DOI: https://doi.org/10.14710/ijred.2022.45913

Decision Support for Investments in Sustainable Energy Sources Under Uncertainties

1Department of Science Education, Br. Andrew Gonzalez FSC College of Education, De La Salle University, Manila, Philippines

2Center for Human Development, University of Science and Technology of Southern Philippines, Cagayan de Oro, Philippines

3Ceriaco A. Abes Memorial National High School, Calapan, Oriental Mindoro, Philippines

4 Department of Community and Environmental Resource Planning, College of Human Ecology, University of the Philippines Los Baños, Laguna, Philippines

View all affiliations
Received: 25 Apr 2022; Revised: 30 May 2022; Accepted: 3 Jun 2022; Available online: 10 Jun 2022; Published: 4 Aug 2022.
Editor(s): H. Hadiyanto
Open Access Copyright (c) 2022 The Author(s). Published by Centre of Biomass and Renewable Energy (CBIORE)
Creative Commons License This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Citation Format:
Abstract

Investment in sustainable energy sources is one of the climate mitigation strategies that can significantly reduce greenhouse gas emissions in the energy sector. However, in developing countries, investment is challenged by high capital expenditures and several uncertainties. This paper aims to provide decision support for investment in sustainable energy projects by evaluating the comparative attractiveness of shifting energy sources from fossil fuels to renewables and nuclear. Applying the real options approach (ROA), this paper calculates the value of the flexibility to postpone the investment decision and identifies the optimal timing (described here as the trigger price of coal) for shifting to sustainable energy sources. Then, various uncertainties are considered, such as coal and electricity prices, negative externality of using fossil fuels, and the risk of a nuclear accident, which are modelled using geometric Brownian motion, Poisson process, and Bernoulli probability. Applying the ROA model in the case of the Philippines, results find that investing in sustainable energy is a better option than continuing to use coal for electricity generation. However, contrary to conventional option valuation result that waiting is a better strategy, this study found that delaying or postponing the investment decisions may lead to possible opportunity losses. Among the available sustainable energy sources, geothermal is the most attractive with trigger prices of coal equal to USD 49.95/ton, followed by nuclear (USD 58.55/ton), wind (USD 69.48/ton), solar photovoltaic (USD 72.04/ton), and hydropower (USD 111.14/ton). Also, the occurrence of jump (extreme) prices of coal, raising the current feed-in-tariff, and considering negative externalities can decrease the trigger prices, which favor investments in sustainable energies. Moreover, the risk of a nuclear disaster favors investment in renewable energy sources over nuclear due to the huge damage costs once an accident occurs. Results provide bases for policy recommendations toward achieving a more secure and sustainable energy sector for developing countries that are highly dependent on imported fossil fuels.

Fulltext View|Download
Keywords: renewable energy; nuclear energy; real options; nuclear disaster; negative externality; Poisson jump; dynamic optimization

Article Metrics:

