IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v217y2021ics0360544220323975.html
   My bibliography  Save this article

Valuing the option to prototype: A case study with Generation Integrated Energy Storage

Author

Listed:
  • Lai, Chun Sing
  • Locatelli, Giorgio

Abstract

New energy generation and storage systems are continuously being developed due to climate change, resource scarcity, and environmental laws. Some systems are incremental innovations of existing systems while others are radical innovations. Radical innovation systems are risky investments due to their relevant technical and economic uncertainties. Prototyping can hedge these risks by spending a fraction of the cost of a full-scale system and in return receiving economic and technical information regarding the system. In economic terms, prototyping is an option to hedge risk coming at a cost that needs to be properly assessed. Real options analysis is the project appraisal approach for these assessments. This paper aims to introduce and test an algorithm based on real options analysis to quantitatively assess the “option to prototype” in the energy sector. First, the interrelated research areas of prototyping, energy systems, and real options analysis are reviewed. Then, a novel algorithm is presented and applied to an innovative Generation Integrated Energy Storage system: Wind-driven Thermal Pumping to demonstrate the effectiveness of option to prototype and the main parameters influencing this decision. Results show that the cost of the prototype and the market size (number of identical systems to build) are key parameters.

Suggested Citation

  • Lai, Chun Sing & Locatelli, Giorgio, 2021. "Valuing the option to prototype: A case study with Generation Integrated Energy Storage," Energy, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:energy:v:217:y:2021:i:c:s0360544220323975
    DOI: 10.1016/j.energy.2020.119290
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544220323975
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2020.119290?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    2. Kroniger, Daniel & Madlener, Reinhard, 2014. "Hydrogen storage for wind parks: A real options evaluation for an optimal investment in more flexibility," Applied Energy, Elsevier, vol. 136(C), pages 931-946.
    3. Aydin, Devrim & Casey, Sean P. & Riffat, Saffa, 2015. "The latest advancements on thermochemical heat storage systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 41(C), pages 356-367.
    4. Detert, Neal & Kotani, Koji, 2013. "Real options approach to renewable energy investments in Mongolia," Energy Policy, Elsevier, vol. 56(C), pages 136-150.
    5. MacDougall, Shelley L., 2015. "The value of delay in tidal energy development," Energy Policy, Elsevier, vol. 87(C), pages 438-446.
    6. Yongma Moon, 2014. "Optimal Time to Invest Energy Storage System under Uncertainty Conditions," Energies, MDPI, vol. 7(4), pages 1-19, April.
    7. Lai, Chun Sing & Locatelli, Giorgio & Pimm, Andrew & Tao, Yingshan & Li, Xuecong & Lai, Loi Lei, 2019. "A financial model for lithium-ion storage in a photovoltaic and biogas energy system," Applied Energy, Elsevier, vol. 251(C), pages 1-1.
    8. Kitapbayev, Yerkin & Moriarty, John & Mancarella, Pierluigi, 2015. "Stochastic control and real options valuation of thermal storage-enabled demand response from flexible district energy systems," Applied Energy, Elsevier, vol. 137(C), pages 823-831.
    9. Mignacca, B. & Locatelli, G., 2020. "Economics and finance of Small Modular Reactors: A systematic review and research agenda," Renewable and Sustainable Energy Reviews, Elsevier, vol. 118(C).
    10. Huenteler, Joern & Schmidt, Tobias S. & Ossenbrink, Jan & Hoffmann, Volker H., 2016. "Technology life-cycles in the energy sector — Technological characteristics and the role of deployment for innovation," Technological Forecasting and Social Change, Elsevier, vol. 104(C), pages 102-121.
    11. Benato, Alberto, 2017. "Performance and cost evaluation of an innovative Pumped Thermal Electricity Storage power system," Energy, Elsevier, vol. 138(C), pages 419-436.
    12. Martínez-Ceseña, E.A. & Mutale, J., 2011. "Application of an advanced real options approach for renewable energy generation projects planning," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(4), pages 2087-2094, May.
    13. Locatelli, Giorgio & Boarin, Sara & Pellegrino, Francesco & Ricotti, Marco E., 2015. "Load following with Small Modular Reactors (SMR): A real options analysis," Energy, Elsevier, vol. 80(C), pages 41-54.
    14. Fleten, Stein-Erik & Linnerud, Kristin & Molnár, Peter & Tandberg Nygaard, Maria, 2016. "Green electricity investment timing in practice: Real options or net present value?," Energy, Elsevier, vol. 116(P1), pages 498-506.
