The Value of Flexibility in the Design of Hybrid Energy Systems: A Real Options Analysis

In this paper, the impact of incorporating flexibility in the design of hybrid energy systems (HES) is considered. Flexibility is introduced by considering the option to upgrade or reconfigure HES configurations at some point in the future in response to economic and technological changes that are initially unknown and uncertain. Such flexibility has been studied previously in real options analysis. We first investigate the impact of flexibility on the most preferred design alternative and its value. Simply considering the option to upgrade or reconfigure the system affects the design choice. The most preferred design alternative for a flexible system will often sacrifice some initial technical or economic performance to better take advantage of a future option. For the HES case study, the most preferred flexible design alternative is more valuable than the most preferred inflexible alternative. In other words, flexibility adds value as is reflected in an increase of the expected utility of the net present value. Second, we investigate the impact of the size of the uncertainty on the option value. Unexpectedly, for the HES case study considered here, increasing uncertainty does not strongly affect the value of flexibility. Furthermore, investigation is necessary to determine whether this relationship holds more generally or is specific to this case study.

[1]  Derek W. Bunn,et al.  Experimental analysis of the efficiency of uniform-price versus discriminatory auctions in the England and Wales electricity market ☆ , 2001 .

[2]  M. Barlow.  A DIFFUSION MODEL FOR ELECTRICITY PRICES , 2002 .

[3]  Shannon M. Bragg-Sitton,et al.  Nuclear Hybrid Energy Systems Regional Studies: West Texas & Northeastern Arizona , 2015 .

[4]  J. Hammersley.  SIMULATION AND THE MONTE CARLO METHOD , 1982 .

[5]  Christiaan J. J. Paredis,et al.  Hybrid Energy System Modeling in Modelica , 2014 .

[6]  D. Bunn,et al.  Evaluating the power investment options with uncertainty in climate policy , 2008 .

[7]  Harris A. Schilling,et al.  Applied Numerical Methods for Engineers Using MATLAB , 1999 .

[8]  G. C. Seeling-Hochmuth.  A combined optimisation concet for the design and operation strategy of hybrid-PV energy systems , 1997 .

[9]  Diane M. Lander,et al.  Challenges to the practical implementation of modeling and valuing real options , 1998 .

[10]  R. Neufville.  Real Options: Dealing With Uncertainty in Systems Planning and Design , 2003 .

[11]  A. Louche,et al.  DESIGN OF HYBRID-PHOTOVOLTAIC POWER GENERATOR, WITH OPTIMIZATION OF ENERGY MANAGEMENT , 1999 .

[12]  D. T. Ingersoll,et al.  NuScale small modular reactor for Co-generation of electricity and water , 2014 .

[13]  Christiaan J. J. Paredis,et al.  A Review of Methods for Design Under Uncertainty From the Perspective of Utility Theory , 2010 .

[14]  Daniel Weisser,et al.  Instantaneous wind energy penetration in isolated electricity grids: concepts and review , 2005 .

[15]  Christiaan J. J. Paredis,et al.  Dynamic performance analysis of two regional nuclear hybrid energy systems , 2016 .

[16]  R. Rubinstein,et al.  On the optimality and e ciency of common random numbers , 1984 .

[17]  Orhan Ekren,et al.  Size optimization of a PV/wind hybrid energy conversion system with battery storage using simulated annealing , 2010 .

[18]  Charles W. Forsberg.  Hybrid systems to address seasonal mismatches between electricity production and demand in nuclear renewable electrical grids , 2013 .

[19]  M. Coller,et al.  Eliciting Individual Discount Rates , 1999 .

[20]  Zhitao Liu,et al.  Technology readiness assessment of Small Modular Reactor (SMR) designs , 2014 .

[21]  Getachew Bekele,et al.  Feasibility study for a standalone solar–wind-based hybrid energy system for application in Ethiopia , 2010 .

[22]  Christiaan J. J. Paredis,et al.  A Rational Design Approach to Gaussian Process Modeling for Variable Fidelity Models , 2011, DAC 2011.

