Economic analysis of a license to build a wind power farm

A company holding a license to build a wind farm has the right, but not the obligation, to build a certain capacity of wind power. This postponement flexibility has value when electricity prices and/or the wind speed distribution are uncertain. Assuming that long term electricity prices follow a Brownian motion dynamics, with parameters estimated by considering forward prices of the Nordic electricity market, the value of the postponement flexibility is estimated. Since this value is lost when investing, the decision rule is to invest when the value of the revenue stream from the wind farm exceeds both investment cost and flexibility value. Investment decisions and wind power values are discussed in terms of a case study from Norway. Although net present value is positive, the value of waiting is higher, so the recommendation is to postpone the investment.