Article Info
Section: Original Research Article
Language : EN
Recent articles
Experimental Investigation of Bladeless Power Generator from Wind-induced Vibration Numerical Investigation of Solidity Effect Based on Variable Diameter on Power Performance of H-type Darrieus Vertical Axis Wind Turbine (VAWT) Short Term Solar Irradiation Forecasting using CEEMDAN Decomposition Based BiLSTM Model Optimized by Genetic Algorithm Approach More recent articles
Most cited articles
Potency of Microalgae as Biodiesel Source in Indonesia Comparative Analysis of Biodiesels from Calabash and Rubber Seeds Oils The Social Aspects and Public Acceptance of Biomass Giving the Example of a Hungarian Region Mathematical Modelling of Solar Photovoltaic Cell/Panel/Array based on the Physical Parameters from the Manufacturer’s Datasheet Techno-economic Analysis of a Wind-Diesel Hybrid Power System in the South Algeria More cited articles
  1. Abdelhady, S. (2021). Performance and cost evaluation of solar dish power plant: sensitivity analysis of levelized cost of electricity (LCOE) and net present value (NPV). Renewable Energy, 168, 332-342. https://doi.org/10.1016/j.renene.2020.12.074
  2. Abdul-Salam, Y. (2022). A Real Options Analysis of the Effects of Oil Price Uncertainty and Carbon Taxes on the Optimal Timing of Oil Field Decommissioning. The Energy Journal, 43(6). https://doi.org/10.5547/01956574.43.6.yabd
  3. Adedoyin, F. F., Ozturk, I., Agboola, M. O., Agboola, P. O., & Bekun, F. V. (2021). The implications of renewable and non-renewable energy generating in Sub-Saharan Africa: The role of economic policy uncertainties. Energy Policy, 150, 112115. https://doi.org/10.1016/j.enpol.2020.112115
  4. Afful-Dadzie, A., Afful-Dadzie, E., Abbey, N. A., Owusu, B. A., & Awudu, I. (2020). Renewable electricity generation target setting in developing countries: Modeling, policy, and analysis. Energy for Sustainable Development, 59, 83-96. https://doi.org/10.1016/j.esd.2020.09.003
  5. Agaton, C. (2017). Coal, Renewable, or Nuclear? A Real Options Approach to Energy Investments in the Philippines. International Journal of Sustainable Energy and Environmental Research, 6(2), 50-62. https://doi.org/10.18488/journal.13.2017.62.50.62
  6. Agaton, C. B. (2018). Use coal or invest in renewables: a real options analysis of energy investments in the Philippines. Renewables: Wind, Water, and Solar, 5(1). https://doi.org/10.1186/s40807-018-0047-2
  7. Assadi, M. R., Ataebi, M., Ataebi, E. s., & Hasani, A. (2022). Prioritization of renewable energy resources based on sustainable management approach using simultaneous evaluation of criteria and alternatives: A case study on Iran's electricity industry. Renewable Energy, 181, 820-832. https://doi.org/10.1016/j.renene.2021.09.065
  8. Assereto, M., & Byrne, J. (2021). No real option for solar in Ireland: A real option valuation of utility scale solar investment in Ireland. Renewable and Sustainable Energy Reviews, 143, 110892. https://doi.org/10.1016/j.rser.2021.110892
  9. Azam, A., Rafiq, M., Shafique, M., Zhang, H., & Yuan, J. (2021). Analyzing the effect of natural gas, nuclear energy and renewable energy on GDP and carbon emissions: A multi-variate panel data analysis. Energy, 219, 119592. https://doi.org/10.1016/j.energy.2020.119592
  10. Azari Marhabi, A., Arasteh, A., & Paydar, M. M. (2021). Sustainable energy development under uncertainty based on the real options theory approach. International Journal of Environmental Science and Technology. https://doi.org/10.1007/s13762-021-03763-8
  11. Beaver, W. (1994). Nuclear nightmares in the Philippines. Journal of Business Ethics, 13(4), 271-279. https://doi.org/10.1007/bf00871673
  12. Behling, N., Williams, M. C., Behling, T. G., & Managi, S. (2019). Aftermath of Fukushima: Avoiding another major nuclear disaster. Energy Policy, 126, 411-420. https://doi.org/10.1016/j.enpol.2018.11.038
