Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant
Autor(a) principal: | |
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Data de Publicação: | 2011 |
Outros Autores: | , , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | RAM. Revista de Administração Mackenzie |
Texto Completo: | http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712011000400005 |
Resumo: | 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 paper we analyze a sugar and ethanol producing plant in Brazil which has both the option to expand and to add a cogeneration unit to allow the sale of surplus energy, generated by burning sugar cane bagasse, where the existence of the second option is conditional to the exercise of the first option. We model sugar, ethanol, and electricity prices as geometric mean reverting processes and apply the real options approach to determine the value of these managerial flexibilities, considering that these options have three distinct underlying assets. The option to expand production is a function of the expected future prices of sugar and ethanol, while, on the other hand, the decision to invest in the cogeneration plant will depend on the future prices of energy. Both decisions are modeled as American Compound Options over their respective underlying assets. The model is then solved using the non-censored binomial mean reverting lattice proposed by Bastian-Pinto, Brandão, and Hahn (2010) using the software DPL TM. The results indicate that a significant value can be derived from the flexibility to choose the optimal timing of investment in both options: the investment in the cogeneration unit adds an amount equivalent to the value of the expanding sugar and ethanol production, and represents up to 44% of the project's static NPV of R$ 195.9 million. We conclude that given that only half of the sugar cane crushing mills currently have cogeneration units installed and given the increasing demand for clean and renewable sources of energy, this may indicate there is a significant potential for investment and further development of bioelectricity cogeneration power plants, and even in the retrofit of older cogeneration units, and that government incentives have been effective in contributing to this development. |
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Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plantBioelectricityCogenerationReal optionsFlexibilityMean reversionEnergy 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 paper we analyze a sugar and ethanol producing plant in Brazil which has both the option to expand and to add a cogeneration unit to allow the sale of surplus energy, generated by burning sugar cane bagasse, where the existence of the second option is conditional to the exercise of the first option. We model sugar, ethanol, and electricity prices as geometric mean reverting processes and apply the real options approach to determine the value of these managerial flexibilities, considering that these options have three distinct underlying assets. The option to expand production is a function of the expected future prices of sugar and ethanol, while, on the other hand, the decision to invest in the cogeneration plant will depend on the future prices of energy. Both decisions are modeled as American Compound Options over their respective underlying assets. The model is then solved using the non-censored binomial mean reverting lattice proposed by Bastian-Pinto, Brandão, and Hahn (2010) using the software DPL TM. The results indicate that a significant value can be derived from the flexibility to choose the optimal timing of investment in both options: the investment in the cogeneration unit adds an amount equivalent to the value of the expanding sugar and ethanol production, and represents up to 44% of the project's static NPV of R$ 195.9 million. We conclude that given that only half of the sugar cane crushing mills currently have cogeneration units installed and given the increasing demand for clean and renewable sources of energy, this may indicate there is a significant potential for investment and further development of bioelectricity cogeneration power plants, and even in the retrofit of older cogeneration units, and that government incentives have been effective in contributing to this development.Editora MackenzieUniversidade Presbiteriana Mackenzie2011-08-01info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersiontext/htmlhttp://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712011000400005RAM. Revista de Administração Mackenzie v.12 n.4 2011reponame:RAM. Revista de Administração Mackenzieinstname:Universidade Presbiteriana Mackenzie (UPM)instacron:MACKENZIE10.1590/S1678-69712011000400005info:eu-repo/semantics/openAccessDias,Augusto Cesar Arenaro e MelloBastian-Pinto,Carlos de LamareBrandão,Luiz Eduardo TeixeiraGomes,Leonardo Limaeng2011-10-04T00:00:00Zoai:scielo:S1678-69712011000400005Revistahttps://www.scielo.br/j/ram/https://old.scielo.br/oai/scielo-oai.phprevista.adm@mackenzie.br1678-69711518-6776opendoar:2011-10-04T00:00RAM. Revista de Administração Mackenzie - Universidade Presbiteriana Mackenzie (UPM)false |
