Real option valuation in renewable energy literature: research focus, trends and design

Abstract

In light of intensive development of the renewable energy (RE) sector, a growing number of academic papers address the complexity of RE investment planning and valuation. To take account of the high-risk profile and irreversibility of RE investments, researchers have resorted to sophisticated real options (RO) approaches that enable flexibility to be incorporated into project design in the face of an uncertain environment. The variety of different frameworks and models adopted as well as a lack of aggregated analysis of the field suggest a need for a critical review of RO methodology and design in RE assessment. This study describes the research focus, trends and design found in contemporary academic literature devoted to RE valuation with a RO approach. Particular attention is given to RO in project and policy design. The results give a comprehensive picture of existing research on the topic, thus providing researchers with a solid foundation for further study and indications of directions for future development. Furthermore, the findings provide policymakers and project planners with valuable insights into key aspects of RE project and policy design.