  13. Bilgen, S., & Sarıkaya, İ. (2018). Energy conservation policy and environment for a clean and sustainable energy future. Energy Sources, Part B: Economics, Planning, and Policy, 13(3), 183-189. https://doi.org/10.1080/15567249.2017.1423412
  14. Borozan, D. (2022). Asymmetric effects of policy uncertainty on renewable energy consumption in G7 countries. Renewable Energy, 189, 412-420. https://doi.org/10.1016/j.renene.2022.02.055
  15. Chi, M., Zhang, D., Zhao, Q., Yu, W., & Liang, S. (2021). Determining the scale of coal mining in an ecologically fragile mining area under the constraint of water resources carrying capacity. Journal of Environmental Management, 279, 111621. https://doi.org/10.1016/j.jenvman.2020.111621
  16. Cho, H. S., & Woo, T. H. (2017). Cyber security in nuclear industry – Analytic study from the terror incident in nuclear power plants (NPPs). Annals of Nuclear Energy, 99, 47-53. https://doi.org/10.1016/j.anucene.2016.09.024
  17. Cho, J., Lee, S. H., Kim, J., & Park, S. K. (2022). Framework to model severe accident management guidelines into Level 2 probabilistic safety assessment of a nuclear power plant. Reliability Engineering & System Safety, 217, 108076. https://doi.org/10.1016/j.ress.2021.108076
  18. Collera, A. A., & Agaton, C. B. (2021). Opportunities for Production and Utilization of Green Hydrogen in the Philippines. International Journal of Energy Economics and Policy, 11(5), 37-41. https://doi.org/10.32479/ijeep.11383
  19. Cueto, L. J., Frisnedi, A. F. D., Collera, R. B., Batac, K. I. T., & Agaton, C. B. (2022). Digital Innovations in MSMEs during Economic Disruptions: Experiences and Challenges of Young Entrepreneurs. Administrative Sciences, 12(1), 8. https://doi.org/10.3390/admsci12010008
  20. Danish, Ozcan, B., & Ulucak, R. (2021). An empirical investigation of nuclear energy consumption and carbon dioxide (CO2) emission in India: Bridging IPAT and EKC hypotheses. Nuclear Engineering and Technology, 53(6), 2056-2065. https://doi.org/10.1016/j.net.2020.12.008
  21. DOE. (2021). Philippine Energy Plan 2020-2040. Philippines Department of Energy. Retrieved 17 April 2022 from https://www.doe.gov.ph/sites/default/files/pdf/pep/PEP_2020-2040_signed_01102022.pdf
  22. Du, Y., & Takeuchi, K. (2020). Does a small difference make a difference? Impact of feed-in tariff on renewable power generation in China. Energy Economics, 87, 104710. https://doi.org/10.1016/j.eneco.2020.104710
  23. Duman, A. C., & Güler, Ö. (2020). Economic analysis of grid-connected residential rooftop PV systems in Turkey. Renewable Energy, 148, 697-711. https://doi.org/10.1016/j.renene.2019.10.157
  24. Feng, Z., Wu, X., Chen, H., Qin, Y., Zhang, L., & Skibniewski, M. J. (2022). An energy performance contracting parameter optimization method based on the response surface method: A case study of a metro in China. Energy, 248, 123612. https://doi.org/10.1016/j.energy.2022.123612
  25. Ge, M., Friedrich, J., & Vigna, L. (2022). 4 Charts Explain Greenhouse Gas Emissions by Countries and Sectors. World Resources Institute. Retrieved 19 April 2022 from https://www.wri.org/insights/4-charts-explain-greenhouse-gas-emissions-countries-and-sectors
  26. Gielen, D., Boshell, F., Saygin, D., Bazilian, M. D., Wagner, N., & Gorini, R. (2019). The role of renewable energy in the global energy transformation. Energy Strategy Reviews, 24, 38-50. https://doi.org/10.1016/j.esr.2019.01.006
  27. Gulagi, A., Alcanzare, M., Bogdanov, D., Esparcia, E., Ocon, J., & Breyer, C. (2021). Transition pathway towards 100% renewable energy across the sectors of power, heat, transport, and desalination for the Philippines. Renewable and Sustainable Energy Reviews, 144, 110934. https://doi.org/10.1016/j.rser.2021.110934
  28. Guno, C. S., Agaton, C. B., Villanueva, R. O., & Villanueva, R. O. (2021). Optimal Investment Strategy for Solar PV Integration in Residential Buildings: A Case Study in The Philippines. International Journal of Renewable Energy Development, 10(1), 79-89. https://doi.org/10.14710/ijred.2021.32657
