Optimal Expansion of a Hydrogen Storage System for Wind Power: A Real Options Analysis
FCN Working Paper No. 05/2016
46 Pages Posted: 11 Jul 2017
Date Written: June 2016
This paper presents a real options-based techno-economic analysis of a hydrogen-based wind energy storage system (H2-WESS) deployed adjacent to a nearshore wind farm in northern Germany. The H2-WESS can be used to produce and store hydrogen when feed-in management takes place, in order to avoid the shutdown of wind turbines during times of excess electricity supply, or when the spot market electricity price falls below the estimated (efficiency-adjusted) market price of hydrogen. Moreover, an H2-WESS can provide negative minute reserve capacity. The modular design of the H2-WESS gives an investor the option to expand the capacity and gradually adapt to changing market conditions. The comprehensive and novel simulation model considers all relevant volatile inputs, such as stochastic wind conditions, feed-in management events, prices, and minute reserve calls. By means of a Monte Carlo simulation, annual revenues and their volatility are computed with a view on projected technology improvements until 2030. Based on the simulation results, a binomial real options pricing model is used to design four interdependent binominal trees and to evaluate a Bermuda-type compound expansion option. The decision trees, in which the investor can choose the maximum of the option to either upgrade the H2-WESS to the next expansion stage or to keep the real option alive, feature 390 time steps and 76,050 decision nodes each. Each compound decision takes the option of a smaller expansion stage explicitly into account. The compound expansion option to invest in a 5, 10, 15, or 20 MW H2-WESS has a 15-year expiration time and is found to have a value of about €2 million, compared to the net present value of a 5 MW H-WESS of about €-2.45 million. We conclude from the real options analysis that for a realistic valuation of modular energy projects subject to various uncertainties it is crucial to incorporate the value of managerial flexibility that is influenced. Due to the modular design, and in contrast to conventional power plants, the flexibility of the H2-WESS comprises many specific options.
Keywords: Wind power, Hydrogen, Storage system, Compound expansion option, Monte Carlo simulation, Germany
JEL Classification: D25, Q40
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