IDEAS home Printed from https://ideas.repec.org/a/eee/rensus/v49y2015icp91-99.html
   My bibliography  Save this article

Pumped-storage project: A short to long term investment analysis including climate change

Author

Listed:
  • Gaudard, Ludovic

Abstract

New renewable energy needs flexibility, which can be provided by storage-hydropower. Climate change affects the potential of this technology in both a negative and a positive way, on one hand by altering runoff, and on the other hand by creating new investment opportunity. This paper provides an economic and financial analysis of a future project in a pumped-storage facility that may be initiated in the Swiss Alps following the glacier retreat. The area released may be considered for building a new reservoir. A complete and integrated model is developed based on the tools of analysis provided by econometrics, finance and operational research. The results show that under the present market conditions such an investment is not profitable. Unexpectedly, the sensitivity analysis shows that most of the time higher price volatility reduces annual revenue. Furthermore, the project׳s lifetime only has a marginal impact on the Net Present Value. The value of the concession, which is the right to use water, is also assessed on the basis of a real option analysis including a long-term horizon. Its present value is substantial even if the project is currently unprofitable. In the discussion, we go beyond the Swiss case study and highlight the implications for energy policy and market design.

Suggested Citation

  • Gaudard, Ludovic, 2015. "Pumped-storage project: A short to long term investment analysis including climate change," Renewable and Sustainable Energy Reviews, Elsevier, vol. 49(C), pages 91-99.
    • Handle: RePEc:eee:rensus:v:49:y:2015:i:c:p:91-99
    DOI: 10.1016/j.rser.2015.04.052
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1364032115003226
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.rser.2015.04.052?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Pierre Vernimmen & Pascal Quiry & Maurizio Dallocchio & Yann Le Fur & Antonio Salvi, 2011. "Corporate finance : Theory and practice," Post-Print hal-02298161, HAL.
    2. Keles, Dogan & Genoese, Massimo & Möst, Dominik & Fichtner, Wolf, 2012. "Comparison of extended mean-reversion and time series models for electricity spot price simulation considering negative prices," Energy Economics, Elsevier, vol. 34(4), pages 1012-1032.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    5. Malte Meinshausen & S. Smith & K. Calvin & J. Daniel & M. Kainuma & J-F. Lamarque & K. Matsumoto & S. Montzka & S. Raper & K. Riahi & A. Thomson & G. Velders & D.P. Vuuren, 2011. "The RCP greenhouse gas concentrations and their extensions from 1765 to 2300," Climatic Change, Springer, vol. 109(1), pages 213-241, November.
    6. Meyer, Lutz & Tsatsaronis, George & Buchgeister, Jens & Schebek, Liselotte, 2009. "Exergoenvironmental analysis for evaluation of the environmental impact of energy conversion systems," Energy, Elsevier, vol. 34(1), pages 75-89.
    7. Ludovic Gaudard & Manfred Gilli & Franco Romerio, 2013. "Climate Change Impacts on Hydropower Management," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 27(15), pages 5143-5156, December.
    8. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    9. Bøckman, Thor & Fleten, Stein-Erik & Juliussen, Erik & Langhammer, Håvard J. & Revdal, Ingemar, 2008. "Investment timing and optimal capacity choice for small hydropower projects," European Journal of Operational Research, Elsevier, vol. 190(1), pages 255-267, October.
    10. Kjaerland, Frode, 2007. "A real option analysis of investments in hydropower--The case of Norway," Energy Policy, Elsevier, vol. 35(11), pages 5901-5908, November.
    11. Weron, Rafal & Misiorek, Adam, 2008. "Forecasting spot electricity prices: A comparison of parametric and semiparametric time series models," International Journal of Forecasting, Elsevier, vol. 24(4), pages 744-763.
    12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    13. Muche, Thomas, 2009. "A real option-based simulation model to evaluate investments in pump storage plants," Energy Policy, Elsevier, vol. 37(11), pages 4851-4862, November.
