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2002-03 Seminars


Investment in generation assets under uncertainty in restructured power markets

Audun Botterud
Visiting doctoral candidate
MIT Laboratory for Energy and the Environment

Abstract

One of the consequences of power market restructuring is that power generation companies are faced with increased uncertainty concerning future electricity price and income from their generation assets. We also see a move away from the traditional cost minimization objective in expansion planning towards maximization of future profits within the restructured electric power industry. This research focuses on how these fundamental changes in power system planning are likely to influence investment behavior, and how this can affect the power systemís performance in a long-term perspective.

A multi-stage model for optimal timing of an investment in a new power generation plant is under development. Stochastic dynamic programming is used to calculate under what conditions it is optimal to invest in order to maximize the expected future profit from the project. The projectís profitability is dependent on the price in the electricity market, which is modeled as a function of underlying state variables such as installed capacity and electricity demand. The optimal investment decision also depends on the prevailing market rules and on the level of competition in the power market. Results from the model show that the inclusion of long-term uncertainties into the investment problem can result in postponement of investment decisions. As long as the option to postpone an investment exists, it can be optimal to do so and thereby learn more about future uncertainties, even if the projectís expected net present value is positive. Delayed investments could have serious consequences for the power system, in terms of lower system reliability and higher frequency of undesired price spikes.

Related experience from power market restructuring in Scandinavia, where the deregulation of the power markets started as early as in 1991, will also be discussed in the presentation.