Economic Foundations of Energy Investments - Green Energy and Efficiency: An Economic Perspective - page 59

Economic Foundations of Energy
Investments

Luis M. Abadie

Abstract This chapter examines fundamental issues in the valuation of energy
investments under uncertainty, using the real options approach (ROA) and market
quotations. Certain basic stochastic processes are analyzed that can be used in line
with the internal characteristics of energy commodities themselves, and a simple
estimate of their parameters is drawn up with quotations from the futures markets to
check the goodness of t between the model and actual data. There is also a

description of the conditioning factors that must be met if the ROA method is to be
applied correctly. The chapter also offers a number of examples taken from the
crude oil, re

ned petroleum products, 3:2:1 crack spread and carbon markets.

Keywords Energy investment Uncertainty Real options Energy markets

Stochastic models Crack spread

1 Introduction

The valuation of energy assets may be a complex task, partly because they involve
multiple uncertainties, long useful lifetimes and technical characteristics which in
some cases mean that valuations must take into account their optimum operating
mode, due to the

exibility with which they may be managed, even though that

exibility may in some cases be reduced to a choice of producing or not producing.
Companies draw up valuations taking into account their expected yields and the
risks that they assume, but not all the bene

ts of energy investments are felt at
company level 1 : such investments may have a signi cant impact in terms of welfare

1

This is not exclusive to energy investments.