A real options analysis of existing green energy facilities: maintain or replace?

Abstract We consider an operator of machinery with deteriorating efficiency, facing the problem optimally timing either a minor (maintenance) investment or major (replacement) under price uncertainty. If maintenance is chosen, efficiency will deteriorate more slowly, and replacing later still possible. The optimal decision rule expressed in form thresholds for long-run prices, indicating that it may be rational to wait see which large small better choice. relate setting repowering green energy facilities, such as hydropower plants wind farms. Our analysis provides several managerial insights. characterize conditions govern whether smaller should considered at all, we quantify effect having replacement option embedded option. demonstrates get postponed significantly expectation, recognizes temporary alternative replacement.