Diffusion of new renewable power in Brazil: A Real Options Approach

Abstract

A major problem in the expansion of renewable energies sources is finding the most adequate way to support them. The design of a suitable support scheme is necessary for an efficient development of renewable energies sources (RES). In Brazil, Many projects are delayed after getting the construction license due to financing problems. Some of them are even abandoned. Experiences of two European countries (Germany and UK) were analyzed in order to find efficient alternatives for RES expansion in Brazil. These countries are currently implementing new RES support schemes in order to increase electric systems’ efficiency; Contract for differences for UK and a tendering scheme in Germany. The recent results show mitigated outcomes. They are however encouraging considering investors caution against new regulatory policies. Brazil has already adopted a similar scheme, the auction mechanism, since 2004. Still, its share from RES apart from hydro and biofuels is very small, 4% for wind energy and less than 1% for solar energy. It has, nevertheless, an attracting potential. To investigate on this problem, we applied a Real Options approach to value the investment opportunities in a wind farm project. Compared to the traditional NPV calculation, The Real Options method excels in terms of covering the managerial flexibility for delaying the investment decision.

The considered project is subject to a multistage investment strategy consisting of design, construction and operation phases. A binomial approach through a decision tree was elaborated to model the investment opportunity. Two scenarios were adopted for wind farms that will participate in the 2017 A-3 auction. The results suggest that the option of delaying the project has significant value, since the investor can wait until the uncertainties get revealed.

This study can serve as a guide to ANEEL, the Brazilian electricity regulatory agency, and to RES investors for the type of strategy to undertake in order to increase RES generation in Brazil.

Keywords: RES support schemes, energy policy, RES auctions, Real option approach

JEL Classification: Q2, Q42, Q48, G11