  29. Huhtala, A., & Remes, P. (2017). Quantifying the social costs of nuclear energy: Perceived risk of accident at nuclear power plants. Energy Policy, 105, 320-331. https://doi.org/10.1016/j.enpol.2017.02.052
  30. Ilalan, D. (2016). A Poisson process with random intensity for modeling financial stability. The Spanish Review of Financial Economics, 14(2), 43-50. https://doi.org/10.1016/j.srfe.2015.10.001
  31. IPCC. (2022). The evidence is clear: the time of action is now. We can halve emissions by 2030. Intergovernmental Panel on Climate Change. Retrieved 19 April 2022 from https://www.ipcc.ch/2022/04/04/ipcc-ar6-wgiii-pressrelease/
  32. IRENA. (2022). World Energy Transistions Outlook 2022: 1.5°C Pathway. International Renewable Energy Agency. Retrieved 17 April 2022 from https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2022/Mar/IRENA_WETO_Summary_2022.pdf?la=en&hash=1DA99D3C3334C84668F5CAAE029BD9A076C10079
  33. Isaza Cuervo, F., Arredondo-Orozco, C. A., & Marenco-Maldonado, G. C. (2021). Photovoltaic power purchase agreement valuation under real options approach. Renewable Energy Focus, 36, 96-107. https://doi.org/10.1016/j.ref.2020.12.006
  34. Jacobson, M. Z. (2020). 100% Clean, Renewable Energy and Storage for Everything. Cambridge University Press
  35. Jorli, M., Van Passel, S., & Sadeghi Saghdel, H. (2018). External costs from fossil electricity generation: A review of the applied impact pathway approach. Energy & Environment, 29(5), 635-648. https://doi.org/10.1177/0958305x18761616
  36. Kim, Y., Kim, W., & Kim, M. (2014). An international comparative analysis of public acceptance of nuclear energy. Energy Policy, 66, 475-483. https://doi.org/10.1016/j.enpol.2013.11.039
  37. Kim, Y. G. (2022). A quantitative accident analysis model on nuclear safety culture based on Bayesian network. Annals of Nuclear Energy, 166, 108703. https://doi.org/10.1016/j.anucene.2021.108703
  38. Kuang, W. (2021). Which clean energy sectors are attractive? A portfolio diversification perspective. Energy Economics, 104, 105644. https://doi.org/10.1016/j.eneco.2021.105644
  39. Lee, H. C., & Chang, C. T. (2018). Comparative analysis of MCDM methods for ranking renewable energy sources in Taiwan. Renewable and Sustainable Energy Reviews, 92, 883-896. https://doi.org/10.1016/j.rser.2018.05.007
  40. Lee, N., Dyreson, A., Hurlbut, D., McCan, M. I., Neri, E. V., Reyes, N. C. R., . . . Leisch, J. (2020). Ready for Renewables: Grid Planning and Competitive Renewable Energy Zones (CREZ) in the Philippines. National Renewable Energy Laboratory (NREL). Retrieved 17 April 2022 from https://www.nrel.gov/docs/fy20osti/76235.pdf
  41. Li, G. (2022). Stabilization of stochastic regime-switching Poisson jump equations by delay feedback control. Journal of Inequalities and Applications, 2022, 20. https://doi.org/10.1186/s13660-022-02756-6
  42. Luderer, G., Madeddu, S., Merfort, L., Ueckerdt, F., Pehl, M., Pietzcker, R., . . . Kriegler, E. (2021). Impact of declining renewable energy costs on electrification in low-emission scenarios. Nature Energy, 7(1), 32-42. https://doi.org/10.1038/s41560-021-00937-z
  43. Najafi, P., & Talebi, S. (2021). Using real options model based on Monte-Carlo Least-Squares for economic appraisal of flexibility for electricity generation with VVER-1000 in developing countries. Sustainable Energy Technologies and Assessments, 47, 101508. https://doi.org/10.1016/j.seta.2021.101508
  44. Ofori, C. G., Bokpin, G. A., Aboagye, A. Q. Q., & Afful-Dadzie, A. (2021). A real options approach to investment timing decisions in utility-scale renewable energy in Ghana. Energy, 235, 121366. https://doi.org/10.1016/j.energy.2021.121366
