Optimal investment in hydrogen production from wind power under uncertainty: A Norwegian case study
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Hydrogen produced from renewable energy can help reduce emissions, especially in the transportation sector. In Norway, an increased political promotion over the last years has started the development of a hydrogen infrastructure, resulting in an increasing demand. Understanding the many benefit of using hydrogen as an energy carrier is key to motivate for further adoption of hydrogen technologies. In this thesis, I examine an investment decision faced by the Norwegian power company TrønderEnergi AS. They hold the option to invest in a hydrogen plant that has direct access to power from their existing wind farm at Valsneset in Central Norway. The hydrogen operations are assumed to be flexible. A real options model is developed in order to not only find the optimal timing, size and plant operations of the investment under cost uncertainty, but also find the optimal investment strategy in terms of investing in single versus multiple stages. The model uses optimisation to find the optimal operations and then the least squares Monte Carlo method to find the corresponding optimal choices for the other managerial flexibilities. Overall, I find that the investment opportunity is profitable under the prevailing technological boundaries and framework conditions in Norway, and should be invested in immediately. I also find that the hydrogen price set by TrønderEnergi determines the optimal choices for each managerial flexibility in the investment decision. Finally, I find that the investor has stronger incentives to delay investment and invest in less capacity with a greater cost uncertainty that remains also after investment. In addition, investing in one stage is more attractive than investing in multiple stages with greater uncertainty.