Strategic timing of commercial-scale tidal energy investment

Abstract

The many uncertainties in tidal energy conversion combine to form a significant barrier to raising private-sector capital. Mitigation and management of risk are essential if the industry is to attract equity investors. One way to manage the risk is through investment timing. The option to time an investment has value, which can be estimated. An analysis of an invest-vs-delay decision revealed a persistent, economicallyrational incentive to delay. Further inquiry identified a strategic rationale for delaying investment in tidal energy projects, given the uncertainty still present in the undertaking. As the largest sensitivity in the value of delay is the volatility of the investment’s expected cash flows, an investigation into the prevalent uncertainties was undertaken.

This paper summarizes the real option valuation model. It then reports on results of a qualitative study of the predominant uncertainties facing developers and conditions that would help move the industry along. Predominant uncertainties reported revolve around technology reliability; site and resource knowledge; prospects for buildout; predictability of government policy and supports; prospects of off-take agreements; and supply chain capacity and costs. These are related back to the variables in the real option pricing model. The model is relevant for companies wishing to systematically evaluate timing options and communicate project value to the investment community. It can also be used by governments to evaluate the design of policies and financial supports in a way that is consistent with the priorities of financial markets.