presence of uncertain electricity market conditions or regulatory policies, and hence the optimal investment timing.…”

“…Given this context, we need to decide the most suitable approach to address the problems above. The partial differential equations (PDE) approach [26,27] based on the research of Black, Scholes and Merton, and binomial lattice [16,18,23] have been widely applied to calculate the value of real options. However, the PDE approach can be used to incorporate only one uncertainty, or at most two correlated ones.…”

Research on Risk Evaluation of Transnational Power Networking Projects Based on the Matter-Element Extension Theory and Granular Computing

“…Now the construction of transnational networking projects in China is still at its preliminary stage, but it is growing rapidly. On the basis of the original projects, a series of transnational networking projects have already been proposed since the promulgation of the Belt and Road Initiative, aiming at exploring the potential international power industry market Considering the development trends of the power industry, it is necessary to construct a scientific risk assessment index system and a practical evaluation model for transnational networking projects, which contributes to identifying the risk factors faced by the project and providing decision support for the stakeholders [6]. As a new research subject, studies about risk evaluation of transnational networking project are still insufficient, but researches concentrated on risk assessment of domestic ordinary projects are relative mature at present.…”