A real options analysis of existing green energy facilities: maintain or replace?

We consider an operator of machinery with deteriorating efficiency, facing the problem of optimally timing of either a minor (maintenance) investment or a major (replacement) investment under price uncertainty. If a maintenance investment is chosen, the efficiency of the machinery will deteriorate m...

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Bibliographic Details
Published in:Energy systems (Berlin. Periodical) 2024-08, Vol.15 (3), p.993-1025
Main Authors: Dønnestad, E. M., Fleten, S.-E., Kleiven, A., Lavrutich, M., Teige, A. M.
Format: Article
Language:English
Subjects:
Alternative energy
Clean energy
Economics and Management
Energy
Energy Policy
Energy Systems
Green energy
Hydroelectric plants
Hydroelectric power
Investment
Machinery
Maintenance
Operations Research/Decision Theory
Optimization
Original Paper
Renewable energy
Repair & maintenance
Wind farms
Wind power
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Summary:We consider an operator of machinery with deteriorating efficiency, facing the problem of optimally timing of either a minor (maintenance) investment or a major (replacement) investment under price uncertainty. If a maintenance investment is chosen, the efficiency of the machinery will deteriorate more slowly, and replacing later is still possible. The optimal decision rule is expressed in the form of thresholds for long-run prices, indicating that it may be rational to wait to see which of the large and small investment is the better choice. We relate the setting to repowering of green energy facilities, such as hydropower plants and wind farms. Our analysis provides several managerial insights. We characterize the conditions that govern whether the smaller investment should be considered at all, and we quantify the effect of having a replacement option embedded in a maintenance option. Our analysis demonstrates that the large investment may get postponed significantly in expectation, which recognizes maintenance as a temporary alternative to replacement.
ISSN:1868-3967
1868-3975
DOI:10.1007/s12667-022-00505-8