A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems

Abstract

This paper aims at serving as a critical analysis of Real Options (RO) methodologies that have so far been applied to the flexible evaluation of smart grid developments and as a practical guide to understanding the benefits but more importantly the limitations of RO methodologies. Hence, future research could focus on developing more practical RO tools for application to the energy industry, thus making the utilization of powerful "real options thinking" for decision making under uncertainty more widespread. This is particularly important for applications in low carbon power and energy systems with increasing renewable and sustainable energy resources, given the different types of uncertaint..