Real Options-Based Framework for Hydropower Plant Adaptation to Climate Change

Kim, Kyeongseok; Park, Taeil; Bang, Su Sik; Kim, Hyoungkwan

doi:10.1061/(asce)me.1943-5479.0000496

Cited by 15 publications

(15 citation statements)

References 32 publications

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“…Jeuland and Whittington (2014) developed a methodology for planning new water resources infrastructure investment and operating strategies considering climate change uncertainty. Kim et al (2017b) proposed a real options-based framework to assess economic benefits of adapting hydropower plants to climate change.…”

Section: Introductionmentioning

confidence: 99%

Assessing real options in urban surface water flood risk management under climate change

et al. 2018

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Developing an adaptation option is challenging for long-term engineering decisions due to uncertain future climatic conditions; this is especially true for urban flood risk management. This study develops a real options approach to assess adaptation options in urban surface water flood risk management under climate change. This approach is demonstrated using a case study of Waterloo in London, UK, in which three Sustainable Drainage System (SuDS) measures for surface water flood management, i.e., green roof, bio-retention and permeable pavement, are assessed. A trinomial tree model is used to represent the change in rainfall intensity over future horizons (2050 s and 2080 s) with the climate change data from UK Climate Projections 2009. A two-dimensional Cellular Automata-based model CADDIES is used to simulate surface water flooding. The results from the case study indicate that the real options approach is more cost-effective than the fixed adaptation approach. The benefit of real options adaptations is found to be higher with an increasing cost of SuDS measures compared to fixed adaptation. This study provides new evidence on the benefits of real options analysis in urban surface water flood risk management given the uncertainty associated with climate change.

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Section: Introductionmentioning

confidence: 99%

Assessing real options in urban surface water flood risk management under climate change

et al. 2018

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“…For example, we have seen applications of the binomial tree model to analyze options to wait, as well as scale or extension options, abandon options, and compound options, that is, options on options. The latter were valued in Ryu et al () and Kim et al () for example. If options for flexibility still have to be identified, or if these involve structuring decisions over time, such as valuing design options such as adding air conditioning in a building at a later date or flood defense designs that can be more easily upgraded (flexibility “in” projects), then other RO methods may be more suitable (Wang & De Neufville, ), as we will discuss in the following section.…”

Section: Real Options Analysis: Origins Approaches and Applicationsmentioning

confidence: 99%

“…Option valuation with traditional ROA methods generally requires an observable variable explaining the stream of benefits, revenues or cashflow of an investment, and whose changes over time can be described by a stochastic process. Ideally, this will be a market price of a traded commodity, for example energy or water prices, such as in the case of hydropower plants (Kim et al, 2017) or profits linked to irrigation dams (Michailidis & Mattas, 2007). In other cases, such as in the flood risk adaptation applications (Dittrich et al, 2019), rainfall or water level observations can serve as a starting point, but for these examples there is clearly more noise between those observations and option valuation.…”

Section: Ensuring the Model Is Appropriate For The Contextmentioning

confidence: 99%

The added value of real options analysis for climate change adaptation

Wreford

Dittrich

Pol

2020

WIREs Climate Change

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Climate change adaptation investment decisions can be made more efficiently if uncertainty and new information are considered in their economic appraisal. Real options analysis (ROA) is a robust decision‐making tool that allows for the incorporation of both uncertainty and new information. In this opinion article, we argue that ROA is a valuable tool, providing the analysis is designed to reflect the real‐world characteristics of the decision context. We highlight the differences between traditional risk‐based ROA, and scenario‐based ROA, and discuss the relative merits of the approaches from the perspective of their assumptions and use of climate information. We also emphasize the need for increased co‐development of ROA design and applications with end‐users. Given the large climate uncertainties for long‐term adaptation planning, we suggest that an emerging strand of scenario‐based ROA methods offers ways to help identify and conditionally value flexibility without aggregating values into precise expected values across states of the world. This article is categorized under: Climate Economics > Iterative Risk‐Management Policy Portfolios

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“…ROA applications dedicated to the maintenance and replacement optimization of ageing infrastructure are scarce but good ROA applications are found in related fields. Several authors have developed ROA applications for optimizing investment decisions in hydropower and flood defense while addressing price uncertainty influenced by climate change scenarios (Woodward et al 2014, Kim et al 2017. Another ROA application focused on investment decisions is presented by Martani et al (2018) who optimize urban real estate investments under uncertain future rental scenarios.…”

Section: Price Uncertaintymentioning

confidence: 99%

Infrastructure maintenance and replacement optimization under multiple uncertainties and managerial flexibility

Boomen

Spaan

Shang

et al. 2019

Construction Management and Economics

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Infrastructure maintenance and replacement decisions are subject to uncertainties such as regular asset degradation, structural failure, and price uncertainty. In the engineering domain, Markov Decision Processes (MDPs) typically focus on uncertainties regarding asset degradation and structural failure. While the literature in the engineering domain stresses the importance of addressing price uncertainties, it does not substantiate the observations of such uncertainties through optimization modeling. By contrast, real option analyses (ROAs) that originate from the financial domain address price uncertainties but generally disregard asset degradation and structural failure. Accordingly, this piece of current research brings both domains closer together and proposes an optimization approach that incorporates the flexibility to choose between multiple successive intervention strategies, regular asset degradation, structural failure and multiple price uncertainties. A practical result of the current research is a realistic approach to optimization modeling in which state space reduction is achieved by combining prices into portfolios. The current research obtains transition probabilities from existing price data. This approach is demonstrated using a case study of a water authority in the Netherlands and confirms the premise that price fluctuations may influence short-term maintenance and replacement decisions. ARTICLE HISTORY

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Real Options-Based Framework for Hydropower Plant Adaptation to Climate Change

Cited by 15 publications

References 32 publications

Assessing real options in urban surface water flood risk management under climate change

Assessing real options in urban surface water flood risk management under climate change

The added value of real options analysis for climate change adaptation

Infrastructure maintenance and replacement optimization under multiple uncertainties and managerial flexibility

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