Valuation of Green Hydrogen Production in Small Hydropower Plants Using the Real Options Approach: A Binomial Tree Methodology Perspective

This research evaluates the technical and financial feasibility of green hydrogen production in Colombia using Small Hydropower Plants (SHPs), positioning them as a strategic complement to intermittent sources such as solar and wind. To address an underexplored niche in the national hydrogen roadmap, the study applies a Real Options framework, specifically using a binomial tree model, and incorporates the Weibull distribution to estimate risk-adjusted discount rates. This methodological combination allows for the modeling of operational flexibility under uncertainty, particularly through the analysis of an American-style abandonment option. The results indicate that SHPs provide continuous power generation, enhance electrolyzer efficiency, lower the Levelized Cost of Hydrogen (LCOH), and improve cash flow. However, fiscal incentives and high initial capital costs remain limiting factors. The study proposes extending the evaluation horizon to 15 years and implementing mechanisms such as Capital Expenditures (CAPEX) subsidies to improve project viability. Overall, the research contributes to the diversification of Colombia’s energy matrix, encourages regional development, and supports the positioning of green hydrogen as a viable financial asset within the country’s energy transition framework.