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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

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    Keywords: Real option Simulation Pump storage plant;

    References

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    1. Pablo Benitez & Lilianna Dragulescu & G. Cornelis van Kooten, 2006. "The Economics of Wind Power with Energy Storage," Working Papers 2006-02, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
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    4. Mount, Timothy D. & Ning, Yumei & Cai, Xiaobin, 2006. "Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters," Energy Economics, Elsevier, vol. 28(1), pages 62-80, January.
    5. Vieira, F. & Ramos, H.M., 2008. "Hybrid solution and pump-storage optimization in water supply system efficiency: A case study," Energy Policy, Elsevier, vol. 36(11), pages 4142-4148, November.
    6. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    7. Cavallaro, Fausto & Ciraolo, Luigi, 2005. "A multicriteria approach to evaluate wind energy plants on an Italian island," Energy Policy, Elsevier, vol. 33(2), pages 235-244, January.
    8. Kanamura, Takashi & Ohashi, Kazuhiko, 2007. "A structural model for electricity prices with spikes: Measurement of spike risk and optimal policies for hydropower plant operation," Energy Economics, Elsevier, vol. 29(5), pages 1010-1032, September.
    9. Laurikka, Harri, 2006. "Option value of gasification technology within an emissions trading scheme," Energy Policy, Elsevier, vol. 34(18), pages 3916-3928, December.
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    Cited by:
    1. He, Xian & Delarue, Erik & D'haeseleer, William & Glachant, Jean-Michel, 2011. "A novel business model for aggregating the values of electricity storage," Energy Policy, Elsevier, vol. 39(3), pages 1575-1585, March.
    2. 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.
    3. Zvonimir Glasnovic & Karmen Margeta & Visnja Omerbegovic, 2013. "Artificial Water Inflow Created by Solar Energy for Continuous Green Energy Production," Water Resources Management, Springer, vol. 27(7), pages 2303-2323, May.
    4. 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).
    5. Daniel Ziegler & Katrin Schmitz & Christoph Weber, 2012. "Optimal electricity generation portfolios," Computational Management Science, Springer, vol. 9(3), pages 381-399, August.
    6. 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.

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