New renewable electricity capacity under uncertainty: The potential in Norway

Uncertainty affecting project values makes investors hesitate to build new capacity unless profitability is significant. When analysing the potential for new renewable power system capacity in a region, it is therefore necessary to properly capture both uncertainty effects and decision-making behaviour of investors. Important stochastic factors typically include wholesale electricity prices and certificate prices. We calculate trigger levels for the sum of these factors, and compare these with the current long-term contract prices to estimate the potential for new renewable electricity capacity. We take into account the cost and technical potential of small hydro and wind in Norway, the number of prenotifications, concession applications and grants, and the capacity targets of subsidising governmental bodies. With an electricity certificate policy target of 41 TWh per year of new renewables for Sweden and Norway combined until 2016, we estimate that 12 TWh wind power and 6.2 TWh hydropower will be built in Norway. Due to the option value of waiting, most of this capacity will come after 2010.Finance, Hydroelectric power generation, Power system planning, Stochastic processes, Uncertainty, Wind energy

Modeling long-term electricity forward prices

In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and mid-term prices. We model long-term electricity forward prices through demand and supply for electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity and aluminum are modeled with a vector autoregressive model. To estimate the model we use weekly prices of far-maturity forwards relevant for Nordic electricity market. Electricity prices experienced few substantial shocks during the period analyzed, however, we found no evidence of a structural break. Cointegration analysis indicates two stationary cointegrating vectors. Nord Pool price is found significant in the short- and the long-run model, while the gas price is insignificant in both. Other variables are significant only in the long-run model. The model shows some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool.Electricity prices; long-term forward prices; VAR modeling; cointegration

Stepwise Green Investment under Policy Uncertainty

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

Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment

We analyze investments in gas fired power plants under stochastic electricity and gas prices. We use a real options approach, taking into account the economic information in futures and forward prices. A simple but realistic two-factor model is used for price process, enabling analysis of the value of operating flexibility, the opportunity to sell and abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study, using real data, indicates that when the decision to build is considered, the plant’s flexibility and abandonment option do not have significant value.Real options, spark spread, gas fired power plant, forward prices

Investment timing and optimal capacity choice for small hydropower projects

This paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices. We present a real options-based method with continuous scaling, and we find that there is a unique price limit for initiating the project. If the current electricity price is below this limit it is never optimal to invest, but above this limit investment is made according to the function for optimal size. The connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant, based on all the important choices for such a plant. The main results of the spreadsheet are simulated production size and the investment costs, which are in turn used for finding the value of the real option and the price limit. The method is illustrated on three different Norwegian small hydropower projects.OR in Energy; Real Options; Continuous Scaling; Project Evaluation; Hydropower

Evaluation of hydropower upgrade projects - a real options approach

When evaluating whether to refurbish existing hydropower plants or invest in a new power plant, there are two important aspects to take into consideration. These are the capacity chosen for the production facilities and the timing of the investment. This paper presents an investment decision support framework for hydropower producers with production facilities due for restoration. The producer can choose between refurbishing existing power plants and investing in a new production facility. A real options framework is proposed to support the investment decision. Using a case from Norsk Hydro ASA, a Norwegian hydropower producer, we employ the framework to evaluate the investment opportunities. Our main contribution is an approach that combines hydropower scheduling and real options valuation, and the results from our analysis suggest feasible investment strategies for Norsk Hydro ASA.Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets

Stochastic programming in energy

We give the reader a tour of good energy optimization models that explicitly deal with uncertainty. The uncertainty usually stems from unpredictability of demand and/or prices of energy, or from resource availability and prices. Since most energy investments or operations involve irreversible decisions, a stochastic programming approach is meaningful. Many of the models deal with electricity investments and operations, but some oil and gas applications are also presented. We consider both traditional cost minimization models and newer models that reflect industry deregulation processes. The oldest research coincides with the birth of linear programming, and most models within the market paradigm have not yet found their final form.stochastic programming, energy, regulated markets, deregulation, uncertainty, electricity, natural gas, oil

Switching from oil to gas production in a depleting field

Author's accepted version (post-print).Available from 26/05/2020.We derive an optimal decision rule with regards to making an irreversible switch from oil to gas production. The approach can be used by petroleum field operators to maximize the value creation from a petroleum field with diminishing oil production and remaining gas reserves. Assuming that both the oil and gas prices follow a geometric Brownian motion we derive an analytical solution for the exercise threshold. We also propose an explicit solution for the option value that is new to the literature. Numerical examples are used to demonstrate the threshold and option value for a generic petroleum field. Both the threshold and option value solutions are relevant for application to other real options cases with similar features (e.g. other types of switching options or a perpetual spread option).acceptedVersio

