Real Option Pricing Model Based on Mean Reversion Applied in a Wind Power Project

Chunxue Wu, Eckart Schulz, Pairote Sattayatham

Abstract

This paper evaluates the market value of a wind power project in China through a real option method which considers the uncertainty of on-grid electricity. The evaluating model assumes that the wind power project revenue follows a mean-reverting process of the Ornstein-Uhlenbeck (O-U) typeand discusses the effect of cost and parameters of mean-reverting process on the project value.This study proposes to use Monte Carlo simulation method to price the wind power project market value and presents that this real option method can allowwind power project investors to decide whether to invest in many different scenarios.