IntroductionEnergy investments have been valued using several methods. Santos et. al. (2014) argue that conventional approaches such as net present value (NPV) or internal rate of return (IRR) do not consider relevant project characteristics such as irreversibility, uncertainty and management flexibility. They propose that the real options approach (ROA) has an advantage over conventional methods. The purpose of this essay is to apply real options to a renewable energy investment (mini-hydro plant) using the binomial lattice tree developed by Cox, Ross, and Rubinstein. Economic evaluation of energy investments Electricity generation projects are more or less irreversible due to their enormous capital spending cannot be easily diversified; the scientific basis of this proposition is provided by Pindyck (1991). Investors make decisions under conditions of high level of uncertainty associated with the market (Kumbaroglu et. al., 2008). Brach (2003) argues that the real options approach measures uncertainty and risk with flexibility. Santos et. al. (2014) propose that ROA considers the volatility associated with the valuation process as a potential positive factor that adds value to the investment. Table 1 represents the evaluation methods used in energy investment projects. Table 1: Evaluation methods used in energy investment projects Source: Santos et. al., (2014) The real options approach for the evaluation of energy investments Before analyzing the application of real options to energy investments, it is necessary to highlight the difference between financial options and real options. Santos et. al., (2014) define a financial option as an asset that gives its owner the right but not the obligation to buy (call option) or sell (put option) a certain quantity of paper. .....irel, M. (2008). “A Real Options Valuation Model for Diffusion Prospects of New Renewable Energy Generation Technologies,” Energy Economics Journal, Vol. 30, no. 1882, pp. 908.Pindyck, R. (1991). “Irreversibility, uncertainty and investment”, Journal of Economic Literature, vol.29, pp.1110-1148Sanislo, M. (2002). Using Real Options to Estimate the Values ​​of an Investment in Energy Storage, Energy Storage Association Annual Meeting, Wisconsin. Santos, L., Soares, I., Mendes, C., et al (2014). “Real Options Versus Traditional Methods for Evaluating Renewable Energy Projects,” Renewable Energy Journal, vol. 68, no. 1, pp. 588-588-594.Swierzbinski, J. (2014a). Black-Scholes formula and some applications of real options theory, handouts, My Aberdeen.Swierzbinski, J. (2014b). Evaluation using a multiplicative binomial lattice, lecture notes, My Aberdeen.