Investment and upgrade in distributed generation under uncertainty

Siddiqui, Afzal S.; Maribu, Karl Magnus

doi:10.1016/j.eneco.2008.08.007

Cited by 65 publications

(32 citation statements)

References 14 publications

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“…Indeed, a ceteris paribus increase in the subsidy raises the value of the lumpy investment strategy, as it is relatively cheaper than stepwise investment. However, with discretion over capacity, a firm compensates for the extra cost associated with the flexibility to proceed in stages by increasing the amount of installed capacity , and, thus, in contrast to Siddiqui and Maribu (2009) and Kort et al (2010), stepwise investment always dominates a lumpy investment strategy.…”

Section: Discussionmentioning

confidence: 99%

Stepwise Green Investment under Policy Uncertainty

Chronopoulos¹,

Hagspiel²,

Fleten³

2016

The Energy Journal

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We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment.

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Section: Discussionmentioning

confidence: 99%

Stepwise Green Investment under Policy Uncertainty

Chronopoulos¹,

Hagspiel²,

Fleten³

2016

The Energy Journal

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“…Some use the real options approach (Dixit and Pindyck 1994), which is able to handle uncertainty, discretion over timing, and multi-stage problems. However, in order to obtain quasi-analytical solutions, simplifying assumptions are usually made about the underlying uncertainties (Siddiqui and Maribu 2009). Furthermore, risk is not directly addressed in the objective function even in simulation-based studies that accommodate more realistic price processes because the objective is still to maximise expected profit (Abadie and Chamorro 2008).…”

Section: Related Workmentioning

confidence: 99%

The natural hedge of a gas-fired power plant

2014

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Electricity industries worldwide have been restructured in order to introduce competition. As a result, decision makers are exposed to volatile electricity prices, which are positively correlated with those of natural gas in markets with price-setting gas-fired power plants. Consequently, gas-fired plants are said to enjoy a "natural hedge." We explore the properties of such a built-in hedge for a gas-fired power plant via a stochastic programming approach, which enables characterisation of uncertainty in both electricity and gas prices in deriving optimal hedging and generation decisions. The producer engages in financial hedging by signing forward contracts at the beginning of the month while anticipating uncertainty in spot prices. Using UK energy price data from 2006 to 2011 and daily aggregated dispatch decisions of a typical gasfired power plant, we find that such a producer does, in fact, enjoy a natural hedge, i.e., it is better off facing uncertain spot prices rather than locking in its generation cost. However, the natural hedge is not a perfect hedge, i.e., even modest risk aversion makes it optimal to use gas forwards partially. Furthermore, greater operational flexibility enhances this natural hedge as generation decisions provide a countervailing response to uncertainty. Conversely, higher energy-conversion efficiency reduces the natural hedge by decreasing the importance of natural gas price volatility and, thus, its correlation with the electricity price.

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“…Predictably, studies concerning the impact of fuel price uncertainty show that the risk of investment increases as the volatility of fuel price increases [18]. It has also been shown that payback is more likely to increase than decrease when faced with electric rate, fuel price, or capital cost volatility [19].…”

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confidence: 99%

Economic and sensitivity analyses of dynamic distributed generation dispatch to reduce building energy cost

Flores

Shaffer

Brouwer

2014

Energy and Buildings

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a b s t r a c tThe practicality of any particular distributed generation (DG) installation depends upon its ability to reduce overall energy costs. A parametric study summarizing DG performance capabilities is developed using an economic dispatch strategy that minimizes building energy costs. Various electric rate structures are considered and applied to simulate meeting various measured building demand dynamics for heat and power. A determination of whether investment in DG makes economic sense is developed using a realtime dynamic dispatch and control strategy to meet real building demand dynamics. Under the economic dispatch strategy, capacity factor is influenced by DG electrical efficiency, operations and maintenance cost, and fuel price. Under a declining block natural gas rate structure, a large local thermal demand improves DG economics. Increasing capacity for DG that produces low cost electricity increases savings, but installing further capacity beyond the average building electrical demand reduces savings. For DG that produces high cost electricity, reducing demand charges can produce savings. Heat recovery improves capacity factor and DG economics only if thermal and electrical demand is coincident and DG heat is utilized. Potential DG economic value can be improved or impaired depending upon how the utility electricity cost is determined.

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Investment and upgrade in distributed generation under uncertainty

Cited by 65 publications

References 14 publications

Stepwise Green Investment under Policy Uncertainty

Stepwise Green Investment under Policy Uncertainty

The natural hedge of a gas-fired power plant

Economic and sensitivity analyses of dynamic distributed generation dispatch to reduce building energy cost

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