This study explores green hydrogen production in Brazil as a strategy for decarbonising critical economic sectors, leveraging the country's leadership in renewable energy for electricity generation. Employing a real options analysis (ROA) framework, we evaluate a hypothetical investment in electrolysis and ammonia synthesis infrastructure, focusing on the versatility of hydrogen. A key feature of our analysis is the 'switch option,' which allows investors to alternate between green hydrogen production for various industries and its conversion into green ammonia, depending on which option yields better financial results. This decision-making flexibility is assessed through comparative analysis against a baseline scenario of selling electricity in the volatile free market, thereby assessing the potential for financial gain or loss.
By applying stochastic price modelling techniques, including the Geometric Brownian Motion (GBM) and the Mean Reverting Process (MRP), to forecast the financial returns under uncertain market conditions, our preliminary results suggest an enhanced return on investment by incorporating the switch option. This enhancement is attributed to adjusting production and sales strategies to market conditions. The study finds that while the GBM model is more straightforward to implement, it may overestimate financial outcomes. In contrast, the MRP offers a more accurate representation of price behaviour, mainly when modelling the switch option. Notably, the value of switching between electricity sales and ammonia production increases when the prices of these outputs are weakly correlated, highlighting the critical role of sophisticated pricing models in maximising investment returns under multiple operational strategies.
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