The Economics of Nuclear Fusion R&D. Jonathan Linton Desmarais Chair in the Management of Technological Enterprises School of Management University of Ottawa Ottawa, On David Goldenberg Rensselaer Polytechnic Institute Troy, NY. What Fusion is worth,
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Desmarais Chair in the Management of Technological Enterprises
School of Management
University of Ottawa
Rensselaer Polytechnic Institute
depends on the future cost of energy:
If perpetual motion machines become available, energy prices decline…
... Nuclear fusion could becomes valueless
If reserves decline for traditional energy sources
and demand continues to grow, energy prices increase…
…Nuclear fusion becomes very valuable
Need to assume that costs and revenues are known in the future.
It is not possible to accurately forecast demand, supply or price of commodities far into the future.
It is not possible to forecast the degree of success of an R&D program in the future or the rate of improvement in technology in the future.
Attempts to do so are needed, but easily challenged.
Consider R&D as insurance against
the possibility of high future energy prices
Invest in R&D or an R&D portfolio
To purchase protection against
unattractive energy costs
and/or cost volatility
The model assumes that the underlying asset follows a stationary log-normal diffusion process described by the stochastic differential equation:
dSt=mStdt + sStdZt
where Zt is a standard arithmetic Brownian Motion process.
The Black-Scholes formula gives the current value of a European call option, C(St), as:
where d1=[ln(St/E) + (r+s2/2)t]/ssqrt(t)
Under this description the log-normal diffusion process is essentially Geometric Brownian Motion.
Black, Scholes, and Merton won the Nobel prize in economics for this model in 1997 under the title ‘for a new method to determine the value of derivatives’.
See: DH Goldenberg and JD Linton, Energy Risk, January 2006