A real options approach to investment timing decisions in utility-scale renewable energy in Ghana

Abstract

a b s t r a c t Private capital is required to urgently complement government's efforts to meet initial capital outlay in renewable energy investments. However, minimising the downside risks for a given return in such a venture presents valuation challenges, including the timing of such investments. Investment timing is therefore relevant to consider when making investments in utility-scale renewable energy technologies which require high initial capital. This study assesses the value of investment delay in renewable energy projects using real options analysis. A model that combines binomial trees and Monte Carlo simulations are used to evaluate the optimal investment timing of the first cycle of Ghana's Renewable Energy Master Plan. The model in- corporates multiple dimensions of uncertainties related to market, economic and technological factors to determine the value of delaying utility-scale renewable energy investments. The results show value in delaying investments until uncertainties are reduced and maximum benefit is obtained. Also, high system capacities and favourable renewable energy policies that border on attractive feed-in tariffs are required to drive private investment in utility-scale renewable energy.