    14. Ansar, Atif & Flyvbjerg, Bent & Budzier, Alexander & Lunn, Daniel, 2014. "Should we build more large dams? The actual costs of hydropower megaproject development," Energy Policy, Elsevier, vol. 69(C), pages 43-56.
    15. Pehnt, Martin, 2006. "Dynamic life cycle assessment (LCA) of renewable energy technologies," Renewable Energy, Elsevier, vol. 31(1), pages 55-71.
    16. Manfred Gilli & Enrico Schumann, 2012. "Heuristic optimisation in financial modelling," Annals of Operations Research, Springer, vol. 193(1), pages 129-158, March.
    17. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
    18. Evans, Annette & Strezov, Vladimir & Evans, Tim J., 2009. "Assessment of sustainability indicators for renewable energy technologies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 13(5), pages 1082-1088, June.
    19. Detlef Vuuren & Jae Edmonds & Mikiko Kainuma & Keywan Riahi & Allison Thomson & Kathy Hibbard & George Hurtt & Tom Kram & Volker Krey & Jean-Francois Lamarque & Toshihiko Masui & Malte Meinshausen & N, 2011. "The representative concentration pathways: an overview," Climatic Change, Springer, vol. 109(1), pages 5-31, November.
    20. Vieira, F. & Ramos, H.M., 2008. "Hybrid solution and pump-storage optimization in water supply system efficiency: A case study," Energy Policy, Elsevier, vol. 36(11), pages 4142-4148, November.
    21. Reuter, Wolf Heinrich & Fuss, Sabine & Szolgayová, Jana & Obersteiner, Michael, 2012. "Investment in wind power and pumped storage in a real options model," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(4), pages 2242-2248.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Berna Tektas Sivrikaya & Ferhan Cebi & Hasan Hüseyin Turan & Nihat Kasap & Dursun Delen, 2017. "A fuzzy long-term investment planning model for a GenCo in a hybrid electricity market considering climate change impacts," Information Systems Frontiers, Springer, vol. 19(5), pages 975-991, October.
    2. Voisin, Nathalie & Dyreson, Ana & Fu, Tao & O'Connell, Matt & Turner, Sean W.D. & Zhou, Tian & Macknick, Jordan, 2020. "Impact of climate change on water availability and its propagation through the Western U.S. power grid," Applied Energy, Elsevier, vol. 276(C).
    3. Bhattacharjee, Subhadeep & Nayak, Pabitra Kumar, 2019. "PV-pumped energy storage option for convalescing performance of hydroelectric station under declining precipitation trend," Renewable Energy, Elsevier, vol. 135(C), pages 288-302.
    4. Barry, Michael & Baur, Patrick & Gaudard, Ludovic & Giuliani, Gianluca & Hediger, Werner & Romerio, Franco & Schillinger, Moritz & Schumann, René & Voegeli, Gillaume & Weigt, Hannes, 2015. "The Future of Swiss Hydropower A Review on Drivers and Uncertainties," Working papers 2015/11, Faculty of Business and Economics - University of Basel.
    5. Perera, A.T.D. & Soga, Kenichi & Xu, Yujie & Nico, Peter S. & Hong, Tianzhen, 2023. "Enhancing flexibility for climate change using seasonal energy storage (aquifer thermal energy storage) in distributed energy systems," Applied Energy, Elsevier, vol. 340(C).
    6. Guittet, Mélanie & Capezzali, Massimiliano & Gaudard, Ludovic & Romerio, Franco & Vuille, François & Avellan, François, 2016. "Study of the drivers and asset management of pumped-storage power plants historical and geographical perspective," Energy, Elsevier, vol. 111(C), pages 560-579.
    7. Gaudard, Ludovic & Madani, Kaveh, 2019. "Energy storage race: Has the monopoly of pumped-storage in Europe come to an end?," Energy Policy, Elsevier, vol. 126(C), pages 22-29.
    8. Yi, Changsheng & Chen, Zhaoming & Chen, Hongchen, 2023. "Opportunity knocks but just once: Impact of infrastructure investment decision on climate adaptation to flood events," Omega, Elsevier, vol. 121(C).
    9. Ludovic Gaudard & Jeannette Gabbi & Andreas Bauder & Franco Romerio, 2016. "Long-term Uncertainty of Hydropower Revenue Due to Climate Change and Electricity Prices," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 30(4), pages 1325-1343, March.
    10. Gaudard, Ludovic & Avanzi, Francesco & De Michele, Carlo, 2018. "Seasonal aspects of the energy-water nexus: The case of a run-of-the-river hydropower plant," Applied Energy, Elsevier, vol. 210(C), pages 604-612.
    11. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    12. Berna Tektas Sivrikaya & Ferhan Cebi & Hasan Hüseyin Turan & Nihat Kasap & Dursun Delen, 0. "A fuzzy long-term investment planning model for a GenCo in a hybrid electricity market considering climate change impacts," Information Systems Frontiers, Springer, vol. 0, pages 1-17.