  45. Rahman, A., Farrok, O., & Haque, M. M. (2022). Environmental impact of renewable energy source based electrical power plants: Solar, wind, hydroelectric, biomass, geothermal, tidal, ocean, and osmotic. Renewable and Sustainable Energy Reviews, 161, 112279. https://doi.org/10.1016/j.rser.2022.112279
  46. Saidi, K., & Omri, A. (2020). Reducing CO2 emissions in OECD countries: Do renewable and nuclear energy matter? Progress in Nuclear Energy, 126, 103425. https://doi.org/10.1016/j.pnucene.2020.103425
  47. Singh, N., Nyuur, R., & Richmond, B. (2019). Renewable Energy Development as a Driver of Economic Growth: Evidence from Multivariate Panel Data Analysis. Sustainability, 11(8). https://doi.org/10.3390/su11082418
  48. Ulimoen, M., Berge, E., Klein, H., Salbu, B., & Lind, O. C. (2022). Comparing model skills for deterministic versus ensemble dispersion modelling: The Fukushima Daiichi NPP accident as a case study. Science of The Total Environment, 806, 150128. https://doi.org/10.1016/j.scitotenv.2021.150128
  49. Volk-Makarewicz, W., Borovkova, S., & Heidergott, B. (2022). Assessing the impact of jumps in an option pricing model: A gradient estimation approach. European Journal of Operational Research, 298(2), 740-751. https://doi.org/10.1016/j.ejor.2021.07.015
  50. Wang, A., Wang, Z., Li, X., & Li, J. (2020). A Collaborative Planning Model of Power Source Considering the Uncertainty of The New Energy and The Power Market. Journal of Physics: Conference Series, 1449(1), 012079. https://doi.org/10.1088/1742-6596/1449/1/012079
  51. Wang, X., & Zhang, H. (2018). Valuation of CCS investment in China's coal-fired power plants based on a compound real options model. Greenhouse Gases: Science and Technology, 8(5), 978-988. https://doi.org/10.1002/ghg.1809
  52. Wen, D., Gao, W., Kuroki, S., Gu, Q., & Ren, J. (2021). The effects of the new Feed-In Tariff Act for solar photovoltaic (PV) energy in the wake of the Fukushima accident in Japan. Energy Policy, 156, 112414. https://doi.org/10.1016/j.enpol.2021.112414
  53. Wheatley, S., Sovacool, B. K., & Sornette, D. (2016). Reassessing the safety of nuclear power. Energy Research & Social Science, 15, 96-100. https://doi.org/10.1016/j.erss.2015.12.026
  54. WNA. (2022). How can nuclear combat climate change? World Nuclear Association. Retrieved 20 April 2022 from https://world-nuclear.org/nuclear-essentials/how-can-nuclear-combat-climate-change.aspx
  55. Wu, Y., Chen, Z., Wang, Z., Chen, S., Ge, D., Chen, C., . . . Hu, L. (2019). Nuclear safety in the unexpected second nuclear era. Proceedings of the National Academy of Sciences, 116(36), 17673-17682. https://doi.org/10.1073/pnas.1820007116
  56. Xie, H., Yu, Y., Wang, W., & Liu, Y. (2017). The substitutability of non-fossil energy, potential carbon emission reduction and energy shadow prices in China. Energy Policy, 107, 63-71. https://doi.org/10.1016/j.enpol.2017.04.037
  57. Yang, D.-x., Jing, Y.-q., Wang, C., Nie, P.-y., & Sun, P. (2021). Analysis of renewable energy subsidy in China under uncertainty: Feed-in tariff vs. renewable portfolio standard. Energy Strategy Reviews, 34, 100628. https://doi.org/10.1016/j.esr.2021.100628
  58. Yap, J. T. (2020). Revisiting The Nuclear Option In The Philippines. Access to Sustainable Energy Programme-Clean Energy Living Laboratories (ASEP-CELLs). Retrieved 15 April 2022 from https://asepcells.ph/wp-content/uploads/2020/10/Revisiting-the-Nuclear-Option-in-the-Philippines_JYap_Oct2020_final.pdf
  59. Zakaria, A., Ismail, F. B., Lipu, M. S. H., & Hannan, M. A. (2020). Uncertainty models for stochastic optimization in renewable energy applications. Renewable Energy, 145, 1543-1571. https://doi.org/10.1016/j.renene.2019.07.081
  60. Zhang, M., Tang, Y., Liu, L., & Zhou, D. (2022). Optimal investment portfolio strategies for power enterprises under multi-policy scenarios of renewable energy. Renewable and Sustainable Energy Reviews, 154, 111879. https://doi.org/10.1016/j.rser.2021.111879

