Using real options model based on Monte-Carlo Least-Squares for economic appraisal of flexibility for electricity generation with VVER-1000 in developing countries. (October 2021)

• Record Type: Journal Article
• Authors: Najafi, P.; Talebi, S.
• Is Part Of: Sustainable energy technologies and assessments. Volume 47(2021)
• Publication Date: 2021-10
• Subjects: Real Options Theory -- Flexibility options -- Nuclear economics -- Irreversible investment -- Monte-Carlo; Renewable energy sources -- Periodicals; Energy development -- Technological innovations -- Periodicals; Electric power production -- Periodicals; Energy storage -- Periodicals; 333.79
• DOI: 10.1016/j.seta.2021.101508
• Languages: English
• ISSNs: 2213-1388

Abstract

Highlights: A decision-making Real-Options model based on Monte-Carlo Least-Squares of nuclear electricity generation investment is proposed. The irreversible investment concept and real-option theory are introduced. The impact of different uncertain factors, including the expiration date of the option, the fluctuation, and the drift rate of the market price of electricity on the option-to-defer value's exercise value, was analyzed. Abstract: This paper aims to measure managerial flexibility value in deferring the investment of deployment. VVER-1000 nuclear power plants (NPPs) in developing countries. A methodology based on the Monte-Carlo simulation and adapting the backward dynamic least-squares programming is implemented to build a Real-Options-Valuation (ROV) framework. The influence of five uncertain market factors, including the risk-adjusted ratio; the expiration date of the option; the specific cost of capital investment; the volatility, and the drift rate of the market price of electricity, on the optimum investment timing and the exercise value of the deferral-option is studied. Results indicate that despite the preliminary analysis with the traditional Discounted-Cash-Flow (DCF) investment appraisal tool, the ROV method provides attractive opportunities for decision-makers to analyze and capture the embedded possible real-options and upside potential risks managerial decisions by keeping the investment option alive and postponing investment for options maturity. Finally, performing a sensitivity analysis highlights that extending the validity period for investment in irreversible nuclear electricity generation with VVER-1000 in developing countries, which experience electricity-price volatility rate higher than 20% up to 11 years, could turn the investment project more economically attractive.