Valuation of investments in energy aggregator and storage systems by compound options

Abstract

The emergence of smart grids has fostered new participants in the electricity market with innovative business models. Among these new market agents, aggregator systems play a crucial role and require modern economic methods to support informed investment decision-making. This paper presents a novel approach to assess investments in aggregator systems using compound real options. The proposed methodology incorporates sequential options, involving the deferral of the initial investment in the aggregator system followed by contingent expansions in energy storage. Uncertainties related to investment costs of the storage and aggregator systems are modeled by a stochastic process and integrated into the valuation framework. A comprehensive sensitivity analysis of key variables is depicted in threshold maps delimiting decision regions. Results of the case study demonstrate that under current and a wide range of projected conditions, aggregator systems with storage are not financially feasible. However, variations in some assumptions indicate that integrating other business models within the aggregator system can render the project profitable. These findings highlight the importance of designing effective incentive and regulatory mechanisms for such businesses during the early stages of technology adoption.