dc.title.none.fl_str_mv |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
title |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
spellingShingle |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant Dias,Augusto Cesar Arenaro e Mello Bioelectricity Cogeneration Real options Flexibility Mean reversion |
title_short |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
title_full |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
title_fullStr |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
title_full_unstemmed |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
title_sort |
Flexibility and uncertainty in agribusiness projects: investing in a cogeneration plant |
author |
Dias,Augusto Cesar Arenaro e Mello |
author_facet |
Dias,Augusto Cesar Arenaro e Mello Bastian-Pinto,Carlos de Lamare Brandão,Luiz Eduardo Teixeira Gomes,Leonardo Lima |
author_role |
author |
author2 |
Bastian-Pinto,Carlos de Lamare Brandão,Luiz Eduardo Teixeira Gomes,Leonardo Lima |
author2_role |
author author author |
dc.contributor.author.fl_str_mv |
Dias,Augusto Cesar Arenaro e Mello Bastian-Pinto,Carlos de Lamare Brandão,Luiz Eduardo Teixeira Gomes,Leonardo Lima |
dc.subject.por.fl_str_mv |
Bioelectricity Cogeneration Real options Flexibility Mean reversion |
topic |
Bioelectricity Cogeneration Real options Flexibility Mean reversion |
description |
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 paper we analyze a sugar and ethanol producing plant in Brazil which has both the option to expand and to add a cogeneration unit to allow the sale of surplus energy, generated by burning sugar cane bagasse, where the existence of the second option is conditional to the exercise of the first option. We model sugar, ethanol, and electricity prices as geometric mean reverting processes and apply the real options approach to determine the value of these managerial flexibilities, considering that these options have three distinct underlying assets. The option to expand production is a function of the expected future prices of sugar and ethanol, while, on the other hand, the decision to invest in the cogeneration plant will depend on the future prices of energy. Both decisions are modeled as American Compound Options over their respective underlying assets. The model is then solved using the non-censored binomial mean reverting lattice proposed by Bastian-Pinto, Brandão, and Hahn (2010) using the software DPL TM. The results indicate that a significant value can be derived from the flexibility to choose the optimal timing of investment in both options: the investment in the cogeneration unit adds an amount equivalent to the value of the expanding sugar and ethanol production, and represents up to 44% of the project's static NPV of R$ 195.9 million. We conclude that given that only half of the sugar cane crushing mills currently have cogeneration units installed and given the increasing demand for clean and renewable sources of energy, this may indicate there is a significant potential for investment and further development of bioelectricity cogeneration power plants, and even in the retrofit of older cogeneration units, and that government incentives have been effective in contributing to this development. |
publishDate |
2011 |
dc.date.none.fl_str_mv |
2011-08-01 |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712011000400005 |
url |
http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712011000400005 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
10.1590/S1678-69712011000400005 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
text/html |
dc.publisher.none.fl_str_mv |
Editora Mackenzie Universidade Presbiteriana Mackenzie |
publisher.none.fl_str_mv |
Editora Mackenzie Universidade Presbiteriana Mackenzie |
dc.source.none.fl_str_mv |
RAM. Revista de Administração Mackenzie v.12 n.4 2011 reponame:RAM. Revista de Administração Mackenzie instname:Universidade Presbiteriana Mackenzie (UPM) instacron:MACKENZIE |
instname_str |
Universidade Presbiteriana Mackenzie (UPM) |
instacron_str |
MACKENZIE |
institution |
MACKENZIE |
reponame_str |
RAM. Revista de Administração Mackenzie |
collection |
RAM. Revista de Administração Mackenzie |
repository.name.fl_str_mv |
RAM. Revista de Administração Mackenzie - Universidade Presbiteriana Mackenzie (UPM) |
repository.mail.fl_str_mv |
revista.adm@mackenzie.br |
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1752128648710717440 |