Journal of Energy Markets

An integrated CVaR and real options approach to investments in the energy sector

Ines Fortin, Sabine Fuss, Jaroslava Hlouskova, Nikolay Khabarov, Michael Obersteiner


The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of specific technologies under uncertainty. These technologies are coal-fired power plants, biomass-fired power plants and onshore windmills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is conditional value-at-risk.

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