Optimal expansion of a hydrogen storage system for wind power (H2-WESS): A real options analysis

Abstract

Increasing penetration of wind energy in Germany challenges the transmission and distribution grid operators to ensure the sustained feed-in of wind energy. Energy storage technologies have become a widely discussed solution to balance intermittent electricity supply and demand. This paper introduces an economic real options-based analysis of a hydrogen wind energy storage system (H2-WESS) deployed adjacent to a nearshore wind farm in northern Germany. The H2-WESS can be used to produce and store hydrogen when feed-in management occurs to avoid the shutdown of wind turbines and when the spot market electricity price falls below the estimated (efficiency-adjusted) market price of hydrogen. Moreover, an H2-WESS can provide negative minute reserve capacity. The modular design of the H2-WESS gives an investor the option to expand its capacity and react to new project developments. A comprehensive simulation model considers all relevant volatile inputs such as stochastic wind conditions, feed-in management events, prices, and minute reserve calls. By means of a Monte Carlo simulation, the annual revenues and their volatility are computed with respect to forecasted technology improvements till 2030. On the basis of the simulation results, a binomial options pricing model is used to design four interdependent binominal trees and to evaluate a Bermuda-type compound expansion option. The decision trees, in which the investor can choose the maximum of the option to either expand to a further H2-WESS stage or to keep the option alive, uses 390 time steps and 76,050 decision nodes each. Every compound decision takes the option of smaller stages into account. The compound expansion option to invest in a 5, 10, 15 or 20 MW H2-WESS has a 15-year expiration time and is calculated to be about €2 million, compared to the net present value of a 5 MW H-WESS of about €-2.45 million. We conclude from the real options analysis that it is crucial for a realistic valuation of energy projects to incorporate the value of managerial flexibility that is influenced by various uncertainties. Compared to conventional power plants, and due to the modular design, the flexibility of the H2-WESS comprises many specific options.