Resumen:
The increased impact of extreme weather events and droughts has prompted the rapid growth of the water market. This paper develops a real options valuation model for a hydropower plant that incorporates uncertainty in water and electricity prices, water inflows, and drought severity. Using a stochastic optimal control framework, the model is calibrated with monthly data from a reservoir in California. Water inflow and prices are modeled as functions of the California Drought Severity Index. Results highlight strong seasonality and uncertainty in price dynamics and show that revenues from water rights trading are highly sensitive to climate conditions. The model provides a comprehensive understanding into managing and valuing hydropower reservoirs under volatile environmental and market conditions.
Palabras Clave: Hydropower asset; Drought; Water; Optimal control; Climate change
Índice de impacto JCR-JIF y cuartil WoS: 4,000 - Q1 (2025)
Referencia DOI:
https://doi.org/10.1016/j.jbankfin.2025.107520
Publicado en papel: Octubre 2025.
Publicado on-line: Agosto 2025.
Cita:
I. Figuerola-Ferretti Garrigues, E. Schwartz, I. Segarra, "Drought, water, and the valuation of hydropower assets", Journal of Banking and Finance, Vol. 179, pp. 107520, Octubre 2025. [Online: Agosto 2025] doi: 10.1016/j.jbankfin.2025.107520
