Active Management in Energy Companies: Combining Real Options and Multicriteria Decision Analysis

Our research team presents an approach for assessing a portfolio of projects in state-owned energy companies from a multidimensional perspective. They rely on an integrated risk management approach using real options valuations and a multicriteria decision analysis and also considering economic and social impacts.

The methodology presented in this study, published in the Journal of Applied Energy Volume 195, Pages 487–502, contributes to decision makers ability to determine a project’s aggregate quality and provide a global ranking using NPV (a passive management approach) and Return-to-Risk ratio, GDP, and Employment (a fully active management perspective). Consequently, it can be been seen that integrating real options into multicriteria analysis constitutes a relevant value-added to help decision makers in allocating their resources, holistically manage a portfolio of projects, and assist in selecting the most qualified projects, with the added advantage of speed and analytical robustness in terms of a company’s strategic planning process.

Journal of Apply Energy Journal of Applied Energy

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Utilizing combined real options and multicriteria decision analysis in the same decision-making model is shown to be an important tool for other decision makers (policy makers, investors, banks, and multilateral aid funds, among others) interested in evaluating a set of projects and comparing them, making recommendations for improvements, redirecting economic and financial resources, or simply evaluating their global performance. Furthermore, this methodology is sufficiently flexible to allow the introduction of new criteria and other advanced real options types and multicriteria decision methods.