Evaluation of new and renewable energy technologies in Korea using real options |
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Authors: | Yeon‐Sik Jang Deok‐Joo Lee Hyung‐Sik Oh |
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Affiliation: | 1. Department of Industrial Engineering, Seoul National University, , Seoul, South Korea, 151‐744;2. Department of Industrial and Management Systems Engineering, Kyung Hee University, , South Korea, 446‐701 |
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Abstract: | For several years recently, the price of oil has fluctuated due to the weak US dollar and financial risks. In particular, the WTI crude oil price reached $147 per barrel in July of 2008, which is the highest price thus far. An awareness of an impending crisis and concern over climate change are driving an increase in R&D for alternative energy sources instead of fossil‐based energy. However, the researches based on traditional method show negative options about the economic value of new and renewable energy. This paper evaluates the value of new and renewable energy through a real option method which considers the uncertainty associated with fossil energy and the uncertainty of the success of R&D. The evaluating model assumes that the fossil energy price follows a geometric mean reverting process and that the probability of success with R&D on renewal forms of energy follows a binomial probability model. The model considers four options: the option to continue R&D, the option to delay R&D, the option to deploy R&D, and the option to abandon R&D. Finally, the value of Korean R&D on renewal forms of energy is analyzed by the model. Copyright © 2012 John Wiley & Sons, Ltd. |
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Keywords: | real option renewable energy uncertainty mean reverting binomial model |
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