Valuing the option to prototype: A case study with Generation Integrated Energy Storage

Abstract New energy generation and storage systems are continuously being developed due to climate change, resource scarcity, and environmental laws. Some systems are incremental innovations of existing systems while others are radical innovations. Radical innovation systems are risky investments due to their relevant technical and economic uncertainties. Prototyping can hedge these risks by spending a fraction of the cost of a full-scale system and in return receiving economic and technical information regarding the system. In economic terms, prototyping is an option to hedge risk coming at a cost that needs to be properly assessed. Real options analysis is the project appraisal approach for these assessments. This paper aims to introduce and test an algorithm based on real options analysis to quantitatively assess the “option to prototype” in the energy sector. First, the interrelated research areas of prototyping, energy systems, and real options analysis are reviewed. Then, a novel algorithm is presented and applied to an innovative Generation Integrated Energy Storage system: Wind-driven Thermal Pumping to demonstrate the effectiveness of option to prototype and the main parameters influencing this decision. The paper shows that the cost of the prototype and the market size (number of identical systems to build) are key parameters.

[1]  Reinhard Madlener,et al.  Economic Feasibility of Kite-Based Wind Energy Powerships with CAES or Hydrogen Storage , 2012 .

[2]  Joseph Mutale,et al.  Application of an advanced real options approach for renewable energy generation projects planning , 2011 .

[3]  R. Madlener,et al.  Hydrogen Storage for Wind Parks: A Real Options Evaluation for an Optimal Investment in More Flexibility , 2013 .

[4]  A. Benato,et al.  Pumped Thermal Electricity Storage: A technology overview , 2018, Thermal Science and Engineering Progress.

[5]  Mao-song Cheng,et al.  Conceptual design and preliminary performance analysis of a hybrid nuclear-solar power system with molten-salt packed-bed thermal energy storage for on-demand power supply , 2018, Energy Conversion and Management.

[6]  Ying Li,et al.  Experimental study on the thermal stability of a new molten salt with low melting point for thermal energy storage applications , 2018 .

[7]  Rob Stringer,et al.  How to Manage Radical Innovation , 2000 .

[8]  Shelley L. MacDougall,et al.  The value of delay in tidal energy development , 2015 .

[9]  A. Oke.  Innovation types and innovation management practices in service companies , 2007 .

[10]  Giorgio Locatelli,et al.  A review on long-term electrical power system modeling with energy storage , 2021, Journal of Cleaner Production.

[11]  Carlye Lauff,et al.  What is a Prototype? What are the Roles of Prototypes in Companies? , 2018 .

[12]  Sonja Wogrin,et al.  Investment in electric energy storage under uncertainty: a real options approach , 2016, Comput. Manag. Sci..

[13]  Gregor Verbic,et al.  Multi-Stage Compound Real Options Valuation in Residential PV-Battery Investment , 2019, ArXiv.

[14]  Dong-Choon Lee,et al.  A Novel Six-Level Inverter Topology for Medium-Voltage Applications , 2016, IEEE Transactions on Industrial Electronics.

[15]  Stein-Erik Fleten,et al.  Green Electricity Investment Timing in Practice: Real Options or Net Present Value? , 2016 .

[16]  Iosu Aizpuru,et al.  Comparative Study and Evaluation of Passive Balancing Against Single Switch Active Balancing Systems for Energy Storage Systems , 2016 .

[17]  G. O'Connor,et al.  Implementing radical innovation in mature firms: The role of hubs , 2001 .

[18]  Giorgio Locatelli,et al.  Investment and risk appraisal in energy storage systems: A real options approach , 2016 .

[19]  Sara Boarin,et al.  Cogeneration: An option to facilitate load following in Small Modular Reactors , 2017 .

[20]  H. Erdogmus.  Valuation of Learning Options in Software Development Under Private and Market Risk , 2002 .

[21]  Giorgio Locatelli,et al.  A Financial Model for Lithium-Ion Storage in a Photovoltaic and Biogas Energy System , 2019, Applied Energy.

[22]  Ben J Hicks,et al.  Accelerating product prototyping through hybrid methods: Coupling 3D printing and LEGO , 2019, Design Studies.

[23]  Martin Steinert,et al.  Eliciting unknown unknowns with prototypes: Introducing prototrials and prototrial-driven cultures , 2017 .

[24]  Byungjoon Yoo,et al.  A Model of Neutral B2B Intermediaries , 2002, J. Manag. Inf. Syst..

[25]  R. S. Elias,et al.  Retrofitting carbon capture and storage to natural gas-fired power plants: A real-options approach , 2018, Journal of Cleaner Production.

[26]  Seamus D. Garvey,et al.  Analysis of a Wind Turbine Power Transmission System with Intrinsic Energy Storage Capability , 2015 .

[27]  Abigail Hird,et al.  The Concept of Purposeful Prototyping: Towards a New Kind of Taxonomic Classification , 2019 .

[28]  B. McLellan,et al.  Investment strategy of hydrothermal geothermal heating in China under policy, technology and geology uncertainties , 2019, Journal of Cleaner Production.

[29]  P. Mancarella,et al.  Stochastic control and real options valuation of thermal storage-enabled demand response from flexible district energy systems , 2015 .

[30]  Thomas Muche,et al.  A real option-based simulation model to evaluate investments in pump storage plants , 2009 .

[31]  Bei Li,et al.  Study on energy storage system investment decision based on real option theory , 2012 .

[32]  Loi Lei Lai,et al.  A comprehensive review on large-scale photovoltaic system with applications of electrical energy storage , 2017 .

[33]  Weidong Chen,et al.  Energy storage subsidy estimation for microgrid: A real option game-theoretic approach , 2019, Applied Energy.

