THE DESIGN OF INVESTMENT STRATEGY FOR MINI-HYDROPOWER PROJECT USING SEQUENTIAL COMPOUND OPTION MODEL (Case Study: Cikancana Mini-Hydropower Project)

• Main Author: Mahanael Sormin, Parada
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/43429
• Institution: Institut Teknologi Bandung

As the electricity consumption in Indonesia increases, the Government plans to expand the power plants capacity by 56.3 Gigawatts (GWh) for the next ten years, with renewable energy power plants as the main focus. The renewable energy power plants capacity expansion creates an investment opportunity for companies to participate in the electricity provision in Indonesia. PT Cahaya Kancana Nusantara intends to participate in Indonesia’s electricity provisions by initiating Cikancana mini-hydropower plant. The company has done the optimization study to analyze the project’s financial feasibility. However, that study hasn’t considered the uncertainty factors that might be faced by the project, so that investors haven’t had any investment strategy to face the uncertainties. This study aims to build an investment strategy for Cikancana mini-hydropower plant, so the investment could be done in the right way. The investment strategy is built with the real option concept, which marketed asset disclaimer (MAD) will be used in this study. The discounted cash flow analysis is performed to calculate the base net present value (NPV) and the value of the project. The electricity tariff, the number of energy produced, and the operation and maintenance cost are the key variables which will be utilized as the uncertainty factors that could affect the project’s cash flow performance. The mapping of asset values and option values are done with the sequential compound option model, which the investment strategy will be developed from this model. Spearman’s rank correlation coefficient is utilized to identify the most contributing variables to the project’s financial feasibility, which the value is obtained from the Monte Carlo simulation. It is found that the project’s base NPV is accounted at Rp7.874.764.905, which the project is feasible to invest based on the NPV. Based on the real options analysis, it is found that investors could only continue to invest for the next stage if the uncertainties associated with the preceded stage is disappear, so the expected benefit produced by the project exceed its investment cost, for every stage of the project. Furthermore, it is also found that the option value of the project is accounted at Rp5.899.431.809, indicates that the uncertainty factor brings negative effects to the project’s financial performance. Investors also need to take a closer look at the energy produced by the project, since this factor contributes the most to the project’s financial performance.