Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach

FCN Working Paper No. 11/2012

46 Pages Posted: 23 Sep 2013

See all articles by Andreas Knaut

Andreas Knaut

University of Cologne - Institute of Energy Economics

Reinhard Madlener

RWTH Aachen University

Christiane Rosen

RWTH Aachen University, E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN)

Christian Vogt

Institute for Applied Geophysics and Geothermal Energy (GGE)

Date Written: November 2012

Abstract

In this paper we investigate the economic viability of geothermal district heating networks using both net present value (NPV) and real options analysis (ROA). We give an introduction to geothermal energy technologies and review the relevant ROA literature focusing on applications in similar fields, such as oil projects. The similarities and differences of oil and geothermal projects are discussed and summarized. The investment structure of geothermal projects is analyzed concerning costs and uncertainties in the different investment stages. We develop a method to assess the impact of temperature uncertainty with ROA. Investments in geothermal projects are evaluated applying a binomial and a trinomial lattice approach. A novel real options model for the evaluation of normally distributed uncertainty is developed for binomial lattices. Using data obtained from a Dutch project in The Hague, we find positive option values for both lattice approaches, compared to negative values for the common NPV calculation. Drilling and production costs are found to have a significant impact on the option value.

Keywords: Geothermal energy, Real options, District heating, Investment under uncertainty

Suggested Citation

Knaut, Andreas and Madlener, Reinhard and Rosen, Christiane and Vogt, Christian, Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach (November 2012). FCN Working Paper No. 11/2012. Available at SSRN: https://ssrn.com/abstract=2329563 or http://dx.doi.org/10.2139/ssrn.2329563

Andreas Knaut (Contact Author)

University of Cologne - Institute of Energy Economics ( email )

Alte Wagenfabrik
Vogelsanger Strasse 321a
Cologne, 50827
Germany
+49 221 - 277 29 306 (Phone)

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

Christiane Rosen

RWTH Aachen University, E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 10
Aachen, 52074
Germany

Christian Vogt

Institute for Applied Geophysics and Geothermal Energy (GGE) ( email )

Mathieustraße 10
Aachen, 52074
Germany

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