The application of real options as a tool for decision-making in the electricity market

Traditional valuation methods such as Net present value (NPV) underestimate the value of projects when they face flexibility, that is to say, it does not know the actions of the managers in the face of changes in market conditions. The application of real options (OR) complements the results obtained by traditional methods, avoiding the possible underestimation of the value of investment projects. The Monte Carlo simulation used in the estimation of the OR opens the possibility of deriving the value of the option using empirical distributions on the returns of the underlying generating a series of trajectories, broadening the spectrum for the electricity market investor.