Determining the Sustainability of a Community Micro Hydro Power System using Real Options Analysis

Isidro Antonio V. Marfori, Alvin B. Culaba, Aristotle T. Ubando, Ray Anthony Almonares, Wei Hsin Chen

Research output: Contribution to journalConference article

Abstract

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.

Original languageEnglish
Article number012108
JournalIOP Conference Series: Earth and Environmental Science
Volume268
Issue number1
DOIs
Publication statusPublished - 2019 Jul 2
EventInternational Conference on Sustainable Energy and Green Technology 2018, SEGT 2018 - Kuala Lumpur, Malaysia
Duration: 2018 Dec 112018 Dec 14

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valuation
sustainability
power plant
hydroelectric power plant
electricity generation
weather
analysis
project
cost
energy
method

All Science Journal Classification (ASJC) codes

  • Environmental Science(all)
  • Earth and Planetary Sciences(all)

Cite this

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abstract = "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.",
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Determining the Sustainability of a Community Micro Hydro Power System using Real Options Analysis. / Marfori, Isidro Antonio V.; Culaba, Alvin B.; Ubando, Aristotle T.; Almonares, Ray Anthony; Chen, Wei Hsin.

In: IOP Conference Series: Earth and Environmental Science, Vol. 268, No. 1, 012108, 02.07.2019.

Research output: Contribution to journalConference article

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