Applying real options methodology to value electrical power quality projects

The object of this paper is to apply real options methodology to value electrical power quality projects. An ESCO can offer, in leasing, through performance contracts, a power conditioning which guarantees a dropping in the number of voltage sags below the fixed value specified in the performance contracts. This underlying asset involves a real option analysis. In this analysis, the binomial tree and the Monte Carlo simulation are used accordingly to simulate the trajectory of the number of voltage sags along the duration of the performance contract. A practical example of power quality performance contract has been analyzed in order to show the applicability of the real option methodology to electrical power quality projects.