Real Options Valuation as a Complement To The Discounted Cash Flow Model In Renewable Energy Projects: A Case Study of the Hesselø Offshore Wind Farm

Abstract

The transition towards renewable energy (RE) has placed offshore wind power at the center of Europe’s decarbonization strategy. The success of this transition is highly dependent on private investors and project developers allocating resources to financially viable projects. However, the capital-intensive and uncertain nature of offshore wind investments poses fundamental challenges for traditional project valuation methods such as the discounted cash flow method. These methods do not capture the value of managerial flexibility under uncertainty and fail to address the complexity of investment planning and valuation for RE projects. In light of this, researchers advocate for more sophisticated valuation methods that allow flexibility to be incorporated into decision-making in the face of uncertain market conditions and point towards real options valuation (ROV) as a solution. This thesis explores how the ROV framework can complement and improve the financial assessment of offshore wind projects, using the Hesselø Offshore Wind Farm as a case study. By applying both a DCF and a binomial option pricing model, the analysis compares project value estimates under different cost scenarios and evaluates how flexibility can add strategic value under uncertainty. To achieve this, the thesis develops a financial model using industry-specific input data and projected cost estimates derived from Monte Carlo simulations of Levelized Cost of Energy forecasts. The results demonstrate that ROV provides significantly different insights than the DCF model, particularly in unfavorable market conditions where the option to delay the project can preserve value despite negative immediate NPV outcomes. Sensitivity and scenario analyses further emphasize the importance of cost assumptions, volatility, and political conditions in shaping investment outcomes. The findings support the broader argument that real options offer a more robust and dynamic framework for evaluating renewable infrastructure investments. In sum, the thesis demonstrates that incorporating ROV as a complement to the traditional DCF model provides a more realistic and comprehensive valuation framework for offshore wind investments. It underscores the importance of managerial flexibility in capital-intensive and uncertain environments, thus contributing to the growing literature advocating for real options as a complementary tool in energy infrastructure development. By applying this methodology to the Hesselø project, the thesis provides practical insights that may inform policymakers, investment managers, and future academic research within the renewable energy sector.