Optimal Investment and Replacement Timing for small Wind Power Projects utilizing second-hand Wind Turbines

Abstract

This paper presents a real options method for evaluating small wind power projects utilizing second-hand wind turbines. In addition to uncertain electricity prices, the model considers the lifetime of a second-hand wind turbine to be finite and random due to deterioration through age and use. If a wind turbine breaks down, there is a perpetually available option to replace it. By deriving the value of the embedded options in such a project, I develop an optimal investment and replacement strategy. To account for certain renewable energy support schemes, I impose a finite life for the initial option to invest. The main purpose of this paper is to examine how investment decisions are affected by the characteristics of wind power projects utilizing second-hand wind turbines. The model is applied to a specific project in Norway to illustrate the effects and the viability of this novel use of second-hand wind turbines.