Research On The Application Of Real Options In Generation Investment Decision-making

Traditional net present value methods(NPV)do not consider the uncertainties that a generation investment project faces in the market while real option approach(ROA) can give full consideration to the possible changes in the market environment.Such changes have great impact on generation investment decision-making.They may bring potential risks but may also bring potential profit opportunities.In this paper we first discussed and compared the NPV method and ROA.And real option pricing models for generation project were built.An improved approach to calculate the volatility in pricing model was given.Then as a case study,NPV and ROA methods were applied respectively to evaluate the values of 3 generation investment projects in the East China electricity market.The comprehensive analyses show that ROA is a more reasonable technical and economic evaluation method.Finally,the B-S model was successfully programmed in Excel spreadsheet.