Valuation of a pumped-storage hydro-plant in a multiple markets framework

There has been an evolving electricity market structure starting from the spot market and its derivatives, to several other markets such as the Intraday Market, the Balancing Market and the Reserve Capacity Market. The participation in these markets has changed significantly the operation policy of the plants and therefore their value in the market. The process of valuating a generation plant is closely related to the markets the plant can participate in terms of country and type (Day Ahead Market, Intraday Market, Balancing Market). Increasingly more Renewable Energy Sources plants have been entering into the system, increasing thus the factor of intermittency in the power profile.In addition to the variability in generation, solar photovoltaic plants, where their generation is consistently during the peak hours, together with the wind power plants have driven down the peak Day Ahead Market prices. Furthermore, the decision of countries in Europe to decommission their nuclear power plants, has driven up the off-peak prices. The current research tackles the problem of the long term valuation of a Hydro Pumped-Storage plant participating in the Day Ahead Market and Intraday Market, for thirty-five (35) years ahead, starting from 2015 and ending to 2050. The consideration of hourly time stage was indispensable since the markets, a Hydro Pumped-Storage plant achieves its main revenues are in the short-term, such as Day Ahead Market and Intraday Market. Within the scope of this research was required the application of four (4) modules that assisted in calculating the intermediate results in order to valuate the Hydro Pumped-Storage plant through a set of economic and financial indicators. Among the four (4) modules, three (3) where specifically developed within this research, one for the IM prices simulation, using the R statistics package, one for the operation simulation of an Hydro Pumped-Storage in the Day Ahead Market and Intraday Market, using MatLab and the IBM Cplex algorithm, and one for the financial and economic valuation of the plant, in excel using the financial formulas package. The fourth (4)th module was a commercial software, named AURORAxmp and developed by the USA company EPIS, for the operation simulation of the Day Ahead Market and the calculation of a proxy of the Day Ahead Market prices throughout the horizon. The latter module was fed with four (4) generation expansion capacity scenarios and reciprocal demand evolutions until 2050, based in the official European Union reports. The final purpose of this research was to design, implement and apply a methodology, on a real case study, for the valuation of a Hydro Pumped-Storage plant in a long term horizon. The results for the Hydro Pumped-Storage plant participating in the Day Ahead Market and Intraday Market, showed after corporate tax, an Net Present Value of 653 million EUR, a payback of the in thirty-one (31) years and of the private equity in twenty (20) years, an Internal Rate of Return of the project of 7.9% and of the private equity of 12.81% (for 20% of private equity). Comparing to the results above, a Hydro Pumped-Storage participating in the Day Ahead Market only, showed deteriorated numbers, having an Net Present Value of 243 million EUR, a payback of the project in thirty-four (34) years and of the private equity in twenty-eight (28) years,an Internal Rate of Return of the project of 6.5% and of the private equity of 10.32%.

Socio-Economic Assessment of Fusion Energy Research, Development, Demonstration and Deployment Programme

