Real Options in Small Hydropower Investments: An Empirical Study from Norway

Abstract

This empirical study examines investment behavior in small hydropower investments under uncertain electricity prices and revenues from selling so-called green certificates. We assess 73 small hydropower projects granted a license to build from the Norwegian authorities. The license is considered an American call option with infinite lifetime. To examine the investment behavior, we conduct a survey to recreate the available information on the date of investment decision. We apply a net present value approach and a real options value approach to the small hydropower projects by using two scenarios; with and without green certificates. Our data does not support that a real options approach explains investor behavior better than a net present value approach.