[34]  Chun Sing Lai,et al.  Are energy policies for supporting low-carbon power generation killing energy storage? , 2021, Journal of Cleaner Production.

[35]  Jonathan Howes,et al.  Concept and Development of a Pumped Heat Electricity Storage Device , 2012, Proceedings of the IEEE.

[36]  Goran Andersson,et al.  Location-dependent valuation of energy hubs with storage in multi-carrier energy systems , 2010, 2010 7th International Conference on the European Energy Market.

[37]  T. Schmidt,et al.  Technology Life-Cycles in the Energy Sector – Technological Characteristics and the Role of Deployment for Innovation , 2015 .

[38]  Daniel Jacob Sorensen,et al.  Creating options while designing prototypes: value management in the automobile industry , 2010 .

[39]  Haisheng Chen,et al.  Transmission characteristics of exergy for novel compressed air energy storage systems-from compression and expansion sections to the whole system , 2020 .

[40]  G. Sheblé,et al.  Comparing Hedging Methods for Wind Power: Using Pumped Storage Hydro Units vs. Options Purchasing , 2006, 2006 International Conference on Probabilistic Methods Applied to Power Systems.

[41]  Giorgio Locatelli,et al.  Load following with Small Modular Reactors (SMR): A real options analysis , 2015 .

[42]  Julie S. Linsey,et al.  Design prototyping methods: state of the art in strategies, techniques, and guidelines , 2017, Design Science.

[43]  Craig E. Buckley,et al.  Metal hydride thermal heat storage prototype for concentrating solar thermal power , 2015 .

[44]  G. Locatelli,et al.  Appraisal of small modular nuclear reactors with ‘real options’ valuation , 2017 .

[45]  Saffa Riffat,et al.  The latest advancements on thermochemical heat storage systems , 2015 .

[46]  Koji Kotani,et al.  Real options approach to renewable energy investments in Mongolia , 2012 .

[47]  Alberto Benato,et al.  Performance and cost evaluation of an innovative Pumped Thermal Electricity Storage power system , 2017 .

[48]  Yongma Moon,et al.  Optimal Time to Invest Energy Storage System under Uncertainty Conditions , 2014 .

[49]  Weidong Chen,et al.  The socially optimal energy storage incentives for microgrid: A real option game-theoretic approach. , 2019, The Science of the total environment.

[50]  Chun Sing Lai,et al.  Economic and financial appraisal of novel large-scale energy storage technologies , 2021, Energy.

[51]  Werner Platzer,et al.  High temperature latent heat storage with a screw heat exchanger: Design of prototype , 2013 .

[52]  Seamus D. Garvey,et al.  The cold store for a pumped thermal energy storage system , 2017 .

[53]  Anthony Paul Roskilly,et al.  Levelised Cost of Storage for Pumped Heat Energy Storage in comparison with other energy storage technologies , 2017 .

[54]  K. Chalvatzis,et al.  Innovative Energy Islands: Life-Cycle Cost-Benefit Analysis for Battery Energy Storage , 2018, Sustainability.

[55]  Pradip Dutta,et al.  High temperature solar receiver and thermal storage systems , 2017 .

[56]  Jessica Menold,et al.  Prototype for X (PFX): A holistic framework for structuring prototyping methods to support engineering design , 2017 .

[57]  Michel Benaroch,et al.  Managing Information Technology Investment Risk: A Real Options Perspective , 2002, J. Manag. Inf. Syst..

[58]  Mariia Kozlova,et al.  Real option valuation in renewable energy literature: Research focus, trends and design , 2017 .

[59]  P. Cheetham,et al.  Enhancement of Dielectric Strength of Cryogenic Gaseous Helium by Addition of Small Mol% Hydrogen , 2017, IEEE Transactions on Applied Superconductivity.

[60]  W. Lipiński,et al.  Techno-economic assessment of solid–gas thermochemical energy storage systems for solar thermal power applications , 2018 .

[61]  Reinhard Madlener,et al.  Economic Feasibility of a Compressed Air Energy Storage System Under Market Uncertainty: A Real Options Approach , 2017 .

[62]  Economic Analysis of Electricity Storage Based on Heat Pumps and Thermal Storage Units in Large-Scale Thermal Power Plants , 2017 .

[63]  S. Garvey,et al.  On generation-integrated energy storage , 2015 .

[64]  S. Fuss,et al.  Investment in wind power and pumped storage in a real options model , 2012 .

[65]  Francesco Casella,et al.  Design of CSP plants with optimally operated thermal storage , 2015 .

[66]  Mauro Mancini,et al.  A simple-to-implement real options method for the energy sector , 2020, Energy.

[67]  Lei Du,et al.  Study on carbon capture and storage (CCS) investment decision-making based on real options for China's coal-fired power plants , 2016 .

[68]  G. Locatelli,et al.  Economics and finance of Small Modular Reactors: A systematic review and research agenda , 2020, Renewable and Sustainable Energy Reviews.

[69]  E. Gerber,et al.  The psychological experience of prototyping , 2012 .

[70]  L. Trigeorgis,et al.  Disruptive Innovation, Market Entry and Production Flexibility in Heterogeneous Oligopoly , 2019, Production and Operations Management.

[71]  Pierluigi Mancarella,et al.  Flexible distributed multienergy generation system expansion planning under uncertainty , 2016, 2016 IEEE Power and Energy Society General Meeting (PESGM).

[72]  Venkataramana Gadhamshetty,et al.  Project-Based Introduction to an Engineering Design Course Incorporating Microbial Fuel Cells as a Renewable Energy Technology , 2016 .