Abstract
New energy generation and storage systems are continuously being developed due to climate change, resource scarcity, and environmental laws. Some systems are incremental innovations of existing systems while others are radical innovations. Radical innovation systems are risky investments due to their relevant technical and economic uncertainties. Prototyping can hedge these risks by spending a fraction of the cost of a full-scale system and in return receiving economic and technical information regarding the system. In economic terms, prototyping is an option to hedge risk coming at a cost that needs to be properly assessed. Real options analysis is the project appraisal approach for these assessments. This paper aims to introduce and test an algorithm based on real options analysis to quantitatively assess the “option to prototype” in the energy sector. First, the interrelated research areas of prototyping, energy systems, and real options analysis are reviewed. Then, a novel algorithm is presented and applied to an innovative Generation Integrated Energy Storage system: Wind-driven Thermal Pumping to demonstrate the effectiveness of option to prototype and the main parameters influencing this decision. Results show that the cost of the prototype and the market size (number of identical systems to build) are key parameters.
Highlights
Driven by the need for a low-carbon society, innovative energy systems are needed to reduce global warming and environmental pollutions [1, 2]
This paper aims to introduce and test an algorithm based on real options analysis to quantitatively assess the “option to prototype” in the energy sector
This paper aims to introduce and test an algorithm based on Real Options Analysis (ROA) to quantitatively assess the “option to prototype” in the energy sector
Summary
Driven by the need for a low-carbon society, innovative energy systems are needed to reduce global warming and environmental pollutions [1, 2]. Novel lowcarbon energy systems are proposed across different domains, including solar photovoltaic [3] wind turbines [4], nuclear reactors [5]. System innovation in the energy sector is not limited to power systems since accommodating the low-carbon energy generation, and decarbonising energy consumption requires several other novel systems, including energy storage systems [6], transmission lines [7] and power conversion systems [8]. Radical innovations bring attractive business opportunities, they are risky due to relevant technical and economic uncertainties [11].
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