Paquete Seguridad

Investment opportunities to acquire real assets are called real options (Dixit & Pindyck, 1994, p. 7). The three common features that are shared by most of the investments are given as follows (p. 3):

 The initial costs of investments are partially or completely irreversible.

 There are uncertainties over the future rewards from the investments.

 Investments can be postponed to get more information about the future.

A firm with an opportunity to invest is holding an option analogous to a financial option (p.

6). In particular, a financial call option gives the holder the right but not the obligation to pay an exercise price³² until a given date and in return receive an asset that has some value (p. 9).

Further, once the option is exercised, it is irreversible. Although the asset can be sold to another investor, one cannot retrieve the option or the money that was paid to exercise.

31 The information is obtained from the publications of EPDK for licensed RETs over 1 MW_el installed capacity.

32 It is also called the strike price.

21 Similarly, a firm has the option to pay for irreversible investment expenditure (i.e. similar to exercise price) now or in the future, in return for a real asset (e.g. ownership of a hydropower plant) of some value. In analogy to the financial assets, the real assets can be sold to another firm; nevertheless the investment expenditures are irreversible. By exercising the option to invest, the firm forgoes the possibility of resolved uncertainty in the next period which might affect the desirability or timing of the expenditure.

A firm’s option to invest is flexibility by being able to postpone an investment and has a value that is not accounted for in net present value analysis (NPV). The NPV of an investment is the difference between the present value of cash inflows (i.e. income) and the present value of the cash outflows (i.e. fixed costs, variable costs, etc.) including the investment cost (see Figure 6 for discrete time NPV analysis). If the NPV of an investment is greater than zero, then the investment should be made and if it is vice versa, the investment should not be made. Hence, the NPV analysis provides a deterministic evaluation of an investment opportunity without considering the value of waiting as an option. This lost option value is an opportunity cost that can be accounted for as part of the investment cost by utilizing the method of real options.

Figure 6- The discrete time NPV analysis (own illustration)

In this study, the level of FLHs of operation to trigger investment in RETs are quantified w.r.t. the different degrees of flexibility (i.e. immediate and flexible decisions) and different levels of discount rate. By using the NPV approach, the break-even price of an investor’s immediate investment decision can be calculated by equating the present value of the revenues to the total cost and then by solving for the break-even price³³ (also can be called

33 In the Chapter 5, detailed information is given about the calculations.

Cash Flow ($)

Cash Inflows (CI)

Cash Outflows (CO)

Investment Cost (I0)

Time (t) Discount Rate (r)

t=T t=0

22 trigger/threshold price). Accordingly, the decision rule is to invest, if the FiT rate exceeds the calculated breakeven price without taking into account the uncertainty in revenues after the expiration of enrollment in the FiT scheme. In analogy, threshold values for FLHs of operation, which are necessary to trigger investments, can be calculated due to an immediate investment decision. A threshold value for FLHs (i.e. called threshold FLHs) of operation indicates the level above/below which investments should be made/not be made given the FiT rates for RETs. In this respect, the threshold FLHs of operation of a considered technology corresponds to the break-even price which is set as high as the corresponding FiT rate.

By utilizing the real options method, the level of FLHs of operation to trigger investment in RETs can be quantified by taking into account the uncertainty in the wholesale market price of electricity. The type of real option, which is utilized for the analysis, is the option “to postpone an investment”, with the objective of maximizing the profits from investment opportunities in RETs. By using this general approach, the investment trigger price corresponding to the FLHs of operation of a project can be calculated taking into account the uncertainty and then, the calculated price can be compared with the expected market price³⁴ whether to initiate an investment or not. More specifically, the risk adjusted break-even prices are calculated indicating a trigger level below which firms are considered to wait further; even though the NPV based break-even prices may indicate the opposite. Accordingly, the decision rule is to invest the first time the expected market price of electricity exceeds a risk adjusted breakeven price. In analogy to the general approach, threshold FLHs of operation indicates the level above/below which investments should be made/postponed given the expected market price of electricity. In this respect, the threshold FLHs of operation of a considered technology corresponds to the investment trigger price which is set as high as the expected market price of electricity.

To sum up, the results of the mentioned analyses indicate above which level of FLHs to initiate an investment and below which level not to invest on RETs in the period 2016-2023.

Accordingly, a discussion on the energy policy 2023 is carried out whether the capacity expansion targets are reachable or not by comparing the calculated threshold FLHs of operation of RETs with the resource quality of renewable energy resources in Turkey.

34 It refers to the expected annual average wholesale market price of electricity. Note that the expected market price of electricity in the period 2016-2023 is simulated by utilizing the Monte Carlo simulation approach prior to the analysis.

23 The assumptions for the calculation of the trigger prices and also the threshold FLHs are given below:

 The investments on RETs are irreversible.

 The uncertainty in the value of the project arises from annual average price of electricity in the spot market, while all other inputs are deterministic. Also, no fuel costs are incurred for electricity generation.

 The value of the project underlying the real option follows an exogenously specified stochastic process (i.e. geometric Brownian motion).

 The geometric Brownian motion is claimed to be not leading to large errors without considering short term mean reversion (on the order of 5%), since it is indicated that the short-term mean reversion has minor influence for the long-term investment decision rules (Pindyck, 1999, pp. 24-25).

 The due date of an investment initiation (i.e. due to license obligation) can be extended or a new license can be acquired; in order to enable an investment opportunity that does not expire (i.e. in analogy to a perpetual call option).

The novelty³⁵ of this study lies in the application of the NPV and the real option analysis to calculate threshold FLHs of operation w.r.t. the different degrees of flexibility and different levels of discount rate. The NPV and the real option analyses have been previously applied on the evaluation of the power plants investments in the Nordic region and Turkey.

Fleten et al. (2007) applied real option method for evaluating investments in decentralized renewable power generation under price uncertainty by assessing the value of option to postpone an investment in Nordic markets. Further, Bøckman et al. (2008) applied real option method on three different Norwegian small hydropower projects for making optimal investment decision by assessing the value of option to postpone an investment. Furtmore, Fleten and Ringen (2009) applied real option method for analyzing the path of the expansion of wind power farms and small hydropower plants in Norway. Moreover, Boomsma et al.

(2012) analyzed investment timing and capacity choice for renewable energy projects according to feed-in tariffs and renewable energy certificate trading in the Nordic region.

Finally, Nygård (2013) analyzed the effect of introducing renewable energy certificates on small hydropower plant investments in Norway.

35 See footnote 17 on page 8 for detailed information concerning the novelty of this approach.

24 Kumbaroglu et al. (2005) analyzed the development of the power plant investments in the period 2008-2025 in Turkey by using a real option based investment planning model. In addition, the learning curve information of renewable power generation technologies was integrated into a dynamic programming formulation. Further, Madlener and Stoverink (2010) evaluated the economic feasibility of constructing a 560 MW coal-fired power plant in Turkey by calculating the real options values as a sequential investment. Furthermore, Yılmaz (2014) analyzed uncertainty-investment relationship for coal fired power plant investments in Turkey. Finally, Onar and Kılavuz (2015) analyzed wind power plant investments in Turkey as a put option created through the feed-in tariffs for the wind power plant investments.

Organization of the Study