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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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Published in: | Energy systems (Berlin. Periodical) 2024-08, Vol.15 (3), p.993-1025 |
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container_title | Energy systems (Berlin. Periodical) |
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creator | Dønnestad, E. M. Fleten, S.-E. Kleiven, A. Lavrutich, M. Teige, A. M. |
description | 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. |
doi_str_mv | 10.1007/s12667-022-00505-8 |
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M.</creatorcontrib><creatorcontrib>Fleten, S.-E.</creatorcontrib><creatorcontrib>Kleiven, A.</creatorcontrib><creatorcontrib>Lavrutich, M.</creatorcontrib><creatorcontrib>Teige, A. M.</creatorcontrib><collection>SpringerOpen</collection><collection>CrossRef</collection><collection>Mechanical & Transportation Engineering Abstracts</collection><collection>Technology Research Database</collection><collection>Engineering Research Database</collection><collection>Civil Engineering Abstracts</collection><jtitle>Energy systems (Berlin. Periodical)</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Dønnestad, E. M.</au><au>Fleten, S.-E.</au><au>Kleiven, A.</au><au>Lavrutich, M.</au><au>Teige, A. M.</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>A real options analysis of existing green energy facilities: maintain or replace?</atitle><jtitle>Energy systems (Berlin. 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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 |
title | A real options analysis of existing green energy facilities: maintain or replace? |
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