Valuing investments in domestic PV-Battery Systems under uncertainty

Renewable energy technologies are expected to play a major role in mitigating climate change and resource depletion effects as well as in contributing to domestic energy security. Due to the intermittent nature of solar photovoltaic (PV), there are often significant gaps between energy consumption and energy supply by PV plants. This makes storage systems a potential option to maximize savings and accrue managerial flexibility by increasing the share of self-consumed energy while guaranteeing adequate power levels in distribution grids. This paper provides a theoretical framework to model households' decision to invest in domestic PV plants coupled with battery storage. To capture the value of managerial flexibility relative to the decision to install both a PV plant and a battery, i.e., a domestic PV-Battery System (PVB), we implement a Real Options approach and propose an optimization model, which we calibrate and test according to data from the Italian energy market. Our findings show that the option of storing energy via batteries increases de facto investment value: the adoption of a PVB increases managerial flexibility, as households can optimally exercise the option to decide their consumption and storage patterns contingent on favorable market conditions. The opportunity to store energy via batteries encourages households to invest in larger plants compared to those not paired with batteries. There is indeed a positive relationship between the PVB optimal size and investment timing.