Valuation of wind energy projects: A real options approach

The research proposes a valuation approach for wind farms that combines a trinomial lattice to model mean-reverting electricity prices with Monte Carlo simulations to account for intermittent wind generation. Using UK data, the authors compare various support mechanisms, including feed-in tariffs, market premiums, and initial capital subsidies. The findings indicate that the option to delay investment significantly increases project value, and that one-time initial subsidies are more effective at triggering immediate investment than long-term premiums per unit of electricity produced.

• The authors argue that traditional discounted cash flow techniques are inferior to real options analysis for wind projects because they fail to account for the "irreversible character and the flexibility enjoyed by project managers (e.g. the option to delay investment)."
• Analysis of UK electricity futures from the Intercontinental Exchange (ICE) indicates that electricity prices follow a mean-reverting stochastic process rather than a geometric Brownian motion.
• The model identifies a positive correlation between the seasonal peaks of electricity prices and wind generation in the UK, with both reaching highs between October and March, which enhances profitability.
• In a 'now-or-never' investment scenario for a 50 MW wind park, the present value under market prices (122,196,833 £) is equivalent to a fixed feed-in tariff of 70.52 £/MWh.
• The ability to delay investment increases the project's value; for certain cost levels, waiting can make a project with a negative Net Present Value (NPV) attractive.
• Initial lump-sum subsidies available only at the start of a project are more effective at triggering immediate investment than subsidies spread over the project's life as premiums per MWh.
• Lower electricity price volatility encourages the deployment of wind turbines, while higher volatility increases the incentive to wait, thereby increasing the 'continuation value' of the investment option.
• Shortening the maturity of the investment option reduces the gain from waiting, which, when combined with transitory initial subsidies, can accelerate investment decisions.

APA

Abadie, L. M., & Chamorro, J. M. (2012). Valuation of wind energy projects: A real options approach. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201409220937541302661407.pdf

Chicago

Abadie, Luis M., and José M. Chamorro. Valuation of wind energy projects: A real options approach. Basque Centre for Climate Change, 2012. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201409220937541302661407.pdf.

Wikipedia

{{cite report |last1=Abadie |first1=Luis M. |last2=Chamorro |first2=José M. |title=Valuation of wind energy projects: A real options approach |publisher=Basque Centre for Climate Change |date=October 2012 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201409220937541302661407.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{abadie2012valuation, author = {Abadie, Luis M. and Chamorro, José M.}, title = {{Valuation of wind energy projects: A real options approach}}, institution = {Basque Centre for Climate Change}, year = {2012}, month = oct, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201409220937541302661407.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }