BEA525 Financial Engineering in Energy Markets using Real Options

• 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 are 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

  The course will be delivered over 15 hours of lectures and will involve preparation before the course begins and self-study after it ends. Specifically, preparation and self-study involve:

  • Reading material before the first lecture: Chapters 1-4 of Dixit and Pindyck (1994)
  • Presentation of a research paper
  • Coursework comprising of exercises and an essay.

• Restricted access

  Open to all candidates in a Norwegian PhD program.

• Compulsory Activity

  Presentation of paper.

  Compulsory activities (work requirements) are valid for one semester after the semester they were obtained.

• Assessment

  Assignment (individual).

  Re-take is offered the semester after the course was offered for students with valid compulsory activities (work requirements).

• 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).