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Energies 2014, 7(4), 2701-2719; doi:10.3390/en7042701
Article

Optimal Time to Invest Energy Storage System under Uncertainty Conditions

College of Business Administration, University of Seoul, Seoul 130743, Korea
Received: 8 February 2014 / Revised: 16 April 2014 / Accepted: 18 April 2014 / Published: 24 April 2014
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Abstract

This paper proposes a model to determine the optimal investment time for energy storage systems (ESSs) in a price arbitrage trade application under conditions of uncertainty over future profits. The adoption of ESSs can generate profits from price arbitrage trade, which are uncertain because the future marginal prices of electricity will change depending on supply and demand. In addition, since the investment is optional, an investor can delay adopting an ESS until it becomes profitable, and can decide the optimal time. Thus, when we evaluate this investment, we need to incorporate the investor’s option which is not captured by traditional evaluation methods. In order to incorporate these aspects, we applied real option theory to our proposed model, which provides an optimal investment threshold. Our results concerning the optimal time to invest show that if future profits that are expected to be obtained from arbitrage trade become more uncertain, an investor needs to wait longer to invest. Also, improvement in efficiency of ESSs can reduce the uncertainty of arbitrage profit and, consequently, the reduced uncertainty enables earlier ESS investment, even for the same power capacity. Besides, when a higher rate of profits is expected and ESS costs are higher, an investor needs to wait longer. Also, by comparing a widely used net present value model to our real option model, we show that the net present value method underestimates the value for ESS investment and misleads the investor to make an investment earlier.
Keywords: energy storage system (ESS); real option theory; uncertainty; decision flexibility energy storage system (ESS); real option theory; uncertainty; decision flexibility
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Moon, Y. Optimal Time to Invest Energy Storage System under Uncertainty Conditions. Energies 2014, 7, 2701-2719.

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