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Upgrading hydropower plants with storage: timing and capacity choice

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Abstract

This paper presents an investment decision support framework for a hydropower producer with storage facilities that is considering upgrading the production capacity in its power plant. A real options framework is proposed to support the investment decision, where both investment timing and capacity choice are considered. Using a case from a Norwegian hydropower producer, we employ the framework to evaluate investment opportunities in this company. Our main contribution is an approach that combines hydropower scheduling and real options valuation for already constructed power plants. Furthermore, the results from our case analysis suggest feasible investment strategies for the hydropower producer.

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Notes

  1. Their approach is developed for option pricing purposes.

  2. Due to restrictions from the case provider, some technical parameters are not presented.

  3. In the production scheduling, we find the present value of the annual revenue for each investment alternative for a range of annual price levels.

  4. The daily long term mean reversion factor, \(\eta \), corresponds to the annual long term mean reversion factor, \(\lambda \), in Eq. (7).

  5. We use spot price data from Nord Pool from the period 01.01.2005 to 31.12.2008.

  6. Specifically, we use contracts with a delivery period of 1 year, and 3 years to maturity. The data is taken from the period 01.01.2008 to 31.12.2008.

  7. This approximately equals the historical median reservoir level.

  8. The valuation procedure is developed for option pricing.

  9. Note that this is the same discount factor as used in the production planning.

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Acknowledgments

The case study was provided by Norsk Hydro ASA, and the authors are thankful for the contributions of data and feedback from Norsk Hydro ASA. The authors acknowledge support from the FINERGY Project 178374 at NTNU and input from anonymous reviewers. This work has partly been carried out as a part of the Young Scientist Summer program (YSSP) at the International Institute for Applied Systems Analysis (IIASA).

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Authors and Affiliations

  1. Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, 7491 , Trondheim, Norway

    Ane Marte Andersson, Morten Elverhøi, Stein-Erik Fleten & Ole Christian Troland

  2. International Institute for Applied Systems Analysis, Schlossplatz 1, 2361 , Laxenburg, Austria

    Sabine Fuss & Jana Szolgayová

Authors
  1. Ane Marte Andersson
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  2. Morten Elverhøi
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  3. Stein-Erik Fleten
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  4. Sabine Fuss
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  5. Jana Szolgayová
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  6. Ole Christian Troland
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Corresponding author

Correspondence to Ane Marte Andersson.

Appendices

Appendices

Appendix 1

Parameters for valuation framework See Tables 6, 7, 8

Table 6 Estimated parameters for the daily electricity price dynamics presented in Eqs. (1)–(4)
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Table 7 Parameters and sets for numerical example
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Table 8 Estimated parameters for the autoregressive process presented in Eq (7)
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Appendix 2

figure a

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Andersson, A.M., Elverhøi, M., Fleten, SE. et al. Upgrading hydropower plants with storage: timing and capacity choice. Energy Syst 5, 233–252 (2014). https://doi.org/10.1007/s12667-013-0112-2

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  • DOI: https://doi.org/10.1007/s12667-013-0112-2

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