Abstract
This paper proposes a model to determine the optimal investment time for energy storage systems (ESSs) in a price arbitrage trade application under conditions of uncertainty over future profits. The adoption of ESSs can generate profits from price arbitrage trade, which are uncertain because the future marginal prices of electricity will change depending on supply and demand. In addition, since the investment is optional, an investor can delay adopting an ESS until it becomes profitable, and can decide the optimal time. Thus, when we evaluate this investment, we need to incorporate the investor’s option which is not captured by traditional evaluation methods. In order to incorporate these aspects, we applied real option theory to our proposed model, which provides an optimal investment threshold. Our results concerning the optimal time to invest show that if future profits that are expected to be obtained from arbitrage trade become more uncertain, an investor needs to wait longer to invest. Also, improvement in efficiency of ESSs can reduce the uncertainty of arbitrage profit and, consequently, the reduced uncertainty enables earlier ESS investment, even for the same power capacity. Besides, when a higher rate of profits is expected and ESS costs are higher, an investor needs to wait longer. Also, by comparing a widely used net present value model to our real option model, we show that the net present value method underestimates the value for ESS investment and misleads the investor to make an investment earlier.
Highlights
Nowadays, in the era of energy shortage, the development of energy storage systems (ESSs) has been highlighted because they can allow current and/or future power grids to operate more efficiently and can maximize its economic value [1,2]
Before conducting experiments to investigate the impact of important factors and comparing our model to net present value (NPV) evaluation, we need to examine the characteristics of uncertainty
The feasible region where a firm can invest is on the right-hand side of the dotted lines. This result implies that, for example, if profit cash flow is 1000, the ESS investment decision is appropriate from the NPV perspective, while it is inappropriate from the real option theory (ROT) perspective
Summary
In the era of energy shortage, the development of energy storage systems (ESSs) has been highlighted because they can allow current and/or future power grids to operate more efficiently and can maximize its economic value [1,2]. The integration of renewable energy sources such as wind and solar provides generator stability, and support for frequency regulation, for spinning reserve capacity, for transmission and distribution, and for voltage including reactive power compensation allow grid reliability For all these benefits of ESS utilization, several studies have recently investigated if investment in ESSs is economically viable or not [1,3], and extensive efforts have been made to evaluate economic profitability of ESSs [1,4,5,6]. State-of-the-art economics literature in the general economic analysis area has suggested a novel approach for investment evaluation under uncertainty and decision flexibility conditions [7,8,9,10], which is a real option approach.
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