Determining the sustainability of a community micro hydro power system using real options analysis
Gokongwei College of Engineering
IOP Conference Series: Earth and Environmental Science
Micro hydro power is a clean source of renewable energy that has been utilized for remote communities for electricity generation. The technology is mature and operates the same principle as large hydroelectric power plant but with much lower power capacity. Sustainability relies on the financial and other benefits brought about the micro hydro power plant during its operation. Traditional valuation method is often used to valuate micro hydro projects however it does not incorporate uncertainty factors, specifically unpredictable changes in weather. Real Options Analysis, on the other hand, uses both the Black-Scholes Model and Binomial Tree Method which incorporates uncertainty. The valuation obtained through real option analysis represents the net present value of the project with decision flexibility option for the investor. In this study, real options analysis is applied to a micro hydro power plant to identify its financial sustainability. Head and flow rate are obtained to calculate the capital investment, electrical sales, maintenance, and cost of operating nearby agricultural facilities. Traditional financial valuation method revealed a positive outcome making the project financially viable. However, real options analysis provided a contradicting result indicating the implementation of the project should be delayed. © Published under licence by IOP Publishing Ltd.
Digitial Object Identifier (DOI)
Marfori, I. V., Culaba, A. B., Ubando, A. T., Almonares, R., & Chen, W. (2019). Determining the sustainability of a community micro hydro power system using real options analysis. IOP Conference Series: Earth and Environmental Science, 268 (1) https://doi.org/10.1088/1755-1315/268/1/012108
Water-power; Energy conservation; Green technology; Sustainable development