Leaving well-worn paths: Reversal of the investment-uncertainty relationship and flexible biogas plant operation

Gordon Briest, Lars-Peter Lauven, Stefan Kupfer and Elmar Lukas

European Journal of Operational Research, 2022, vol. 300, issue 3, 1162-1176

Abstract: We propose a dynamic investment model to study investment behavior for power grid-stabilizing, flexibility-providing energy projects. Our model adds to the literature in several novel ways. First, we use time series-based optimization approaches (i.e., a single-unit commitment model) to determine, validate and parametrize exponential Ornstein–Uhlenbeck (OU) revenues as a state variable for the real options model in a biogas plant flexibilization case study. Second, from a theoretical perspective, our findings suggest that for specific revenue processes (i.e., exponential OU processes) the well-known option-driven incentive to wait acts alongside a new uncertainty-driven intrinsic investment incentive. Hence, higher uncertainty may lead to earlier investment. Third, we show how the results influence managerial decision making in practice and can be used to shape the design of an optimal renewable support scheme.

Keywords: Investment analysis; Finite technology life; Operation type switching; Subsidy policies; Real options (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:300:y:2022:i:3:p:1162-1176

DOI: 10.1016/j.ejor.2021.10.035

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