Application of real options valuation in corporate renewable energy electricity (RES-E) portfolio strategies / von Ivan Milovanović
VerfasserMilovanović, Ivan
UmfangXIII, 172 Bl. : Ill., graph. Darst., Kt.
HochschulschriftWien, Techn. Univ., Master Thesis, 2013
URNurn:nbn:at:at-ubtuw:1-66459 Persistent Identifier (URN)
 Das Werk ist frei verfügbar
Application of real options valuation in corporate renewable energy electricity (RES-E) portfolio strategies [14.34 mb]
Zusammenfassung (Englisch)

"Decisions on investment in capital projects, such as those based on renewable energy sources - electricity generation technologies (RES-E), are associated with the future uncertainties that affect the present value of the considered projects. One of implications of uncertain business environment to corporate finance and strategy is increased interest in sophisticated strategic valuation tools and techniques, which involve valuation of risk, i.e. uncertainty, as well as managerial flexibility in the strategic decision making process. The thesis examines the applicability of real options valuation (ROV) in RES-E greenfield projects, namely on-shore wind and solar photovoltaic (PV) technologies. The case study of multi-phased compound mutually exclusive pathdependent real options applied to the on-shore wind farm and PV plant projects in Serbia, evaluates different real options and their interactions. The strategy tree model covers a period of 14 years - two years of investment period and next twelve years of operation period, which is protected by Feed-in-Tariffs (FiT), according to the Serbian RES regulation. The model examines two mutually exclusive strategic paths - the blue path (expand/abandon) and the red path (don't expand/abandon), as a result of the bifurcation of the basic path in the 3rd year of the plant operation. In the case study, the author demonstrates the ROV of more complex (blue) path, consisting of following options: sequential option to invest in the plant construction (European call), option to expand the plant capacity in the 3rd year of operation (European call) depending on the results of previous two years of operation, as well as options to repower (European call) in case of favorable or to contract (European put) in case of unfavorable conditions after the expiration of protective FiT period in the 13th year of operation, depending on the market conditions at that time. Abandon option (American put) is permanently present in the model from the start of the project until 12th plant operation year. It is shown that, due to scalability and modularity of on-shore wind and PV technologies, options to alter the scale (expand/contract) can be easily executed from a technical point of view. The ROV follows the framework based on the IRMP (Integrated Risk management Process) approach. Volatility is calculated according to the logarithmic present value returns approach. It is shown that the volatility of the project cash flow is dominantly sensitive to the capacity factor forecasted as modified Weibull's probability distribution and simulated with Monte Carlo simulation (MCS), together with the other uncertainties affecting the project value. The author has developed an MS Excel tool for binomial tree option pricing which is used for the ROV process. Obtained results have been proven by comparison with the results in the SLS (Super Lattice Solver) software. Considering calculated real option values in the final binomial tree, as well as its four moments (mean, standard deviation, skew and kurtosis), it is shown that the proposed sequence of options, after being optimized, increases project value by transforming higher risk and lower returns in the initial discounted cash flow (DCF) model - to lower risk and higher returns in the optimized RO model. The final RO value obtained after optimization is sensitive only to risk-free rate change, which enables easier risk management and decision making process over the examined ROV period. Furthermore, the analysis of the real options interactions shows that incremental of the American abandon option in the presence of other options increases the project value, while there is no benefit out of interactions of other options included in the RO model. As a final point, the portfolio of real options has been examined in two different ways: on intra-project level (combinations of different real options within a single project, considering their interactions) and on inter-project level (optimization of the RES-E projects portfolio consisting of combinations of six wind and six PV projects, under budget and diversification constraints). The 3D options space metrics in the ""Tomato garden"" approach has been applied on intra-project level, showing the optimal development path of the real options, which corresponds to the above mentioned results of the binomial tree options pricing model. On the inter-project level, basic principles of the efficient frontier approach for project portfolio optimization have been demonstrated, as well as ranking of different portfolios according to the Sharpe ratio. Key words: investment project, renewable energy, electricity, real options valuation, compound options, Monte Carlo simulation, portfolio, strategy, binomial tree, interactions, DCF, NPV, risk, uncertainty, volatility, risk-free rate, underlying asset, RES-E, Weibull's probability distribution, capacity factor, wind farm, PV plant, IRMP, "Tomato garden", efficient frontier, Sharpe ratio."