Electricity generation assets are capital intensive, last for many years, and, due to the deregulation of electricity markets, their revenues are subject to uncertainty and strategic interactions. Hence, given the unprecedented investment level in response to pressing climate change concerns, inaccurate decisions may entail dire financial consequences. Therefore, investment and operational problems in electricity markets are amenable to analysis by the real options approach, which accounts for decision making under uncertainty while reflecting the value from embedded managerial discretion. Examples of the latter include discretion over investment timing, project scale, operations and technology choice. Thus, real options theory offers an enhancement of the traditional net present value (NPV) approach, as it allows for the assessment of strategies that would not have been able to be addressed otherwise. This course offers a balanced treatment of real options theory and its applications within electricity markets.
The main topics to be covered are:
- Introduction to real options theory and its application to electricity markets.
- Timing, sizing and technological characteristics of investments in electricity generation facilities.
- Support schemes and their impact on electricity capacity expansion.
- Electricity market structures and strategic interactions.