Optimal Investment Strategies in Decentralized Renewable Power Generation Under Uncertainty

Abstract

This paper presents a method for evaluation of investments in decentralized renewable power generation under price uncertainty. The analysis is applicable for a building owner with an electricity load and a renewable resource that can be utilized for power generation. The owner of the building has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore, makes it more attractive to postpone investment until larger units are profitable.

Keywords: On-site power, distributed generation, renewable energy, real options, capacity choice

JEL Classification: Q40, G13, D80, M20, Q26