Energy Systems

, Volume 5, Issue 2, pp 285–306 | Cite as

Optimal investment timing and capacity choice for pumped hydropower storage

  • Emily Fertig
  • Ane Marte Heggedal
  • Gerard Doorman
  • Jay Apt
Original Paper


Pumped hydropower storage can smooth output from intermittent renewable electricity generators and facilitate their large-scale use in energy systems. Germany has aggressive plans for wind power expansion, and pumped storage ramps quickly enough to smooth wind power and could profit from arbitrage on the short-term price fluctuations wind power strengthens. We consider five capacity alternatives for a pumped storage facility in Norway that practices arbitrage in the German spot market. Price forecasts given increased wind capacity are used to calculate profit-maximizing production schedules and annual revenue streams. Real options theory is used to value the investment opportunity, since unlike net present value, it accounts for uncertainty and intertemporal choice. Results show that the optimal investment strategy under the base scenario is to invest in the largest available plant approximately eight years into the option lifetime.


Pumped hydropower storage Real options Wind power integration European Energy Exchange Mutually exclusive options 



The authors thank Bjørn Bakken, Michael Belsnes, and Atle Harby of SINTEF Energy Research; Stein-Erik Fleten from the Norwegian University of Science and Technology (NTNU); Arne Sæterdal and Rolv Guddal from Sira Kvina Kraftselskap; and anonymous reviewers for helpful input. This work was supported by FINERGY Project 178374, the Center for Sustainable Energy Studies (CenSES) at NTNU, the National Science Foundation (NSF) Graduate Research Fellowship Program, and the Research Council of Norway and NSF through the Nordic Research Opportunity. This work was also supported in part by grants from the Alfred P. Sloan Foundation and EPRI to the Carnegie Mellon Electricity Industry Center; from the Doris Duke Charitable Foundation, the Department of Energy National Energy Technology Laboratory, and the Heinz Endowments to the RenewElec program at Carnegie Mellon University; and from the U.S. National Science Foundation under Award no. SES-0345798.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Emily Fertig
    • 1
  • Ane Marte Heggedal
    • 2
  • Gerard Doorman
    • 3
  • Jay Apt
    • 4
  1. 1.Engineering Systems DivisionMassachusetts Institute of TechnologyCambridgeUSA
  2. 2.Department of Industrial Economics and Technology ManagementNorwegian University of Science and TechnologyTrondheimNorway
  3. 3.Department of Electric Power EngineeringNorwegian University of Science and TechnologyTrondheimNorway
  4. 4.Department of Engineering and Public Policy and Tepper School of BusinessCarnegie Mellon UniversityPittsburghUSA

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