Engineering in Energy Markets using Real Options

BEA525 Engineering in Energy Markets using Real Options

Autumn 2020

  • Topics

    This course offers a balanced treatment of real options theory focusing on applications within the area of emerging technologies and the energy sector. Real options account for decision making under uncertainty while reflecting the value from embedded managerial discretion. Examples of the latter include discretion over investment timing, capacity size, operations, and technology choice. Since investment and operational problems in the energy sector are sensitive to a wide range of uncertainties, e.g. price, technological and policy, they are amenable to analysis by the real options approach as it accounts for uncertainty, technology choice, and strategic interactions. Consequently, real options theory allows for the assessment of strategies that would not have been able to be addressed otherwise, and, therefore, offers an enhancement of the traditional net present value (NPV) approach, which is unable to capture the value of discretion over the timing and sequential decision- making. In this course, we will begin with a thorough treatment of the theory of real options and present the latest developments by discussing topics from recent research papers. Subsequently, we will proceed to illustrate how it may be applied to relevant problems in the energy sector and emerging technologies within a deregulated environment

  • Learning outcome

    After successfully completing the course, the candidates should be able to:

    Knowledge

    • analyze and evaluate real options theory and its potential and limitations within the area of emerging technologies and the energy sector
    • identify sensitivity to a wide range of uncertainties related to investment timing, capacity size, operations, technology choice, and strategic interactions in the energy sector

    Skills

    • review, assess and utilize relevant scientific papers addressing real options
    • formulate and model decision making under uncertainty including discretion over investment timing and strategic interactions
    • identify the applicability to relevant problems in the energy sector and emerging technologies within a deregulated environment

    Competence

    • take part in and manage interdisciplinary research involving strategic investment decisions in emerging technologies
    • assess strategies that cannot be valued by classical NPV, to capture the value of discretion over timing and sequential decision making

  • Teaching

    Intensive one week (3 days): The course will consist of 15 hours of lectures and involve self-study before and after the course. These are

    • Pre-reading materials before the first meeting Chapters 1-4 in Dixit and Pindyck (1994)
    • A group presentation of one of the research papers 
    • Exercises and an essay

  • Requirements for course approval

    Presentation of paper

  • Assessment

    Assignment/Essay

  • Grading Scale

    Pass/Fail

  • Literature

    References and reading materials Dixit, AK and RS Pindyck (1994), Investment under Uncertainty, Princeton University Press, Princeton, NJ, USA (ISBN: 0-691-03410-9)

Overview

ECTS Credits
5
Teaching language
English
Semester

Autumn. Autumn 2020.

If necessary, depending on the Corona situation the course will be digital. 

Note: This course description was formerly published with a disclaimer regarding potential changes to teaching methods, mandatory requirements and assessment. The course description has now been updated, and this is the final version.

Course responsible

Dr Michail Chronopoulos, City University of London/(FOR)