Power generation investment opportunities evaluation

A comparison between net present value and real options approach

Lu Zhe, Ariel Liebman, Yang Dong Zhao

Research output: Chapter in Book/Report/Conference proceedingConference PaperResearchpeer-review

6 Citations (Scopus)

Abstract

To evaluate an investment project in the competitive electricity market, there are several key factors that affects the project's value: the present value that the project could bring to investor, the possible future course of actions that investor has and the project's management flexibility. The traditional Net Present Value (NPV) criteria has the ability to capture the present value of the project's future cash flow, but it fails to assess the value brought by market uncertainty and management flexibility. By contrast with NPV, the Real Options Approach (ROA) method has the advantage to combining the uncertainty and flexibility in evaluation process. In this paper, a framework for using ROA to evaluate the generation investment opportunity has been proposed. By given a detailed case study, the proposed framework is compared with NPV and showing a different results.

Original languageEnglish
Title of host publication2006 IEEE Power Engineering Society General Meeting, PES
Publication statusPublished - 2006
Externally publishedYes
EventIEEE Power and Energy Society General Meeting 2006 - Montreal, QC, Canada
Duration: 18 Jun 200622 Jun 2006

Conference

ConferenceIEEE Power and Energy Society General Meeting 2006
CountryCanada
CityMontreal, QC
Period18/06/0622/06/06

Keywords

  • Binomial tree and market deregulation
  • Black Scholes model
  • Investment evaluation
  • NPV
  • ROA

Cite this

Zhe, L., Liebman, A., & Zhao, Y. D. (2006). Power generation investment opportunities evaluation: A comparison between net present value and real options approach. In 2006 IEEE Power Engineering Society General Meeting, PES [1709400]
Zhe, Lu ; Liebman, Ariel ; Zhao, Yang Dong. / Power generation investment opportunities evaluation : A comparison between net present value and real options approach. 2006 IEEE Power Engineering Society General Meeting, PES. 2006.
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abstract = "To evaluate an investment project in the competitive electricity market, there are several key factors that affects the project's value: the present value that the project could bring to investor, the possible future course of actions that investor has and the project's management flexibility. The traditional Net Present Value (NPV) criteria has the ability to capture the present value of the project's future cash flow, but it fails to assess the value brought by market uncertainty and management flexibility. By contrast with NPV, the Real Options Approach (ROA) method has the advantage to combining the uncertainty and flexibility in evaluation process. In this paper, a framework for using ROA to evaluate the generation investment opportunity has been proposed. By given a detailed case study, the proposed framework is compared with NPV and showing a different results.",
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Zhe, L, Liebman, A & Zhao, YD 2006, Power generation investment opportunities evaluation: A comparison between net present value and real options approach. in 2006 IEEE Power Engineering Society General Meeting, PES., 1709400, IEEE Power and Energy Society General Meeting 2006, Montreal, QC, Canada, 18/06/06.

Power generation investment opportunities evaluation : A comparison between net present value and real options approach. / Zhe, Lu; Liebman, Ariel; Zhao, Yang Dong.

2006 IEEE Power Engineering Society General Meeting, PES. 2006. 1709400.

Research output: Chapter in Book/Report/Conference proceedingConference PaperResearchpeer-review

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AU - Liebman, Ariel

AU - Zhao, Yang Dong

PY - 2006

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N2 - To evaluate an investment project in the competitive electricity market, there are several key factors that affects the project's value: the present value that the project could bring to investor, the possible future course of actions that investor has and the project's management flexibility. The traditional Net Present Value (NPV) criteria has the ability to capture the present value of the project's future cash flow, but it fails to assess the value brought by market uncertainty and management flexibility. By contrast with NPV, the Real Options Approach (ROA) method has the advantage to combining the uncertainty and flexibility in evaluation process. In this paper, a framework for using ROA to evaluate the generation investment opportunity has been proposed. By given a detailed case study, the proposed framework is compared with NPV and showing a different results.

AB - To evaluate an investment project in the competitive electricity market, there are several key factors that affects the project's value: the present value that the project could bring to investor, the possible future course of actions that investor has and the project's management flexibility. The traditional Net Present Value (NPV) criteria has the ability to capture the present value of the project's future cash flow, but it fails to assess the value brought by market uncertainty and management flexibility. By contrast with NPV, the Real Options Approach (ROA) method has the advantage to combining the uncertainty and flexibility in evaluation process. In this paper, a framework for using ROA to evaluate the generation investment opportunity has been proposed. By given a detailed case study, the proposed framework is compared with NPV and showing a different results.

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Zhe L, Liebman A, Zhao YD. Power generation investment opportunities evaluation: A comparison between net present value and real options approach. In 2006 IEEE Power Engineering Society General Meeting, PES. 2006. 1709400