    15. Lai, Chun Sing & Locatelli, Giorgio, 2021. "Economic and financial appraisal of novel large-scale energy storage technologies," Energy, Elsevier, vol. 214(C).
    16. Xin Li & Konstantinos J. Chalvatzis & Phedeas Stephanides, 2018. "Innovative Energy Islands: Life-Cycle Cost-Benefit Analysis for Battery Energy Storage," Sustainability, MDPI, vol. 10(10), pages 1-19, September.
    17. Chen, Weidong & Zeng, Yu & Xu, Chongqing, 2019. "Energy storage subsidy estimation for microgrid: A real option game-theoretic approach," Applied Energy, Elsevier, vol. 239(C), pages 373-382.
    18. Muche, Thomas, 2009. "A real option-based simulation model to evaluate investments in pump storage plants," Energy Policy, Elsevier, vol. 37(11), pages 4851-4862, November.
    19. Garvey, S.D. & Eames, P.C. & Wang, J.H. & Pimm, A.J. & Waterson, M. & MacKay, R.S. & Giulietti, M. & Flatley, L.C. & Thomson, M. & Barton, J. & Evans, D.J. & Busby, J. & Garvey, J.E., 2015. "On generation-integrated energy storage," Energy Policy, Elsevier, vol. 86(C), pages 544-551.
    20. Locatelli, Giorgio & Invernizzi, Diletta Colette & Mancini, Mauro, 2016. "Investment and risk appraisal in energy storage systems: A real options approach," Energy, Elsevier, vol. 104(C), pages 114-131.
    21. Ma, Yiju & Swandi, Kevin & Chapman, Archie C. & Verbič, Gregor, 2020. "Multi-stage compound real options valuation in residential PV-Battery investment," Energy, Elsevier, vol. 191(C).
    22. Zhao, Bing-chen & Cheng, Mao-song & Liu, Chang & Dai, Zhi-min, 2018. "System-level performance optimization of molten-salt packed-bed thermal energy storage for concentrating solar power," Applied Energy, Elsevier, vol. 226(C), pages 225-239.
    23. Paskevicius, M. & Sheppard, D.A. & Williamson, K. & Buckley, C.E., 2015. "Metal hydride thermal heat storage prototype for concentrating solar thermal power," Energy, Elsevier, vol. 88(C), pages 469-477.
    24. Lai, Chun Sing & Jia, Youwei & Lai, Loi Lei & Xu, Zhao & McCulloch, Malcolm D. & Wong, Kit Po, 2017. "A comprehensive review on large-scale photovoltaic system with applications of electrical energy storage," Renewable and Sustainable Energy Reviews, Elsevier, vol. 78(C), pages 439-451.
    25. Ida Bakke & Stein-Erik Fleten & Lars Ivar Hagfors & Verena Hagspiel & Beate Norheim & Sonja Wogrin, 2016. "Investment in electric energy storage under uncertainty: a real options approach," Computational Management Science, Springer, vol. 13(3), pages 483-500, July.
    26. Bayon, Alicia & Bader, Roman & Jafarian, Mehdi & Fedunik-Hofman, Larissa & Sun, Yanping & Hinkley, Jim & Miller, Sarah & Lipiński, Wojciech, 2018. "Techno-economic assessment of solid–gas thermochemical energy storage systems for solar thermal power applications," Energy, Elsevier, vol. 149(C), pages 473-484.
    27. Zipf, Verena & Neuhäuser, Anton & Willert, Daniel & Nitz, Peter & Gschwander, Stefan & Platzer, Werner, 2013. "High temperature latent heat storage with a screw heat exchanger: Design of prototype," Applied Energy, Elsevier, vol. 109(C), pages 462-469.
    28. Benoît Chevalier‐Roignant & Christoph M. Flath & Lenos Trigeorgis, 2019. "Disruptive Innovation, Market Entry and Production Flexibility in Heterogeneous Oligopoly," Production and Operations Management, Production and Operations Management Society, vol. 28(7), pages 1641-1657, July.
    29. Haisheng Chen & Xinjing Zhang & Jinchao Liu & Chunqing Tan, 2013. "Compressed Air Energy Storage," Chapters, in: Ahmed F. Zobaa (ed.), Energy Storage - Technologies and Applications, IntechOpen.
    30. Horn, Anders & Kjærland, Frode & Molnár, Peter & Steen, Beate Wollen, 2015. "The use of real option theory in Scandinavia's largest companies," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 74-81.
    31. Locatelli, Giorgio & Mancini, Mauro & Lotti, Giovanni, 2020. "A simple-to-implement real options method for the energy sector," Energy, Elsevier, vol. 197(C).
    32. Guo, Huan & Xu, Yujie & Zhang, Xinjing & Zhou, Xuezhi & Chen, Haisheng, 2020. "Transmission characteristics of exergy for novel compressed air energy storage systems-from compression and expansion sections to the whole system," Energy, Elsevier, vol. 193(C).
    33. Reuter, Wolf Heinrich & Fuss, Sabine & Szolgayová, Jana & Obersteiner, Michael, 2012. "Investment in wind power and pumped storage in a real options model," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(4), pages 2242-2248.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raisa Pérez-Vas & Félix Puime Guillén & Joaquín Enríquez-Díaz, 2021. "Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options," IJERPH, MDPI, vol. 18(10), pages 1-13, May.
    2. Houd Al-Obaidli & Rajesh Govindan & Tareq Al-Ansari, 2023. "Multidimensional Risk-Based Real Options Valuation for Low-Carbon Cogeneration Pathways," Energies, MDPI, vol. 16(3), pages 1-22, January.
