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A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems

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  • Benjamin Hassi
  • Tomas Reyes
  • Enzo Sauma

Abstract

The use of residential Photovoltaic-Storage systems may produce large benefits to owners and has expanded rapidly in recent years. Nonetheless, large uncertainties regarding the profitability of these systems make it necessary to incorporate flexibilities in their economic evaluations. This paper offers a new method to evaluate the compound flexibility of both the option of delaying investments and the option of further expanding the capacity of solar photovoltaic modules and batteries during the investment horizon. Flexibility is modeled as a compound real option, whose value is computed using a novel method that we call Compound Least Squares Monte Carlo (CLSM). The model is applied to the investment decisions associated to a residential Photovoltaic-Storage system. Results suggest that investors should use the proposed CLSM method in the economic valuation of multi-stage projects, since considering only a single flexibility could promote sub-optimal decisions. Moreover, in our case study, we show that it is optimal to break the investment down into two steps or more in 36% of future scenarios, on average.

Suggested Citation

  • Benjamin Hassi & Tomas Reyes & Enzo Sauma, 2022. "A Compound Real Option Approach for Determining the Optimal Investment Path for RPV-Storage Systems," The Energy Journal, , vol. 43(3), pages 83-104, May.
    • Handle: RePEc:sae:enejou:v:43:y:2022:i:3:p:83-104
    DOI: 10.5547/01956574.43.3.bhas
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    References listed on IDEAS

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    1. F. Mariscal & T. Reyes & E. Sauma, 2020. "Valuing flexibility in transmission expansion planning from the perspective of a social planner: A methodology and an application to the Chilean power system," The Engineering Economist, Taylor & Francis Journals, vol. 65(4), pages 288-320, October.
    2. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
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