Exploratory analysis to support real options analysis: An example from electricity infrastructure investment

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

Several approaches have been developed to analyze the potential of real options. Their assessments, however, are mostly based on limited future scenarios. In this paper two of the approaches, the option pricing and the decision analysis method, are combined and extended with exploratory analysis: computational experiments across a wide spectrum of future scenarios. The case study investigates the impact of various uncertainties (i.e. electricity price, and demand, natural gas price) on the net present value of two electricity power plant investments. Three uses of exploratory analysis are demonstrated: (i) providing the spectrum of future scenarios that give robust performance, (ii) estimating the range of option values across a wide spectrum of future scenarios, and (iii) calculating the regret value of an underutilized option. These insights can facilitate the decision on whether or not to include a real option in an infrastructure investment.

Original languageEnglish (US)
Pages (from-to)3689-3696
Number of pages8
JournalUnknown Journal
Volume4
StatePublished - 2005
Externally publishedYes

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Electricity
Natural Gas
Power Plants
Decision Support Techniques
Decision theory
Uncertainty
Natural gas
Power plants
Emotions
Costs and Cost Analysis
Costs
Experiments

Keywords

  • Electricity infrastructure investments
  • Exploratory analysis
  • Real options analysis
  • Uncertainties

ASJC Scopus subject areas

  • Engineering(all)

Cite this

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abstract = "Several approaches have been developed to analyze the potential of real options. Their assessments, however, are mostly based on limited future scenarios. In this paper two of the approaches, the option pricing and the decision analysis method, are combined and extended with exploratory analysis: computational experiments across a wide spectrum of future scenarios. The case study investigates the impact of various uncertainties (i.e. electricity price, and demand, natural gas price) on the net present value of two electricity power plant investments. Three uses of exploratory analysis are demonstrated: (i) providing the spectrum of future scenarios that give robust performance, (ii) estimating the range of option values across a wide spectrum of future scenarios, and (iii) calculating the regret value of an underutilized option. These insights can facilitate the decision on whether or not to include a real option in an infrastructure investment.",
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