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

Authors
Journal
Energy Policy
0301-4215
Publisher
Elsevier
Publication Date
Volume
37
Issue
11
Identifiers
DOI: 10.1016/j.enpol.2009.06.041
Keywords
  • Real Option
  • Simulation
  • Pump Storage Plant
Disciplines
  • Ecology

Abstract

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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