Economic foundations of energy investments

Abstract

This chapter examines fundamental issues in the valuation of energy investments under uncertainty, using the real options approach (ROA) and market quotations. Certain basic stochastic processes are analyzed that can be used in line with the internal characteristics of energy commodities themselves, and a simple estimate of their parameters is drawn up with quotations from the futures markets to check the goodness of fit between the model and actual data. There is also a description of the conditioning factors that must be met if the ROA method is to be applied correctly. The chapter also offers a number of examples taken from the crude oil, refined petroleum products, 3:2:1 crack spread and carbon markets.