Real options in renewable energy investments

: evidence and application

Abstract

In order to carve out a better future for the energy industry, the paradigm of investment and decision-making in the sector should make the shift towards a more sustainable, renewable and long-term oriented business model. Although investments in renewables have been made on a large scale, in 2017 only 13.9% of total energy is produced based on renewable sources (IEA, 2019). Energy security is a challenge that requires constant investments from countries and firms. However, investors in the industry have been mostly using traditional appraisal techniques, such as Discounted Cash Flow (DCF), that underestimate the value of projects by ignoring real options value and neglecting managerial and strategic flexibility and the potential long-term benefits arising from uncertainty. This thesis addresses this dilemma, with the main aim of quantifying the real options value at firm and industry levels. The first part of this thesis quantifies the real options flexibility value for the ethanol sub-sector at firm level, using a quantitative case analysis of a Brazilian distillery. Results show that currently, with oil prices as they stand, it is highly unlikely that investors could foresee appealing opportunities for investment in new ethanol distilleries in Brazil. In the second part of this thesis, I examine the potential for renewable investments, statistically analyzing the growth options value of a sample of relevant energy firms throughout the world. The results show that capital markets tend to attribute a higher growth option value to renewable energy firms than to non-renewable counterparts. This may indicate that markets might have given more value to sustainability aspects, but in addition, since cash flows occur in the long run, there is a higher perception of risk, which could deflect present investments in renewables.  

Date of Award	1 Apr 2021
Original language	English
Awarding Institution	King's College London
Supervisor	Tarik Driouchi (Supervisor)