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

Briest, Gordon and Lauven, Lars-Peter and Kupfer, Stefan and Lukas, Elmar (2022) Leaving well-worn paths : Reversal of the investment-uncertainty relationship and flexible biogas plant operation. European Journal of Operational Research, 300 (3). pp. 1162-1176. ISSN 0377-2217

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.