A decision maker seldom behaves completely rationally when deciding on the investment in capacity portfolio for a power system. Thus his decision will certainly show some bias when compared with a truly risk-neutral one. In order to provide an in-depth analysis of such bias, this paper studies the issues influencing capacity portfolio planning for a power system when the decision maker is lossaverse. The investment decision is the result of the decision maker aiming to maximize utility, and the effect of this is investigated using a modified newsvendor model, in which the probability of abnormal electricity demand is considered. Theoretical proofs and numerical simulations are also presented to provide explanations of some counterintuitive findings. We find that bias in the capacity portfolio occurs whenever underage losses are greater than overage losses. Even where significant flexibility is installed, the loss-averse decision maker values dedicated capacity to a greater extent when building redundancy into the system capacity, and all of his decision bias will go towards building-in dedicated capacity rather than flexibility. The most interesting finding is that the probability and variance of abnormal demand are likely to be overestimated, and this will result in investing more dedicated capacity, not only for providing higher service levels in abnormal situations, but also for delivering greater operational profit.
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