    3. Biggins, Flora & Kataria, Mohit & Roberts, Diarmid & Brown, Dr Solomon, 2022. "Green hydrogen investments: Investigating the option to wait," Energy, Elsevier, vol. 241(C).
    4. Ma, Yiju & Chapman, Archie C. & Verbič, Gregor, 2022. "Valuation of compound real options for co-investment in residential battery systems," Applied Energy, Elsevier, vol. 318(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lai, Chun Sing & Locatelli, Giorgio, 2021. "Economic and financial appraisal of novel large-scale energy storage technologies," Energy, Elsevier, vol. 214(C).
    2. Locatelli, Giorgio & Mancini, Mauro & Lotti, Giovanni, 2020. "A simple-to-implement real options method for the energy sector," Energy, Elsevier, vol. 197(C).
    3. Maeda, Mansaku & Watts, David, 2019. "The unnoticed impact of long-term cost information on wind farms’ economic value in the USA. – A real option analysis," Applied Energy, Elsevier, vol. 241(C), pages 540-547.
    4. Àlex Alonso-Travesset & Diederik Coppitters & Helena Martín & Jordi de la Hoz, 2023. "Economic and Regulatory Uncertainty in Renewable Energy System Design: A Review," Energies, MDPI, vol. 16(2), pages 1-30, January.
    5. Locatelli, Giorgio & Invernizzi, Diletta Colette & Mancini, Mauro, 2016. "Investment and risk appraisal in energy storage systems: A real options approach," Energy, Elsevier, vol. 104(C), pages 114-131.
    6. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    7. Moon, Yongma & Baran, Mesut, 2018. "Economic analysis of a residential PV system from the timing perspective: A real option model," Renewable Energy, Elsevier, vol. 125(C), pages 783-795.
    8. Assereto, Martina & Byrne, Julie, 2021. "No real option for solar in Ireland: A real option valuation of utility scale solar investment in Ireland," Renewable and Sustainable Energy Reviews, Elsevier, vol. 143(C).
    9. Zhang, Mingming & Nie, Jinchen & Su, Bin & Liu, Liyun, 2024. "An option game model applicable to multi-agent cooperation investment in energy storage projects," Energy Economics, Elsevier, vol. 131(C).
    10. Ofori, Charles Gyamfi & Bokpin, Godfred Alufar & Aboagye, Anthony Q.Q. & Afful-Dadzie, Anthony, 2021. "A real options approach to investment timing decisions in utility-scale renewable energy in Ghana," Energy, Elsevier, vol. 235(C).
    11. Wang, Xingwei & Cai, Yanpeng & Dai, Chao, 2014. "Evaluating China's biomass power production investment based on a policy benefit real options model," Energy, Elsevier, vol. 73(C), pages 751-761.
    12. Pimm, Andrew J. & Cockerill, Tim T. & Taylor, Peter G. & Bastiaans, Jan, 2017. "The value of electricity storage to large enterprises: A case study on Lancaster University," Energy, Elsevier, vol. 128(C), pages 378-393.
    13. Gazheli, Ardjan & van den Bergh, Jeroen, 2018. "Real options analysis of investment in solar vs. wind energy: Diversification strategies under uncertain prices and costs," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 2693-2704.
    14. Chen, Siyuan & Zhang, Qi & Wang, Ge & Zhu, Lijing & Li, Yan, 2018. "Investment strategy for underground gas storage facilities based on real option model considering gas market reform in China," Energy Economics, Elsevier, vol. 70(C), pages 132-142.
    15. Kim, Kyeongseok & Park, Hyoungbae & Kim, Hyoungkwan, 2017. "Real options analysis for renewable energy investment decisions in developing countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 75(C), pages 918-926.
    16. Lai, Chun Sing & Locatelli, Giorgio & Pimm, Andrew & Tao, Yingshan & Li, Xuecong & Lai, Loi Lei, 2019. "A financial model for lithium-ion storage in a photovoltaic and biogas energy system," Applied Energy, Elsevier, vol. 251(C), pages 1-1.
    17. Work, James & Hauer, Grant & Luckert, M.K. (Marty), 2018. "What ethanol prices would induce growers to switch from agriculture to poplar in Alberta? A multiple options approach," Journal of Forest Economics, Elsevier, vol. 33(C), pages 51-62.
    18. Wei Chen & Yongle Tian & Kaiming Zheng & Nana Wan, 2023. "Influences of mechanisms on investment in renewable energy storage equipment," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(11), pages 12569-12595, November.
    19. Sun, Bo & Fan, Boyang & Zhang, Yifan & Xie, Jingdong, 2023. "Investment decisions and strategies of China's energy storage technology under policy uncertainty: A real options approach," Energy, Elsevier, vol. 278(PA).
    20. Balibrea-Iniesta, José & Rodríguez-Monroy, Carlos & Núñez-Guerrero, Yilsy María, 2021. "Economic analysis of the German regulation for electrical generation projects from biogas applying the theory of real options," Energy, Elsevier, vol. 231(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:energy:v:217:y:2021:i:c:s0360544220323975. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/energy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.