Real Options Theory Applied to Renewable Energy Generation Projects Planning

Student thesis: Phd


The existing environmental threats and the ever increasing global dependence on electric power highlight the importance of producing power in a sustainable manner. In accordance, it is vital to attract investments in electricity generation projects based on renewable energy sources, also called renewable energy projects (REP). This poses a challenge, as REP tend to be less financially competitive than their fossil fuel based counterparts. Moreover, the power grid has to be upgraded to integrate large amounts of RESs in an efficient and economic manner.An appealing alternative to enhance the financial appealing of REP is to improve the techniques used for their assessment. These tools produce robust and economically sound assessments, but tend to undervalue REP and other projects under uncertainty, as they neglect the flexibility of the projects to be adjusted in response to uncertainty. This can be corrected by extending the tools with the aid of real options (RO) theory.RO theory can be used to extend assessment techniques to value flexibility derived from the projects, their management, and even their environment, which can be used to enhance the financial value of REP in the changing power sector. In addition, the scope of RO theory is increasing to address flexibility in the design of the projects. Therefore, the theory can drive investments in REP and motivate the design of more profitable projects.This research project seeks to analyse the potential of RO theory to increase the financial worth of different types of REP in the current and changing power sector. The novelties of this research are that it expands RO theory by addressing the flexibility within the design of the projects, the potential of RO theory to manage uncertainties that are exclusive to the projects or typical in the power sector, and other relevant areas of research interest.The research produced several RO methodologies to model the planning, operation, and design of hydropower projects, wind power projects, and solar photovoltaic projects in existing power sector environments and environments characterised by high penetration of RESs and consumers with demand response capabilities. The results demonstrate the applicability of RO theory to enhance the financial value of different types of REP under a wide range of circumstances.
Date of Award1 Aug 2012
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorJoseph Mutale (Supervisor)


  • Wind power systems
  • Hydropower systems
  • Solar Photovoltaic systems
  • Real Options theory
  • Power systems economics

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