Authors: Bastian-Pinto, C., Araujo, F. VdS., Brandão, L. E. T., Gomes, L. L.
Abstract: Renewable energy sources such as wind power are increasing their share of the world energy matrix. Nonetheless, wind farms projects are subject to variations in output due to climate conditions and to price volatility if they choose to anticipate construction to sell their energy in the short term markets. In order to create incentives for early investment, we show that wind farm investors can hedge electricity price risk by simultaneously investing in a cryptocurrency mining facility that uses electricity as input to produce newly minted Bitcoins to sell in the market. Given that electricity and Bitcoin prices are mostly uncorrelated, the ability to switch outputs between these two assets depending on their relative prices, allows the firm to maximize revenues and minimize losses. We develop a numerical application where we apply the real options approach to model a wind farm that chooses to anticipate construction in order to sell energy in the short term market for up to four years prior to entering into its long term energy sales commitment. Given that this power plant also invests in a Bitcoin mining facility, whenever the price of the Bitcoins created is higher than the market price of electric power, the firm will choose to operate the mining facility. Otherwise, it will sell its energy to the market. The short-term energy price and Bitcoin price/mining-difficulty ratio are modeled as two distinct stochastic diffusion processes. The results show that the option to switch outputs significantly increases the generator’s revenue while simultaneously decreasing the risk.
This work presents the calculations done for the article of the same title. Here are the parameters for the diffusion of stochastic variables among with other data that have been defined in the paper. All the code is presented in R and in a Notebook format with the outputs for every command.