The carbon market incremental payoff in renewable electricity generation projects in Brazil: A real options approach

Abstract

The objective of this work is to present a methodology capable of estimating the incremental payoff of the carbon market for grid-connected renewable power generation projects in Brazil. The proposed methodology consists of using the NEWAVE model to determine the optimal operating policy for the Brazilian Interconnected System over the medium-term, and to establish hydrological dispatch scenarios for the power plants connected to this system. Based on these results, the criteria defined in the methodology ACM0002 were used to estimate the baseline of the projects developed in response to the Clean Development Mechanism of the Kyoto Protocol. Having estimated the baseline for the project, the incremental payoff obtained from the sale of Certified Emission Reductions is estimated using the real options theory. Subsequently, the value of the option is added to the conventional cash flow of the project, determining the impact of the carbon market on its internal rate of return.

Determination of the carbon market incremental payoff considering a stochastic jump-diffusion process

“…Regarding the determination of E F O M , the ACM0002 methodology establishes four different methods that can be applied to grid-connected generation projects: the Simple, Simple adjusted, Dispatch Data Analysis, and the Average Method. Given that the objective of this paper is to verify the robustness of different numerical methods in the valuation of the considered option, and that a comparative analysis of the different methods for baseline emission factor calculations has already been carried out by Batista et al (2011a), in this paper only the Average method will be used. This decision is justified through its simplicity when used in Operating Margin Emission Factor calculations.…”

“…With this in mind, Batista et al (2011a) proposed a methodology capable of determining the incremental payoff of the carbon market for grid-connected renewable electricity generation CDM projects, considering that its baseline behaves as a random variable. In this case, the built-in randomness of the baseline is intended to account for uncertainties associated with the operation of the electricity system in which the CDM project will be connected, in this way including a risk factor in calculating the quantity of CERs that the project will produce and commercialize in the future.…”

“…In addition, Batista et al (2011a) considered the uncertainty of the market due to the randomness in CER price when determining the incremental payoff of the carbon market. For this purpose, it was considered that renewable electricity generation projects may have sufficient flexibility to be registered by the United Nations Executive Board, thus allowing the commercialization of CERs generated through their operation.…”

The Impacts of Carbon Sequestration on Oil Production Projects Decision-Making: A Real Option Valuation Approach

“…Real option models are being used to evaluate projects involving greenhouse gas emissions in a few different energy industries. Projects such as coal fired power plants with capture and storage of CO 2 [9], renewable electricity generation projects [10], electricity generation technologies [11], adoption of photovoltaic technology [12] and petroleum production project [13,14].…”

Modelo Decisório Dinâmico Para Incentivar as Fontes Renováveis No Brasil

“…δ s ≥ z − R s , ∀s (3)(4)(5)(6)(7)(8)(9)(10)(11)(12) δ s ∈ R + , ∀s CV aR α como uma grandeza para expressar a sua satisfação, ela poderá servir como o seu equivalente certo. Esta função de valor foi utilizada em outros trabalhos [122], [121].…”