[23]  Belgin Emre Turkay,et al.  Economic analysis of standalone and grid connected hybrid energy systems , 2011 .

[24]  Genichi Taguchi,et al.  Introduction to quality engineering.... , 2014 .

[25]  Robert B. Jackson,et al.  Opportunities and barriers to pumped-hydro energy storage in the United States , 2011 .

[26]  H. Geman,et al.  Understanding the Fine Structure of Electricity Prices , 2004 .

[27]  Olivier L. de Weck,et al.  Staged Deployment of Communications Satellite Constellations in Low Earth Orbit , 2004, J. Aerosp. Comput. Inf. Commun..

[28]  Paul Denholm,et al.  Grid flexibility and storage required to achieve very high penetration of variable renewable electricity , 2011 .

[29]  B. Dunn,et al.  Electrical Energy Storage for the Grid: A Battery of Choices , 2011, Science.

[30]  G. Davis,et al.  Optimizing the level of renewable electric R&D expenditures using real options analysis , 2003 .

[31]  Madhan Shridhar Phadke,et al.  Quality Engineering Using Robust Design , 1989 .

[32]  Ronald A. Howard,et al.  Decision analysis: practice and promise , 1988 .

[33]  M. Osborne,et al.  Letter to the Editor---Reply to “Comments on 'Brownian Motion in the Stock Market'” , 1959 .

[34]  M. Shahidehpour,et al.  Microgrid-Based Co-Optimization of Generation and Transmission Planning in Power Systems , 2013, IEEE Transactions on Power Systems.

[35]  Leonardo Lima Gomes,et al.  Switching outputs in a bioenergy cogeneration project: A real options approach , 2014 .

[36]  Charles A. Holt,et al.  Risk Aversion and Incentive Effects , 2002 .

[37]  J. Torriti,et al.  Demand response experience in Europe: Policies, programmes and implementation , 2010 .

[38]  Sandip Deshmukh,et al.  Modeling of hybrid renewable energy systems , 2008 .

[39]  J. Spall,et al.  Simulation-Based Optimization with Stochastic Approximation Using Common Random Numbers , 1999 .

[40]  Michel-Alexandre Cardin,et al.  Extracting Value from Uncertainty: Proposed Methodology for Engineering Systems Design , 2007 .

[41]  M. J. Khan,et al.  Pre-feasibility study of stand-alone hybrid energy systems for applications in Newfoundland , 2005 .

[42]  Humberto E. Garcia,et al.  Dynamic analysis of hybrid energy systems under flexible operation and variable renewable generation – Part I: Dynamic performance analysis , 2013 .

[43]  Mohammed H. Albadi,et al.  A summary of demand response in electricity markets , 2008 .

[44]  Richard de Neufville,et al.  Flexibility in Engineering Design , 2011 .

[45]  S. M. Moghaddas-Tafreshi,et al.  Optimal sizing of a stand-alone hybrid power system via particle swarm optimization for Kahnouj area in south-east of Iran , 2009 .

[46]  J. E. Neely,et al.  HYBRID REAL OPTIONS VALUATION OF RISKY PRODUCT DEVELOPMENT PROJECTS , 2001 .

[47]  Blake Johnson,et al.  Exotic electricity options and the valuation of electricity generation and transmission assets , 2001, Decis. Support Syst..

[48]  D. T. Ingersoll,et al.  NuScale Energy Supply for Oil Recovery and Refining Applications , 2014 .

[49]  R. E. Shrieves,et al.  FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED (EVA™), AND NET PRESENT VALUE (NPV):. A RECONCILIATION OF VARIATIONS OF DISCOUNTED-CASH-FLOW (DCF) VALUATION , 2001 .

[50]  Tao Wang,et al.  Real Options by Spreadsheet: Parking Garage Case Example , 2006 .

[51]  S. Schneider,et al.  Climate Change 2001: Synthesis Report: A contribution of Working Groups I, II, and III to the Third Assessment Report of the Intergovernmental Panel on Climate Change , 2001 .