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A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems

Author

Listed:
  • Benjamin Hassi
  • Tomas Reyes
  • Enzo Sauma

Abstract

The use of residential Photovoltaic-Storage systems may produce large benefits to owners and has expanded rapidly in recent years. Nonetheless, large uncertainties regarding the profitability of these systems make it necessary to incorporate flexibilities in their economic evaluations. This paper offers a new method to evaluate the compound flexibility of both the option of delaying investments and the option of further expanding the capacity of solar photovoltaic modules and batteries during the investment horizon. Flexibility is modeled as a compound real option, whose value is computed using a novel method that we call Compound Least Squares Monte Carlo (CLSM). The model is applied to the investment decisions associated to a residential Photovoltaic-Storage system. Results suggest that investors should use the proposed CLSM method in the economic valuation of multi-stage projects, since considering only a single flexibility could promote sub-optimal decisions. Moreover, in our case study, we show that it is optimal to break the investment down into two steps or more in 36% of future scenarios, on average.

Suggested Citation

  • Benjamin Hassi & Tomas Reyes & Enzo Sauma, 2022. "A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems," The Energy Journal, , vol. 43(3), pages 83-104, May.
    • Handle: RePEc:sae:enejou:v:43:y:2022:i:3:p:83-104
    DOI: 10.5547/01956574.43.3.bhas
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    References listed on IDEAS

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    5. Uddin, Kotub & Gough, Rebecca & Radcliffe, Jonathan & Marco, James & Jennings, Paul, 2017. "Techno-economic analysis of the viability of residential photovoltaic systems using lithium-ion batteries for energy storage in the United Kingdom," Applied Energy, Elsevier, vol. 206(C), pages 12-21.
    6. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
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    Cited by:

    1. Su, Qing & Zhou, Peng & Ding, Hao, 2025. "Portfolio optimization of diversified energy transition investments with multiple risks," Renewable and Sustainable Energy Reviews, Elsevier, vol. 219(C).
    2. Anna Carozzani & Chiara D’Alpaos, 2025. "The Real Option Approach to Investment Decisions in Hybrid Renewable Energy Systems: A Systematic Literature Review," Energies, MDPI, vol. 18(20), pages 1-35, October.
    3. Castellini, Marta & D'Alpaos, Chiara & Fontini, Fulvio & Moretto, Michele, 2025. "Optimal investment in an energy storage system," FEEM Working Papers 349431, Fondazione Eni Enrico Mattei (FEEM).

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