Economic valuation of wind energy through a real options approach
Gomes de Lima, Dmitry Paladino
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Energy price volatility may result in increased profits for some sectors and unexpected costs for others. Natural gas prices after their initial deregulation in 1989 presented periods of high volatility affecting sectors that rely on the energy as inputs. Energy price volatility has increased the uncertainty of production costs and vectored the agricultural sector in search of alternative energy inputs. This study develops a feasibility analysis using a financial real options approach to assess substituting natural gas powered irrigation systems with either electric or hybrid-(electric/wind) energy systems. The Texas Panhandle and Southwest Kansas geographical areas compromise the study area due to the current presence of a significant number of natural gas powered irrigation systems and consistency of wind velocity that fulfill energy generation requirements of wind turbine systems. Feasibility of quarter-mile sprinkler systems, three crops, and two pumping lifts are assessed. Breakeven points identify the price at which conversion from a natural gas irrigation system to a hybrid system is cost effective. Results indicate that net present value is more susceptible to investment adoption not considering the risk of volatility in input prices and that real option analysis may be a preferential analysis in the valuation of energy investments.