The Application Of Real Option In Renewable Energy Project Investment Decision

With the shortage of conventional energy sources and environmental degradation, states increase investment in renewable energy development. The industry must be developed rapidly, and will attract more and more investors. How to invest are the important problems that investors will face with. The traditional methods of investment decision-making have inherent flaws, and can not made the scientific evaluation in renewable energy projects. Real options approach that developed from financial option theory can help investors to identify potential investment opportunities, take advantage of uncertainty to enhance the investment value of projects, and provide investors with a new policy idea.First, this article describes the basic theory of the traditional methods of investment decision and real options approach. Second, the paper explores the domestic and foreign investment in renewable energy projects, and explains the main features of investment in renewable energy from these four areas that is renewable energy projects uncertainty, irreversibility, selectivity and potential investment opportunities. Third, analyze of the shortcomings of NPV. The paper described that real option approach can make up for deficiencies in net present value method from six aspects, is suitable for investment analysis of the industry. Construct the Option to Growth, and use B- S formula to investment analysis in renewable energy projects. Fourth, the paper demonstrates the superiority of real options approach through the case in bio-diesel. Last, summarize the full text.The most important research results:1. Investors who use the real option approach can adjust flexibly the investment program according to market conditions. The theory can also take advantage of market uncertainty and management flexibility to help investors to create follow-up investment opportunities, and improve the enterprise's competitive advantage.2. The paper combines the shortcomings of traditional investment approach with features that there are more uncertainties in renewable energy projects, proposes that introduce real options approach into the assessment of the industry's investment, use B-S formula for renewable energy projects in quantitative analysis and indicates that real options approach can take advantage of uncertainty to enhance the investment value of projects and provide investors with a new policy ideas.3. Case analysis in bio-diesel project that compares with net present value method points out that real option approach can overcome the shortcomings of NPV and explore the potential investment opportunities in higher risk project, which proves the feasibility and superiority of real option approach in renewable energy projects.