A real option-based simulation model to evaluate investments in pump storage plants

Muche, Thomas

doi:10.1016/j.enpol.2009.06.041

Cited by 49 publications

(15 citation statements)

References 20 publications

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“…We are not aware of any investment analyses which use real options to value battery banks. However, there are several papers that apply the net present value approach to battery storage (Kazempour et The real options framework has been applied to conventional storage technologies, like pumpedhydroelectric storage (PHS) (Muche, 2009;Fertig et al, 2014). Muche (2009) considers the option of operating the storage plant flexibly in response to the spot price.…”

Section: Valuations In the Energy Sectormentioning

confidence: 99%

Investment in electric energy storage under uncertainty: a real options approach

et al. 2016

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Problem descriptionThe growing portion of renewables in the generation mix has led to an increasing need for ancillary services in the electricity grid. As a part of this green shift, the role of storage in the electricity market has changed. Traditionally, the motivation for investing in storage was based on time arbitrage of the spot price. Today, the investments in storage are being linked with the need for improving the power quality and balancing the grid.Recent research papers point out that investments in small storage facilities are not profitable today without public support. This thesis will apply the real options framework, and investigate the profitability of energy storage under uncertain electricity prices, balancing prices and investment cost. It will further consider how policy makers can trigger investments in electric energy storage. PrefaceThis is a master thesis written within the field of Financial Engineering at the Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU). We would like to thank our supervisors, Verena Hagspiel and Stein-Erik Fleten, for professional guidance throughout the project. We also wish to thank Professor Sonja Wogrin at Universidad Pontificia Comillas de Madrid for technical assistance, PhD candidate Lars Ivar Hagfors at NTNU for valuable input and Statkraft for providing market data. Trondheim, 8th of June 2015Ida BakkeBeate Norheim AbstractThe transition from conventional power sources to renewable energy sources is taking place in a number of European countries. Electric energy storage has been proposed as an environmentally friendly solution to make this transition possible. This thesis analyzes the profitability of investing in a battery bank in Germany and the UK, using a real options model. The model determines the option value and the optimal investment time, under the conditions of uncertain revenues and investment cost. The results show that it is profitable to invest in both countries, given that the battery banks can participate in both the spot and balancing market. The valuation also gives insight into how the battery bank should be operated between the two markets to maximize its expected profits and discovers that the battery earns over 70 % of its profit from ancillary services. This finding underlines the importance for investors to not only consider revenues from the spot market. The thesis further analyzes how uncertainty affects investor behavior and explains why there is a reluctance to invest in storage technology under the current market conditions; the investor is favoring the option to wait for more information. SammendragOvergangen fra konvensjonelle energikilder til fornybare energikilder finner sted i en rekke europeiske land. Elektrisk energilagring har blitt foreslått som en miljøvennlig løsning forå gjøre denne overgangen mulig. I denne masteroppgaven utvikler vi en realopsjonsmodel for a analysere lønnsomheten vedå investere i batteribanker i Storbritannia og Tyskland. Mode...

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Section: Valuations In the Energy Sectormentioning

confidence: 99%

Investment in electric energy storage under uncertainty: a real options approach

et al. 2016

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“…Pump storage plants are an important electricity storage technology at present [4]. Investments and innovations in this technology are expected to increase [5,6]. The great interest nowadays generally is in the field of the profit from renewable energy sources.…”

Section: Introductionmentioning

confidence: 99%

“…Unit commitment policy of the pump storage plants results in realizable cash flows, which is the base for the investment in pump storage plants valuation. The use of forecasted market prices is common because it offers an objective yardstick for investment comparison [5]. Day-ahead markets are mostly used for this investment valuation [8][9][10].…”

Section: Introductionmentioning

confidence: 99%

“…The main characteristics of power markets are the strong power price volatility and the occurrence of price spikes. The common approach for the appraisal of capital budgeting, and thus of power plants, represents the net present value method [5,7]. Muche [7] developed a valuation approach that considers the real options in the valuation of a pump storage plant.…”

Section: Introductionmentioning

confidence: 99%

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Modeling the Profit from Hydropower Plant Energy Generation using Dimensional Analysis

Čarnogurská¹,

Příhoda²,

Zeleňáková³

et al. 2016

Pol. J. Environ. Stud.

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Our work presents the original mathematical model, which can be determined on the basis of the actual profits from electricity production in pumped storage hydropower plants (PSHP). The derived relationship was obtained by the dimensional analysis of the relevant physical parameters describing the production of energy. The main purpose of this paper is to prove whether a dimensional analysis can be a useful tool to describe the economic aspect of the phenomenon, as proved by its worth when examining technical phenomena. The mathematical model has been derived for PSHP Ružín in Slovakia, but its validity, based on the similarity theory, can be extended to any pumping power plant that works with the influx of water into the upper storage reservoir, and/or without the feed, respectively. The article discusses the effects of various parameters on the operating profit for the turbine operations and the costs associated with the pumping operation.

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“…This differential equation is solved with explicit finite differences. Muche (2009) valuates pump storages optimizing the intraday contribution margin by mixed integer programming. Thereby he considers the price uncertainty by MonteCarlo Simulation.…”

Section: Introductionmentioning

confidence: 99%

Valuation of Multiple Hyro Reservoir Storage Systems in Competitive Electricity Markets

Felix

2014

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in VALUATION OF MULTIPLE HYRO RESERVOIR STORAGE SYSTEMS IN COMPETITIVE ELECTRICITY MARKETS by Bastian Felix and Christoph Weber AbstractIncreasing renewable generation results in growing supply uncertainty. By now hydrostorages are the most efficient way of smoothing uncertain power supply. In liberalized and competitive markets the valuation of hydro storages investment projects needs to take the market information and therefore the uncertainty of electricity prices into account in investment valuation. Besides the investment in new pump storage facilities the extension of existing storage sites may be an opportunity. However, the correct valuation of multiple reservoir storage systems within an uncertain market is a valuation problem with high dimensionality. We propose an approach that applies numerically constructed multinomial recombining price trees to reduce the problem dimension. We present results for a representative case study. In doing so, we apply a spot price model which accounts for the price fundamentals as well as for the price stochastic.

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A real option-based simulation model to evaluate investments in pump storage plants

Cited by 49 publications

References 20 publications

Investment in electric energy storage under uncertainty: a real options approach

Investment in electric energy storage under uncertainty: a real options approach

Modeling the Profit from Hydropower Plant Energy Generation using Dimensional Analysis

Valuation of Multiple Hyro Reservoir Storage Systems in Competitive Electricity Markets

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