Microgrid investment under uncertainty: a real option approach using closed form contingent analysis

Farnaz Farzan, Khashayar Mahani, Kaveh Gharieh, Mohsen A. Jafari

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


The traditional net present value approach to investment in microgrid assets does not take into account the inherent uncertainties in fuel prices, cost of technology, and microgrid load profile. We propose a real option approach to microgrid investment, which includes solar photovoltaic (PV) and gas-fired generation assets. Likewise the (n, m) exchange literature in real option analysis, we examine cases with interdependency and independency of fuel price and the cost of PV technology. This work, however, makes a major contribution by the way of introducing a new parameter, which is defined as the elasticity of the option value to prices and is used in the formulation of closed form solutions. We further extend the (1, 1) exchange problem here to include operational flexibility of microgrid, such that optimal switching between investment, suspension and re-activation can be examined.

Original languageEnglish (US)
Pages (from-to)259-276
Number of pages18
JournalAnnals of Operations Research
Issue number1
StatePublished - Dec 1 2015

All Science Journal Classification (ASJC) codes

  • General Decision Sciences
  • Management Science and Operations Research


  • Distributed generation
  • Investment timing
  • Microgrids
  • Real option analysis


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