The Power of Real Options - Evaluating nuclear energy investments in Ontario

Abstract

The Ontario electricity sector is at a critical junction in its history. With decreasing generation capacity and escalating demand, a province-wide shortfall is projected to emerge before the end of the decade. The situation has predetermined that capital investments in new installed generation capacity will have to be made in order to ensure a stable and reliable supply. The objective of this thesis is to evaluate capital investment decisions that will be made in the near future. We place particular emphasis on nuclear generation, which will continue to play a major role in meeting base load needs. More specifically, we consider decisions to invest in new nuclear generation and refurbishment of existing plants. In order to evaluate these investment decisions in a flexible manner, we will employ the real options methodology. The real options approach is relevant in the context of strategic energy investment planning due to its superior ability in dealing with uncertainties and incorporating management’s flexibilities into the valuation process. Our findings confirm that the real options approach uncovers hidden strategic value and provides critical insights to the investment decision making process.