Real Options Analysis for Investment Decisions in Geothermal Energy

Abstract

Geothermal renewable energy can contribute to the reduction of greenhouse gas emissions. However, difficulties have been encountered during its development. It is characterized by high-risk investment and irreversibility, whereas traditional investment analysis techniques have limited applications. As a tool for evaluating energy investments, the real options theory allows flexibility to be incorporated into project design in the face of an uncertain environment and has demonstrated the ability to add economic value to investments. Based on simulations of a geothermal project implemented in Brazil in a real-options framework specifically adapted for the analysis of geothermal investments, this study demonstrates that the tool is efficient in adding economic value to the analysis. In addition, it provides a comprehensive view of the project, identifying the managerial flexibilities and uncertainties that influence profits the most. This model is expected to encourage researchers and investors to evaluate geothermal energy projects in Brazil.