Optimal investment strategy based on a real options approach for energy storage systems in the Korean power market

Abstract

Energy storage systems (ESSs) are widely recognized as a possible solution for integrating the increasing renewable energy penetration in electrical grids. However, ESS investments have many uncertainties, such as curtailment effects, incentive value, cost overruns, and delays in construction levels. This study proposes an optimal investment strategy for the expanded net present value (ENPV) using the real options approach (ROA) that accounts for technical types and investment levels. The ROA is defined according to the sum of total values, including all uncertainties, in conjunction with the extended binomial tree based on economic theory. Simulations are performed to demonstrate the applicability of the ENPV with regard to evaluating the economic and technical viability of ESSs on the Korean power market. These results prove that lithium-ion ESSs are technologically suitable for RE but are economically risky. Thus, the current investment decision approach is not recommended. Although the ENPV improves the economic performance of ESSs with respect to uncertainties, investors can maximize future profits and reduce adverse risks based on the optimal ESS investment strategy. The investment of lithium-ion ESS under specific conditions requires incentives of at least 25$/MWh. © 2024 The Authors