An Analytical Method to the Economics of Pumped Storage Power Plants Based on the Real Options Method

Weihao Wang, Jianbin Fan, Jian Le (), Gong Zhang, Longxiang Chen and Lei Deng
Additional contact information
Weihao Wang: Institute of Next Generation Power Systems and International Standards, Wuhan University, Wuhan 430072, China
Jianbin Fan: Institute of Next Generation Power Systems and International Standards, Wuhan University, Wuhan 430072, China
Jian Le: Institute of Next Generation Power Systems and International Standards, Wuhan University, Wuhan 430072, China
Gong Zhang: Pumped-Storage Technological & Economic Research Institute, State Grid Xinyuan Co., Ltd., Beijing 100052, China
Longxiang Chen: State Grid Corporation of China, Beijing 100031, China
Lei Deng: State Grid Electric Power Engineering Research Institute Co., Ltd., Beijing 100192, China

Energies, 2025, vol. 18, issue 19, 1-12

Abstract: This paper develops an economic evaluation framework for pumped storage hydropower (PSH) projects based on real options, addressing the limitations of traditional economic evaluation methods that neglect investment flexibility and path dependence. The framework integrates an annual net cash flow model with an improved mean-reverting electricity price model to generate thousands of electricity price trajectories, while backward dynamic programming dynamically values abandonment options. The core innovation of this study lies in the dynamic pricing mechanism of abandonment options, which explicitly captures the flexibility of terminating projects under adverse conditions. A comparative analysis between the traditional NPV approach and the real options method reveals significant differences: the average NPV under base scenario is −38.35 million CNY, whereas option scenario yields an average NPV of 143.15 million CNY. The average value of real options is 181.5 million yuan, and it increases the average internal rate of return by 0.34%. These results demonstrate that incorporating real options prevents the underestimation of project value and provides more robust decision-making support under uncertainty, thereby offering methodological and policy insights for the investment appraisal of large-scale energy storage projects.

Keywords: pumped storage; real options; investment decisions; economic analysis (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1996-1073/18/19/5291/pdf (application/pdf)
https://www.mdpi.com/1996-1073/18/19/5291/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jeners:v:18:y:2025:i:19:p:5291-:d:1765783

Access Statistics for this article

Energies is currently edited by Ms. Cassie Shen

More articles in Energies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().