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A real option-based simulation model to evaluate investments in pump storage plants

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  • Muche, Thomas
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    Abstract

    Investments in pump storage plants are expected to grow especially due to their ability to store an excess of supply from wind power plants. In order to evaluate these investments correctly the peculiarities of pump storage plants and the characteristics of liberalized power markets have to be considered. The main characteristics of power markets are the strong power price volatility and the occurrence of prices spikes. In this article a valuation model is developed capturing these aspects using power price simulation, optimization of unit commitment and capital market theory. This valuation model is able to value a future price-based unit commitment planning that corresponds to future scope of actions also called real options. The resulting real option value for the pump storage plant is compared with the traditional net present value approach. Because this approach is not able to evaluate scope of actions correctly it results in strongly smaller investment values and forces wrong investment decisions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 37 (2009)
    Issue (Month): 11 (November)
    Pages: 4851-4862

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    Handle: RePEc:eee:enepol:v:37:y:2009:i:11:p:4851-4862

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    Web page: http://www.elsevier.com/locate/enpol

    Related research

    Keywords: Real option Simulation Pump storage plant;

    References

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    1. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    2. Huisman, R. & Huurman, C. & Mahieu, R.J., 2007. "Hourly electricity prices in day-ahead markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3131737, Tilburg University.
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    Cited by:
    1. Daniel Ziegler & Katrin Schmitz & Christoph Weber, 2012. "Optimal electricity generation portfolios," Computational Management Science, Springer, vol. 9(3), pages 381-399, August.
    2. Xian He & Erik Delarue & William D'haeseleer & Jean-Michel Glachant, 2010. "A Novel Business Model for Aggregating the Values of Electricity Storage," RSCAS Working Papers 2010/82, European University Institute.
    3. Kroniger, Daniel & Madlener, Reinhard, 2013. "Hydrogen Storage for Wind Parks - A Real Options Evaluation for an Optimal Investment in More Flexibility," FCN Working Papers 3/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    4. Connolly, D. & Lund, H. & Finn, P. & Mathiesen, B.V. & Leahy, M., 2011. "Practical operation strategies for pumped hydroelectric energy storage (PHES) utilising electricity price arbitrage," Energy Policy, Elsevier, vol. 39(7), pages 4189-4196, July.
    5. Muche, Thomas, 2014. "Optimal operation and forecasting policy for pump storage plants in day-ahead markets," Applied Energy, Elsevier, vol. 113(C), pages 1089-1099.

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