Abstract
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.
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Notes
Launch of battery project in Germany Press release by Statkraft 27.07.15. http://statkraft.com/media/news/20151/launch-of-battery-project-in-germany/.
The Chan-Karolyi-Longstaff-Sanders differential equation nests several processes commonly used to represent commodity prices, including the GBM, Vasicek, Merton and Brennan-Schwartz model. It can assume the form of any of these processes by altering the parametrization, without changing the solution of the equation. This allows us to incorporate elements such as mean reversion and inverse leverage effects in our model. We refer to Chan et al. (1992) for further details.
Investment costs is an economic variable that is highly affected by the business cycle. It exhibits long-term variation, and changes in the cost level be expected to persist for a long while. It is also natural to expect that changes in costs are normally distributed when considering relative changes (as opposed to absolute EUR/kWh changes). These features point toward a geometric Brownian motion for these costs.
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Acknowledgments
Support from the Research Council of Norway through Project 228811 is gratefully acknowledged. Further, the work was partly supported by the Danish Council for Strategic Research through the project ’5s’—Future Electricity Markets (No. 12-132636/DSF).
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Bakke, I., Fleten, SE., Hagfors, L.I. et al. Investment in electric energy storage under uncertainty: a real options approach. Comput Manag Sci 13, 483–500 (2016). https://doi.org/10.1007/s10287-016-0256-3
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DOI: https://doi.org/10.1007/s10287-016-0256-3