CONICET | Buscador de Institutos y Recursos Humanos

Risk management is a key concept when decidinginvestments in electricity markets. Power investment projects arecapital-intensive, largely irreversible and subject to highuncertainties on future returns. Fortunately, most projects havestrategic flexibilities embedded to manage uncertainties andmitigate risks under unfavorable market scenarios. Moderncorporate finance recognizes Real Option analysis (ROA) as the correct approach for valuing investment projects with thesefeatures. Because of environmental concerns and fuel priceescalations, power generation based on renewable sources hasshown a dramatic global growth in the last decade. Argentina hasrecently established aggressive support policies for meetingambitious renewable targets. Renewable investment projectsshare many of the mentioned characteristics. Hence, optionvaluation methods can be applied for appraising the monetaryworth of managerial flexibility embedded in renewable powerinvestments. In this work, a methodology for assessing theeconomic value of a photovoltaic power plant under uncertainty ispresented. ROA is applied to determine the monetary value ofdelaying the investment decision in order to wait for bettermarket information and for cost abatements due to technologicaldevelopment. In addition, the economic value of relocating thesolar power plant in the future to a more attractive site in termsof costs, grid access and/or regulatory policies is also considered.The option valuation problem is solved by means of stochasticsimulation combined with recursive approximate dynamicprograming techniques. The developed methodology can be usedby investors for efficient decision making and by regulatoryagencies for designing proper support policies to encourageinvestments in renewable generation.