Bidding Pricing Strategy for Waste to Energy Projects Based on Option Game Theory

Developing waste-to-energy (WTE) projects is an important way to achieve sustainable development. Due to the high capital expenditure, WTE projects are jointly constructed by the government agencies and private investors under the formation of public-private partnership. Private investors usually participate in a bidding process, which quote the price for disposing of waste. Government agencies choose the lowest bidder among all the qualified private investors. The bidding price has become a key factor for qualified private investors to obtain project opportunities. Hence, how to determine the optimal bidding price becomes a critical task for private investors. This article adopts option game theory to establish an investment value model to estimate the bidding price for investors. The least squares Monte Carlo simulation has been applied to solve the model. The proposed model is further applied to a WTE project based on incineration technology located in Shaanxi, China. Results show that determining the optimal bidding price requires balancing both risk-hedging capability and winning probability. At the same time, when there are many bidders involved, it can lead to a vicious competition among them. Results provide guidance for private investors and promote the development of WTE projects.