On Application of Real Option Analysis to Electric Utilities Sector

Abstract

Author: Yuri Y. Dranev National Research University The Higher School of Economics dranioff@hotmail.com

Attraction of investments is one of the key problems which have to be solved to continue development of Russian electric utilities sector. High uncertainty of tariff price caps regulation and volatility of prices of energy sources have a negative impact on investment climate in this sector. However real option analysis (ROA) allows to implement management flexibility under constantly changing environment and look at risks of investment in utilities from another point of view.This paper provides a review of  literature on ROA applications to valuation of investment projects and management decisions. Particularly an approach to valuation of GENCO is considered, implementing real options (spark spread options) on electricity price with strike which depends on price of energy sources. Major attention of researches attracted also to options to switch from one energy source to another including renewable sources. Energy efficiency plays an important role in development of electric utilities sector. That is why methods of valuations of investments in energy efficiency are considered.