Real Options Valuation of Wind Energy Based on the Empirical Production Uncertainty

Using a real options approach, we analyze the valuation of wind energy projects and associated investment decisions while accounting for both price and production uncertainty. We propose a new approach to explicitly incorporate production uncertainty into the valuation. Specifically, we account for the production risk using a stochastic process for wind speed, a cubic spline model for the conversion of wind speed to wind electricity, and a Bayesian procedure for estimating and forecasting the wind electricity processes. In a case-study on a comprehensive dataset of a Dutch offshore wind farm, we evaluate the financial consequences of ignoring production risk for different levelized costs of energy values. We find that fixing the production at a capacity factor value leads to substantial underestimation of the real options value, and relying on theoretical instead of empirical power curves leads to overestimation.