Modeling and evaluating an investment without any delay in renewable resources based on real option approach (Case study: Optimal feed-in tariff for solar renewable resource in Iran)

Subject Areas : Financial engineering

Reyhaneh Sayyadinejad ¹ , Ali Mohammad Kimiagari ²

1 - Financial Engineering Group, Faculty of Industrial Engineering and Management Systems, Amirkabir University of Technology, Tehran, Iran
2 - Financial Engineering Group, Faculty of Industrial Engineering and Management Systems,, Amirkabir University of Technology, Tehran, Iran

Received: 2020-07-13 Accepted : 2020-09-02 Published : 2021-03-21

Keywords: Uncertainty, investment, Real Option, Renewable Resources, Optimal Tariff,

Abstract :

Investors are faced with a wide range of investment options. Considering the growing demand for energy and the limitations of non-renewable resources (RES) , the importance of modeling and evaluating investment in RES has become significant for both investors and policymaker. The purpose of this study is to model and evaluate investment in RES with the aim of attracting investors without delay by determining the optimal level of the RE tariff by applying the Real Option approach (ROA). For modeling, a five-factor set of uncertainty, delay option, climatic differences has been considered and for implementation, a combination of backward dynamic programming algorithm, Monte Carlo simulation and geometric Brownian motion has been used. The results show investing in RES without considering the subsidy is not attractive for investors to investment without delay and then investors and policymakers need to apply ROA to evaluate and invest. The optimal tariff is estimated at an average of 503,000 Rials and the tariff should be adjusted according to the climatic conditions. By technology advancement, Implementation of CO2 trading scheme, the investment value increases and the optimal subsidy is reduced. The optimal subsidy is directly related to tax rate, capacity, exchange rate, discount rate and volatility.