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

Abstract

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...

Optimal forward trading and battery control under renewable electricity generation

“…. , T, with 0 < Π < Π to define the reward functions by r t (p, (z (1) , z (2) ), a) = −l(a)f (t, z (2) ) − e a p Π + e a p Π, t = 0, . .…”

“…Remark: 1 The right plot in Figure 5 shows the dependence of the cumulated rewards on the battery size. In this graph, we gradually increase the capacity from 5 MWh to 100MWh and determine the value function for an initially empty storage (for φ = 0.9, z…”

“…On this account, it is important to compare the portion of the cumulative reward which results from intermediate Figure 8: The averaged evolution (10000 scenarios) of the energy storage level for the large battery, on the left, and for small battery on the right. r T (p, (z (1) , z (2) )) = 0 p ∈ P, (z (1) , z (2) ) ∈ R 2 . (6.2)…”

Stochastic valuation of energy storage in wholesale power markets

“…In Oudalov et al (2006), the revenue streams of battery systems are considered separately. A real options approach is taken in evaluating the profitability of investing in a battery bank (Bakke et al, 2016). The revenue from energy shifting and ancillary services are modeled simultaneously.…”

“…The revenue from energy shifting and ancillary services are modeled simultaneously. However, the capacity market value is ignored in Bakke et al (2016), Denholm and Sioshansi (2009), Mokrian and Stephen (2006), Oudalov et al (2007), Sioshansi et al (2009). This paper corrects these problems by developing a comprehensive energy storage system valuation framework.…”