Investment strategy for small hydropower generation plants in Norway

Abstract

Every potential investor faces two central questions when dealing with irreversable investments: If and when to invest. Whilst the most common valuation techniques fails to incorporate the value of flexibility and thus the timing option, we will, through a Real Option Valuation framework, provide our take on the answers to these two fundamental questions for potential investors in small scale hydropower plants in Norway. The paper will build on the framework introduced by Dixit and Pindyck (1994) and derive both the optimal trigger price for an investment and the subsequent investment value.