REAL OPTIONS ANALYSIS IN THE ENERGY SECTOR WITH A FOCUS ON THE SPOT PRICE OF ELECTRICITY: DECISION CRITERIA FOR SELECTING THE OPTIMAL METHOD

Real options analysis (ROA) can be used as an extension of standard capital investment appraisal techniques in an environment with high uncertainty and sufficient managerial flexibility. Many studies have proven the potential of ROA in the energy sector; however, adoption of this framework among practitioners remains limited because users can find it too complex. This paper presents a review of ROA in energy projects with a focus on projects where the spot price of electricity is one of the main sources of uncertainty determining a project's cashflow. The mainstream ROA methods in the energy sector are identified and contrasted with the properties of the spot price of electricity to subsequently highlight the assumptions the methods are built on and the limitations they have. The review and analysis from the first block are used to present a set of decision criteria, which can be used by practitioners to select the optimal ROA method, with the goal of facilitating the process