Generation investment evaluation under uncertainty in a competitive environment

Abstract

This paper proposes a new explicit, step-by-step approach for a generating company to evaluate investments considering uncertainties and future expected investment from its competitors. We introduce a probabilistic valuation model to provide to the generating company a wider analytical framework as well as to incorporate risk assessment in the evaluation. The new framework consists of i) defining statistical distribution in future load growth and plant technologies' fuel cost; ii) anticipating competitors' future expansion using dynamic programming; iii) generating future cash-flow for the new plant by clearing the market every year with respect to the anticipated system expansion over the life time of the plant; iv) computing the plant's rate of return and expected profit of the company within the simulation period; v) performing a Monte Carlo simulation to capture the statistical fluctuations of the rate of return; vi) analyzing the profit distribution and making decision.