Last update:

  1. Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

    Casper Boongaling Agaton. Resources, 11 (6), 2022. doi: 10.3390/resources11060059

  2. Assessing the potential of low-transmissivity aquifers for aquifer thermal energy storage systems: a case study in Flanders (Belgium)

    Luka Tas, David Simpson, Thomas Hermans. Hydrogeology Journal, 31 (8), 2023. doi: 10.1007/s10040-023-02696-5

  3. Success Factors and Challenges: Implications of Real Options Valuation of Constructed Wetlands as Nature-Based Solutions for Wastewater Treatment

    Casper Boongaling Agaton, Patricia Marie Caparas Guila. Resources, 13 (1), 2024. doi: 10.3390/resources13010011

  4. Dominant Smart Contracts Based on Major Bargaining Solutions

    Elmira Mohammadhosseini Fadafan, Rudolf Vetschera. Group Decision and Negotiation, 33 (2), 2024. doi: 10.1007/s10726-023-09863-9

  5. Real Options Analysis of Constructed Wetlands as Nature-Based Solutions to Wastewater Treatment Under Multiple Uncertainties: A Case Study in the Philippines

    Casper Boongaling Agaton. Sustainability, 16 (22), 2024. doi: 10.3390/su16229797

  6. Water Treatment in Urban Environments: A Guide for the Implementation and Scaling of Nature-based Solutions

    Casper Boongaling Agaton, Patricia Marie Caparas Guila, Anne Dominique Hitape Rodriguez. Applied Environmental Science and Engineering for a Sustainable Future, 2024. doi: 10.1007/978-3-031-49282-2_4

  7. Techno-economic analysis of fixed versus sun-tracking solar panels

    Akram Elahi Gol, Milan Ščasný. International Journal of Renewable Energy Development, 12 (3), 2023. doi: 10.14710/ijred.2023.50165

  8. ESG-Driven Investment Decisions in Photovoltaic Projects

    Ruolan Wei, Yunlong Ma, Huina Bi, Qi Dong. Energies, 17 (16), 2024. doi: 10.3390/en17164117

  9. Assessment of residential renewable energy investment under dynamic market environment: Aspect from household benefits

    Qian Xu, Changxu Chen, Xinli Huang, Weiyao Yang. Journal of Environmental Management, 374 , 2025. doi: 10.1016/j.jenvman.2025.124060

  10. Sustainable transformation of energy sector: Cluster analysis for the sustainable development strategies of selected European countries

    Wadim Strielkowski, Olena Chygryn, Serhii Drozd, Vitaliia Koibichuk. Heliyon, 10 (19), 2024. doi: 10.1016/j.heliyon.2024.e38930

  11. Nutrient balance for enhanced recovery of stressed Spirulina platensis

    Abo El-Khair B. El-Sayed, Adel W. Almutairi. Environmental Science and Pollution Research, 31 (45), 2024. doi: 10.1007/s11356-024-34979-z

  12. The use of real options approach in solar photovoltaic literature: A comprehensive review

    Joaquín Lazo, David Watts. Sustainable Energy Technologies and Assessments, 57 , 2023. doi: 10.1016/j.seta.2023.103204

Last update: 2025-04-25 18:55:47

No citation recorded.