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

I. Bakke, S.E. Fleten, L.I. Hagfors, V. Hagspiel, B. Norheim, S. Wogrin

In this paper we develop a real options approach to evaluate the profitability of investing in a battery bank. The approach determines the optimal investment timing under conditions of uncertain future revenues and investment cost. It includes time arbitrage of the spot price and profits by providing ancillary services. Current studies of battery banks are limited, because they do not consider the uncertainty and the possibility of operating in both markets at the same time. We confirm previous research in the sense that when a battery bank participates in the spot market alone, the revenues are not sufficient to cover the initial investment cost. However, under the condition that the battery bank also can receive revenues from the balancing market, both the net present value (NPV) and the real options value are positive. The real options value is higher than the NPV, confirming the value of flexible investment timing when both revenues and investment cost are uncertain.


Keywords: Real options ; Electric energy storage; Markov regime switching; Economic dispatch; Least squares Monte Carlo


Computational Management Science. Volume: 13 Issue: 3 Pages: 483-500

DOI reference: DOI icon 10.1007/s10287-016-0256-3    

Published on paper: July 2016. Published on-line: May 2016.



Citation:
I. Bakke, S.E. Fleten, L.I. Hagfors, V. Hagspiel, B. Norheim, S. Wogrin. Investment in electric energy storage under uncertainty: a real options approach. Computational Management Science. vol. 13, no. 3, pp. 483-500, July 2016. [Online: May 2016]


    Topics research:
  • *Long-term strategic analysis

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