Valuation models for future energy clusters considering market, technology and policy uncertainty - Case Study Biomass

Market liberalization, technological change and increasing complexity of international policy processes (e .g. climate negotiations) necessitate new approaches to evaluating investments in an uncertainty and risk-augmented framework. This project developed valuation methods from financial theory - such as real options valuation and portfolio optimization - to quantify the relative competitiveness of bioenergy chains and total energy systems.

Short Description




Using the Real Options approach the decision maker, be it a manager in the energy market or a market regulator, is able to give robust investment judgment on the issue whether a bioenergy project will turns out to be economically viable. Such judgment is based on present conditions, but also under the aspects of a very uncertain trajectory of key determinants governing the future behavior of the market. Market and policy uncertainties were appraised by a number of computer runs of a deterministic variant of the iPLAN/MESSAGE model runs. From a family of these scenarios stochastic price processes were estimated, which in turn entered a Real Options model. The flexibility of biomass technologies were was described by detailed engineering costing models. Scenario analysis showed that increased flexibility and diversification enabled the investor to cushion potential negative impacts of risk and uncertainty on the investment project and allowed to size profit opportunities more effectively. Contrarily Conversely, ignorance of flexibilities in the assessment of power plant investments necessarily leads to myopia in entrepreneurial behavior (i. e., when investment decisions are guided by short-term signals), which, on the sector aggregate, can lead to losses of competitiveness, robustness and the sustainability of the entire energy system. This is due to the fact that investors, on the basis of the Real Options concept, may find it rational to postpone investments given a positive option value for of waiting. This was exactly the focal point of our theoretical and practical investigation since Real Options Theory allowed us to incorporate the properties of technological flexibility (vis-à-vis the emerging market uncertainty) in the financial appraisal of the bioenergy project.

The following project results were obtained:

  • Risk-augmented assessment of biomass technologies based on their respective technological properties.
  • Assessment of innovation policies/ and projects using methods from the finance literature.
  • Planning software for robust investment decisions in biomass plants in a decision making environment of multiple uncertainties.
  • Optimal timing for investments and /policy measures under uncertainties.
  • Planning software for portfolio optimization of several power plants based on so-called 'Conditional Value at Risk' metrics.

Project Partners

Project management

Michael Obersteiner
International Institute for Applied Systems Analysis (IIASA)
A-2361 Laxenburg, Austria
Phone: +43 (2236) 807-460
Fax: +43 (2236) 807-599
Internet: IIASA - International Institute for Applied Systems Analysis

Project and cooperation partners

  • Integriertes Ressourcen Management (IRM)