Bruk av Lyngdalsmodellen i komplekse tilvirkningsprosjekter : en vurdering av ny gjennomføringsmodell

Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2013Formålet med denne studien har vært å undersøke om den nyutviklede Lyngdalsmodellen, utviklet ved Universitetet i Agder, gir bedre forutsetninger for en vellykket prosjektgjennomføring enn de tradisjonelle totalentreprisene. Ettersom modellen ikke tidligere har vært utprøvd, forefinnes ingen dokumentasjon på dens virkning målt mot tradisjonelle modeller. Hensikten med oppgaven har derfor vært å gjennomføre en inngående analyse av Lyngdalsmodellen, basert på utsagn, meninger og erfaringer fra sentrale prosjektaktører. Ettersom modellen brukes for første gang i dette prosjektet, kan ikke resultater og synspunkter generaliseres. Funnene kan likevel legge et grunnlag for å konstatere om modellen gir bedre forutsetninger for et vellykket prosjektresultat, enn bruk av den tradisjonelle totalentreprisen. Studiens viktigste funn er som følger: Modellen legger i stor grad til rette for aktiv og involverende eier- og brukermedvirkning Modellen gir incitamenter til å minimere livssykluskostnader gjennom å åpne for privat drift Modellen sikrer involvering av alle parter, både før og under bygging Modellen anvender utredninger og analyser, som er virkemidler for å gjøre riktige valg, særlig hva angår livsløpskostnader Modellen ekskluderer alle formelle endringer, med unntak av større grep. Endringer gir altså ikke grunnlag for endring i kontraktsgrunnlaget Modellen medfører lavere kvalitetsrisiko for oppdragsgiver og lavere økonomisk risiko for begge parter Modellen krever at entreprenøren besitter en viss stab og har god økonomi Modellen med valg av konkurranseprosedyre fører til at mindre aktører lett ekskluderes Prosessene før avtaleinngåelse er ressurskrevende både for oppdragsgiver og potensielle leverandører Modellen øker entreprenørens arbeidsmengde, gjennom stor vekt på prosjektutvikling og oppfølging Modellen gir entreprenøren et større ansvar, spesielt i utviklingsfasen Entreprenøren får utnyttet sin fulle kompetanse, gjennom både utvikling og bygging I følge prosjektledelsen er god møtestruktur og de involverte parters beslutningsmyndighet er en forutsetning for god framdrift Oppdragsgiver vet ikke hva han får ved kontraktsinngåelse, men kan til gjengjeld påvirke bygget underveis i prosjektet Modellen prøver å sikre effektiv prosjektering, gjennom kostnadskontrakter for rådgivere og arkitekter. Incentiver for arkitekter bør revurderes. Det offentlige er avhengig av prosessveiledning for å lykkes med modellen Om bruk av modellen vil gi et bedre prosjektresultat enn ved andre modeller, avhenger i stor grad av de involverte prosjektaktørene. I denne sammenheng er modellforståelse, samspill og kompetanse nøkkelord. Uten forståelse for hvordan modellen skal brukes, vil en lett falle tilbake i den tradisjonelle tankegangen, som har andre metoder for strukturering og fordeling av oppgaver. Det er derfor sentralt at alle involverte parter får en god innføring i bruk av modellen, herunder dens begrunnelse og formål. Derfor er det sentralt at prosjekteier engasjerer kompetent prosesslederskap dersom modellen anvendes for første gang

Representation of uncertainty in market models for operational planning and forecasting in renewable power systems: a review

As the power system is becoming more weather-dependent and integrated to meet decarbonization targets, the level and severity of uncertainty increase and inevitably introduce higher risk of demand rationing or economic loss. This paper reviews the representation of uncertainty in power market models for operational planning and forecasting. A synthesis of previous reviews is used to find the prevalence of stochastic tools in power and energy system applications, and it concludes that most approaches are deterministic. A selection of power market tools handling uncertainty is reviewed in terms of the uncertain parameters they capture, and the methods used to describe them. These all use probabilistic methods and typically cover weather-related uncertainty, including demand. Random outages are also covered by several short-term power market models, while uncertainty in fuel and CO2 emission prices were generally not found to be included, nor other types of uncertainty. A gap in power market models representing multiple dimensions of uncertainty, solvable on a realistic, large-scale system in a reasonable time, is identified. The paper concludes with a discussion on topics to address when representing uncertainty, where the main challenges are that uncertainty can be difficult to describe and quantify, and including uncertainty adds additional complexity and computational burden to the problem.publishedVersio