Microgrid investment under uncertainty: a real option approach using closed form contingent analysis

• Published in: Annals of operations research Vol. 235; no. 1; pp. 259 - 276
• Main Authors: Farzan, Farnaz, Mahani, Khashayar, Gharieh, Kaveh, Jafari, Mohsen A.
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.12.2015; Springer; Springer Nature B.V
• Subjects: Algorithms; Alternative energy sources; Business and Management; Combinatorics; Costs; Distributed generation; Electricity; Electricity distribution; Electricity generation; Exact solutions; Exchange; Financing; Investment; Investment policy; Investments; Load; Management; Mathematical analysis; Natural gas prices; Operations research; Operations Research/Decision Theory; Ordinary differential equations; Partial differential equations; Photovoltaic cells; Present value; Public private partnerships; Put & call options; Real options analysis; Solar cells; Studies; Theory of Computation; Distributed generation; Real option analysis; Investment timing; Microgrids
• ISSN: 0254-5330; 1572-9338
• DOI: 10.1007/s10479-015-1929-y

The traditional net present value approach to investment in microgrid assets does not take into account the inherent uncertainties in fuel prices, cost of technology, and microgrid load profile. We propose a real option approach to microgrid investment, which includes solar photovoltaic (PV) and gas-fired generation assets. Likewise the (n, m) exchange literature in real option analysis, we examine cases with interdependency and independency of fuel price and the cost of PV technology. This work, however, makes a major contribution by the way of introducing a new parameter, which is defined as the elasticity of the option value to prices and is used in the formulation of closed form solutions. We further extend the (1, 1) exchange problem here to include operational flexibility of microgrid, such that optimal switching between investment, suspension and re-activation can be examined.