Valuing Learning Effects as a Real Option: Application to PEM Fuel Cells in the Indian TelcoMarket

Christian Johannes Lange & Julius Aarup Poulsen

Student thesis: Master thesis


The key purpose of this thesis is to value, purely from an economic perspective, the choice of backup power generation source presented to operators of telecommunication towers. Conventional backup power from diesel generators (DG) are compared to and challenged by one specific alternative, the proton exchange membrane (PEM) fuel cell technology. The thesis is conducted within a specific setting, the Indian telecommunication market, which is found to be an appropriate case due to three main reasons; (i) Intelligent Energy, a British-listed fuel cell manufacturer, recently announced a billion-dollar deal with the Indian telco tower operator GLT Limited to supply electricity to more than 27,000 telco sites in the coming years. Secondly (ii), telco towers in India are subject to lengthy periods of outages due to an unreliable grid-network, thus implying an extensive demand for backup power solutions, and thirdly (iii), the market is one of the biggest of its kind yet projected to grow in the coming years. Having established the Indian case, the PEM fuel cell system is compared to a conventional diesel generator through the levelized cost of energy (LCOE) model in order to determine its present cost competitiveness. The model reveals that PEM fuel cell are still far more expensive from a total cost of ownership perspective. To investigate whether the fuel cell may become a viable choice in the future, learning effects attached to repetitive production are estimated in order to evaluate potential cost reductions in the manufacturing process. Based on the historical figures on cost development and installed cumulative capacity, the learning rate for PEM fuel cells is estimated to be 23.15% for each doubling in cumulative production. Lastly, findings from both the LCOE model regarding the cost structure of the systems and the learning rate approximations are applied in a real option valuation to estimate the true cost of backup power with higher degrees of precision. Specifically, the ROV shows that the flexibility of choice between either backup power systems carries a value of 462 USD per telco site thus lowering the actual costs of backup power compared to conclusions derived through the conventional LCOE model.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages136
SupervisorsMarcus Asplund