Evaluation of RES projects for electricity generation

Abstract

Renewable energy sources (RES) emerge as a necessary condition to achieve sustainable development. Traditional evaluation models relying mainly on discounted cash-flows fail to assess the strategic dimension of the investments in RES and do not allow for properly dealing with the risk and uncertainty of these particular projects. The diffusion of the renewable energy technologies are also affected by this features, so, the way investors evaluate their investments call for the use of more sophisticated evaluation techniques. Real options theory (ROT), gives the investor the ability to account for the value inherent in the flexibility to delay an irreversible investment into the future. This paper presents an application of the ROT to a photovoltaic investment project for the particular case of the Portuguese electricity market conditions. Special attention is given to the combination of learning curves and ROT aiming to provide a new approach to the sustainable development and diffusion possibilities of renewable energy technologies.