    13. Ludovic Gaudard & Jeannette Gabbi & Andreas Bauder & Franco Romerio, 2016. "Long-term Uncertainty of Hydropower Revenue Due to Climate Change and Electricity Prices," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 30(4), pages 1325-1343, March.
    14. Liebensteiner, Mario & Haxhimusa, Adhurim & Naumann, Fabian, 2023. "Subsidized renewables’ adverse effect on energy storage and carbon pricing as a potential remedy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 171(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    2. Kroniger, Daniel & Madlener, Reinhard, 2014. "Hydrogen storage for wind parks: A real options evaluation for an optimal investment in more flexibility," Applied Energy, Elsevier, vol. 136(C), pages 931-946.
    3. Balibrea-Iniesta, José & Rodríguez-Monroy, Carlos & Núñez-Guerrero, Yilsy María, 2021. "Economic analysis of the German regulation for electrical generation projects from biogas applying the theory of real options," Energy, Elsevier, vol. 231(C).
    4. Lin, Boqiang & Wesseh, Presley K., 2013. "Valuing Chinese feed-in tariffs program for solar power generation: A real options analysis," Renewable and Sustainable Energy Reviews, Elsevier, vol. 28(C), pages 474-482.
    5. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    6. Nomikos, Nikos & Andriosopoulos, Kostas, 2012. "Modelling energy spot prices: Empirical evidence from NYMEX," Energy Economics, Elsevier, vol. 34(4), pages 1153-1169.
    7. Locatelli, Giorgio & Mancini, Mauro & Lotti, Giovanni, 2020. "A simple-to-implement real options method for the energy sector," Energy, Elsevier, vol. 197(C).
    8. Assereto, Martina & Byrne, Julie, 2021. "No real option for solar in Ireland: A real option valuation of utility scale solar investment in Ireland," Renewable and Sustainable Energy Reviews, Elsevier, vol. 143(C).
    9. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    10. MacDougall, Shelley L., 2015. "The value of delay in tidal energy development," Energy Policy, Elsevier, vol. 87(C), pages 438-446.
    11. Santos, Lúcia & Soares, Isabel & Mendes, Carla & Ferreira, Paula, 2014. "Real Options versus Traditional Methods to assess Renewable Energy Projects," Renewable Energy, Elsevier, vol. 68(C), pages 588-594.
    12. Lee, Shun-Chung & Shih, Li-Hsing, 2010. "Renewable energy policy evaluation using real option model -- The case of Taiwan," Energy Economics, Elsevier, vol. 32(Supplemen), pages 67-78, September.
    13. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
    14. Glensk, Barbara & Madlener, Reinhard, 2017. "Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis," FCN Working Papers 107/2016, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    15. Dobes Leo & Jotzo Frank & Stern David I., 2014. "The Economics of Global Climate Change: A Historical Literature Review," Review of Economics, De Gruyter, vol. 65(3), pages 281-320, December.
    16. Sim, Jaehun & Kim, Chae-Soo, 2019. "The value of renewable energy research and development investments with default consideration," Renewable Energy, Elsevier, vol. 143(C), pages 530-539.
    17. Carlos de Lamare Bastian-Pinto & Alexandre Paula Silva Ramos & Luiz de Magalhães Ozorio & Luiz Eduardo Teixeira Brandão, 2015. "Uncertainty and Flexibility in the Brazilian Beef Livestock Sector: the Value of the Confinement Option," Brazilian Business Review, Fucape Business School, vol. 12(6), pages 100-120, November.
    18. Maeda, Mansaku & Watts, David, 2019. "The unnoticed impact of long-term cost information on wind farms’ economic value in the USA. – A real option analysis," Applied Energy, Elsevier, vol. 241(C), pages 540-547.
    19. Foo, Nam & Bloch, Harry & Salim, Ruhul, 2018. "The optimisation rule for investment in mining projects," Resources Policy, Elsevier, vol. 55(C), pages 123-132.
    20. Cuervo, Felipe Isaza & Botero, Sergio Botero, 2016. "Wind power reliability valuation in a Hydro-Dominated power market: The Colombian case," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1359-1372.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:rensus:v:49:y:2015:i:c:p:91-99. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/600126/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.