THE EFFECT OF WEATHER-RELATED UNCERTAINTYON THE ADOPTION OF WIND-FARM TECHNOLOGIES

Mr. Alolo A Mutaka,(PhD Student, Finance)

University of Hull Business School, Cottingham Road, HU6 7RX,

Hull, UKemail:a.m.alhassan@2011.hull.ac.uk

Phone: + 44(0)1482463107/+447760657934

The classical investment appraisal techniques and the real options methodology, when applied to the optimization of the adoption of wind-turbine technologies, assume that the output production of the adopted technology is fully predictable. We provide empirical evidence about the Lynn/Inner Dowsing offshore (LIDO) wind-turbine project of Centric Energy, Plc, located at Skegness which shows, however, that this is not always the case. We adjust Paxson and Pinto (2005) model to a monopoly market and derive analytical solutions for the firm’s value function and investment threshold. We calibrate our model with parameters estimated from a data set comprising daily electricity market prices and daily energy power production of the LIDO wind-turbine project of Centrica Energy for the period between January 2011 and December 2011, a unique contribution. Our empirical evidence illustrates, and quantifies, the relevance of considering weather uncertainty when evaluating the adoption of wind-turbine technologies, a variable which is neglected in the current investment appraisal literature. Our results show that the higher the energy market prices and the energy power production volatility the later is the adoption of the technology, and the more negative (positive) is the correlation between the energy market prices and the energy power production, the earlier (later) is the investment.

INTRODUCTION DATAMETHODOLOGY

CONCLUSION

We have observed that the efficiency of the wind turbines does not operate as predetermined as a result of the weather (sun) uncertainty according to our data.

Rising efficiency volatility has been observed to significantly delay the investment in wind turbines.

Rising volatility of revenue from output also delays the investment significantly.

Correlation between market revenue and efficiency also has a significant effect on the investment timing.

Highly negated correlation results in an early investment whiles less negative correlation delays the investment timing significantly

Following (Paxson and Pinto, 2005; Azevedo and Paxson ,2012) ,we developed a real options model for optimizing monopolistic investment in wind turbine technologies

Azevedo, A., and Paxson, D., (2011). Developing Real Option Game Models: Presented at the European Financial Management Association Conference, School of Economic and Management, University of Minho, Braga.

Abadie, L. M., and Chamorro, M., (2012). Valuation of Wind Energy Projects: A Real Options Approach, Working Paper, Basque Centre for Climate Change.

Boomsma, T., Meade, N., and Fleten, S., (2012), Renewable Energy Investments Under Different Support Schemes, A Real Options Approach”, Journal of Operational Research 220, pp. 225-237.

Cortazar G., Schwartz E., and Salinas M., (1998). Evaluating environmental Investments: A Real Options approach, Management Science 44, 1059-1070.

Dixit, A., and Pindyck, R., (1994), Investment under Uncertainty, Princeton NJ, Princeton University Press

Paxson, D., and Pinto, H., (2005). Rivalry under Price and Quantity Uncertainty”, Review of Financial Economics 14, pp. 209-224.

www.centrica.com

RESULTS/SENSITIVITY ANALYSIS

The Effect of Weather - Related Uncertaintyon the Adoption of Wind Turbine Technologies

(Mutaka A Alolo and Alcino Azevedo )

HULL UNIVERSITY BUSINESS SCHOOL, UK

Daily Electricity Market Price Per MWH (Jan-Dec 2011)

Centrica Pic. Wind-Farm Daily Electricity Production (MW) (Jan-Dec 2011)

Sensitivity of the Investment Threshold to Changes in the Volatility of the Energy Power Market Prices and the EAA of the Technology

Sensitivity Analysis of the Investment threshold to Changes in the Volatility of Efficiency of the Technology

There is a wide public outcry about regulating global carbon emissions due to climate change.

For that matter adoption of renewable energy technologies have been encouraged to reduce carbon emissions emanating from energy production.

Investments in Renewable energy technologies are not without uncertainties.

There is always an assumption that renewable energy technologies operate with the same efficiency as predicted.

However, recent research has proved otherwise (see Azevedo and Paxson,2012)

We developed a real options model to optimize technology adoption in the light of weather related(sun) uncertainty and market revenue (output prize ) uncertainty.

We specifically evaluated adoption of LC wind turbine project in the UK using data from an existing wind farm.

Real Options Framework

The Investment threshold

Value function

Lynn/Inner Drowsingwind Farm

Lincs Wind Farm Project

ACKNOWLEDGEMENT

Centrica Plc (energy)

Hull University Business School

USAEE/IAEE

REFERENCES

Sensitivity of the Investment Threshold to Changes in the Correlation between the Energy Power Production and the Energy Power Price

ABSTRACT

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