The value of IS-enabled flexibility in electricity demand - a real options approach

As the transition to renewable energy sources progresses, their integration makes electricity production increasingly fluctuating, also causing amplified volatility in electricity prices on energy markets. To contribute to power grid stability, utilities need to balance volatile supply through shifting demand. This measure of demand side management creates flexibility, being enabled as the integration of IS in the power grid grows. The flexibility of deferring consumption to times of lower demand or higher supply bears an economic value. We show how to quantify this value in order to support decisions on short-term consumer compensation. We adapt real options theory, which has been widely used in IS research for valuation under uncertainty. Addressing a prerequisite, we develop a stochastic process, which realistically replicates intraday electricity spot price development. We employ it in a binomial tree model to assess the value of IS-enabled flexibility in electricity demand.