Sustainable energy development under uncertainty based on the real options theory approach

Considering the growing global energy demand for continuous economic advancement, the issue of energy supply has become one of the most important topics of the twenty-first century. Today’s world supplies its energy demands in various ways, and fossil fuels are one of the key resources for energy supply. Due to their high efficiency and low production costs, fossil fuels have become one of the main energy supply resources since the beginning of the twentieth century. Two aspects of this field cause concern. First, fossil fuels are considered to be non-renewable resources, and predictions regarding their amount and consumption rate indicate that they will be depleted in the next 50 years. Second, converting these resources to electrical energy for consumption in industry and general applications produces carbon dioxide and global warming materials. The objective of this study is to find a suitable tool for politicians to further manipulate the choice of investors in this field toward renewable resources to produce electricity. In this regard, this study uses the real options theory and the dynamic programming model based on the Bellman equation. Finally, a combination of the Bellman equation and the binomial tree algorithm is used in the Monte Carlo simulation to analyze the effect of government policies and their impact on investor's behavior. The findings indicate that reducing the life span of fossil fuel power plants in favor of renewable power plants is the least expensive method.