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Open AccessArticle

Imbalance Market Real Options and the Valuation of Storage in Future Energy Systems

1
School of Mathematical Sciences, Queen Mary University of London, London E1 4NS, UK
2
School of Mathematics, University of Leeds, Leeds LS2 9JT, UK
*
Author to whom correspondence should be addressed.
Risks 2019, 7(2), 39; https://doi.org/10.3390/risks7020039
Received: 13 December 2018 / Revised: 27 March 2019 / Accepted: 28 March 2019 / Published: 11 April 2019
(This article belongs to the Special Issue Applications of Stochastic Optimal Control to Economics and Finance)
As decarbonisation progresses and conventional thermal generation gradually gives way to other technologies including intermittent renewables, there is an increasing requirement for system balancing from new and also fast-acting sources such as battery storage. In the deregulated context, this raises questions of market design and operational optimisation. In this paper, we assess the real option value of an arrangement under which an autonomous energy-limited storage unit sells incremental balancing reserve. The arrangement is akin to a perpetual American swing put option with random refraction times, where a single incremental balancing reserve action is sold at each exercise. The power used is bought in an energy imbalance market (EIM), whose price we take as a general regular one-dimensional diffusion. The storage operator’s strategy and its real option value are derived in this framework by solving the twin timing problems of when to buy power and when to sell reserve. Our results are illustrated with an operational and economic analysis using data from the German Amprion EIM. View Full-Text
Keywords: multiple optimal stopping; general diffusion; real option analysis; energy imbalance market multiple optimal stopping; general diffusion; real option analysis; energy imbalance market
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Moriarty, J.; Palczewski, J. Imbalance Market Real Options and the Valuation of Storage in Future Energy Systems. Risks 2019, 7, 39.

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