Utilities Examples

Utilities Example #1

Investing in a Cogeneration Plant

  • Asymmetry
  • Downstream Decisions
  • Multiple Attributes
  • Perform Subtrees
  • Learning
  • Real Options Analysis

Brandão, Luiz. "Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant." Revista de Administração Mackenzie 12.4 (2011): Scielo. Web. 5 Aug. 2016

DPL Decision Tree for Valuing a Highway Concession with Real Options

Energy generation from biomass has become a source of increasing interest due to growing environmental concerns and the depletion of the world's fossil fuel reserves. In this DPL application a sugar and ethanol producing plant has both the option to expand and to add a cogeneration unit to allow the sale of surplus energy that is generated by burning sugar cane bagasse. The existence of the second option is conditional to the exercise of the first option. A real options approach is employed to determine the value of these managerial flexibilities, considering that these options have three distinct underlying assets (sugar, ethanol, and electricity).

The option to expand production is a function of the expected future prices of sugar and ethanol, while the decision to invest in the cogeneration plant depends on the future prices of energy. The analysis results indicate that significant value can be derived from the flexibility to choose the optimal timing of investment in both options. Few sugar cane crushing mills currently have cogeneration units installed, and given the increasing demand for clean and renewable sources of energy, there is significant potential for investment and further development of bioelectricity cogeneration power plants.

Utilities Example #2

Analyzing a Wind Project Investment Decision

DPL Decision Tree for Wind Project Investment Decision

This example analyzes the invest decision of a hypothetical wind project -- one that has the opportunity to negotiate energy in auctions held 5 years before the first delivery commitment (A-5 auctions, which are held in the regulated market). This 5 year option was offered as a way to allow firms to potentially achieve higher profitability by negotiating energy in the deregulated market. Should the investor decide to begin construction immediately after the auction, energy produced from years 3-5 can be negotiated in the deregulated market.

Real Options theory is applied, leading to results that indicate -- with current low wind energy prices -- it is most likely that the firm would not take advantages of the flexibility granted by the A-5 auction to negotiate energy for the deregulated market. The firm would instead likely wait for better CapEx and price conditions before initiating construction. With construction commencing in years 2 or 3 there is little time left for delivering energy to the deregulated market. The attempt to bolster the deregulated market through these A-5 auctions seem misguided.

DPL Decision Tree for Wind Project Investment Decision


Brandão, Dalbem, & Gomes. "Brazil's Quest to also Foster Wind Energy in the Deregulated Market: Will it work?." USAEE.org. Web. 7 Sept. 2012