Economic valuation of battery storage integration in operational solar plants under price uncertainty: a compound real options approach

Abstract

Variable renewable energy expansion has intensified the need for battery energy storage systems (BESS) to manage price volatility and operational intermittency in power systems. This work evaluates integrating BESS into operational utility-scale solar plants, focusing on how managerial flexibility mitigates financial risks from price uncertainty. The objective is to develop a decision-making framework to identify the optimal timing and strategy for BESS investment by evaluating different investment paths to maximize project value through energy arbitrage. The methodology employs K-means clustering for price pattern identification and Mixed-Integer Linear Programming (MILP) for joint PV-BESS dispatch optimization. These inputs feed a Real Options Analysis (ROA) model using the Least Squares Monte Carlo (LSM) algorithm adapted to compound options, which incorporates stochastic evolution in day and night prices through geometric Brownian motions. Results show the flexible approach yields an expected incremental value of 13.2 MMUSD, reversing the-59.1 MMUSD loss suggested by traditional valuation. The model justifies investment in 83.4% of scenarios, with 53.4% favouring compound expansion over single-stage investment. Furthermore, nighttime price growth and volatility are identified as the most critical drivers of project profitability. This framework serves as a strategic tool for private investors to mitigate declining daytime revenues by transforming static solar assets into flexible systems. Practically, developers should prioritize modular designs and negotiate Power Purchase Agreements (PPAs) that capitalize on nighttime price spreads to ensure financial resilience in uncertain market environments.