Option valuation of energy storage integration to a wind farm: a real options approach

Wind energy is a promising source of renewable power, yet its inherent uncertainties present challenges to grid stability. The variability of wind energy often leads to energy curtailment when production does not match demand. In response to this challenge, our paper explores the financial feasibility of integrating energy storage systems into wind energy operations. The central question is whether the high capital costs of energy storage can be justified within the operational and economic framework of wind energy firms. To address this, we adopt a real options approach, utilizing a binomial lattice model. This method allows for a detailed assessment of the financial viability of energy storage, factoring in the uncertainties of electricity demand, wind speed, and capital cost. In this paper, we focus on the potential for energy storage to extend the operational period of wind energy systems. This extension allows the wind firm to achieve increased financial incentives through the Renewable Electricity Production Tax Credit for renewable energy generation. Our research aims to assess the option value of energy storage considering this added benefit.