Denis Bednyagin

Providing safe, clean and affordable energy supply is essential for meeting the basic needs of human society and for supporting economic growth. From the historical perspective, the constantly growing energy use was one of the main factors, which drove the industrialised countries to the current level of prosperity. Meanwhile, in recent decades, the issue of global energy security became a topic of increasing concern in the international policy agenda. On the one hand, the world is facing the problem of exhaustion of most convenient and cheep fuel reserves. The situation is becoming worse, because of the constantly growing demand in developing countries, and the oligopolistic behaviour of major energy exporting countries. On the other hand, the society is becoming more and more sensitive to the environmental pollution problems, caused by the excessive consumption of fossil fuels. In the face of energy security challenge, national governments ought to implement adequate strategies aimed at liberalisation of energy markets, diversification of energy supply mix, enhancement of energy efficiency, encouragement of investments in energy infrastructures, and promotion of innovation in energy sector. In a longer term perspective, the latter point becomes increasingly important, because the world is relying currently on the consumption of non-renewable fossil fuels, and the development of new safe, clean and resource unconstraint energy technologies is vitally needed. In line with this strategy, the major world economies pursue the joint R&D programme on thermonuclear Fusion technology, which represents numerous advantages due to its inherent safety, avoidance of CO2 emissions, relatively small environmental impact, abundance and world-wide uniform distribution of fuel resources. Considering the importance of the projected environmental and economic benefits of Fusion, the questions are raised whether the current level of financial support is sufficient, and what could be the optimal strategy to proceed with the demonstration of Fusion technology, given the time span and potential risks of Fusion RDDD programme. To put these questions into the context, one has to consider the current trends in energy R&D funding, which has seen a drastic decline ( ~50%) over the last three decades. The liberalisation of energy sector poses additional problem due to the fact that free markets partially failure to provide public goods, such as basic science and R&D, because of the so-called spillover effects meaning that the firms are not able to appropriate the integral results of their R&D investments. Regarding the thermonuclear Fusion technology, the decision makers responsible for national energy policies and allocation of public R&D funds may face the following specific questions: What is the expected net socio-economic payoff (social rate of return) of Fusion R&D programme, including both internal and external costs and benefits? What are the reasonable economic arguments that could justify the increase in public funding of the ongoing and future Fusion R&D activities and would stimulate greater involvement of the private sector? What additional value can be obtained through undertaking a more ambitious Fusion R&D programme (accelerated development path), which requires bigger number of experimental facilities, increased funding, and more intense overall efforts of international scientific and industrial community? In order to provide sound arguments for policymakers seeking to optimise public R&D funding, a robust socio-economic evaluation of the whole Fusion research, development, demonstration and deployment (RDDD) programme is needed. At the present stage, prospective analyses of Fusion technology have been emphasised mainly on the investigation of technological issues, estimation of the direct costs of Fusion power and analysis of its potential role in future energy systems. Meanwhile, methodological tools and practical studies aiming at a more comprehensive socio-economic assessment of global long-term energy R&D programmes, such as Fusion, are still incomplete. The primary difficulty concerns the evaluation of positive externalities that may reveal through different types of spillover effects, including but not limited to knowledge, network and market spillovers. While the presence of these effects has been identified in the economic theory and confirmed by empirical studies, their quantitative analysis in the specific case of large scale energy R&D programmes represents some methodological lacuna and deserves further investigation. Another problem relates to the methodology of cost-benefit analysis, which oftentimes ignores the hidden value of R&D projects arising due to the possible flexibility in managerial decisions. In fact, throughout the course of any R&D project, its prospective cash-flows can be significantly improved by pro-active management of different implementation stages, e.g. expanding the production, if market conditions are favourable, or abandoning, if R&D process appears to be unproductive. As a result, the strategic value of any R&D project normally exceeds its net present value (NPV) calculated with the traditional discounted cash flow (DCF) method. Although this strategic approach to capital budgeting, known as Real Options, has been propagated recently in several publications dealing with appraisal of lumpy irreversible investments, its practical application in the context of Fusion RDDD programme has not been mastered yet to the required extent. A particular challenge consists in the need for adequate treatment of different types of uncertainty in the model structure, parameters and input data. Accordingly, the main objective of this thesis consists in complementing the existing studies with an in-depth analysis of the positive externalities (spillover benefits) of Fusion RDDD programme and calculation of its strategic real options value subject to different managerial strategies throughout demonstration and deployment stages. Net social present value of Fusion RDDD programme and potential impact of Fusion R&D activities on the economic performance of the involved private companies are estimated using an integrated modelling framework, which includes the following components: (1) assessment of technological potential for deployment of Fusion power plants based on the simulation of multi-regional long term electricity supply scenarios with PLANELEC model; (2) economic evaluation of Fusion RDDD programme and analysis of different implementation strategies using Real Options model; (3) estimation of the economic value of spillover benefits from participation in Fusion R&D projects at the microeconomic level with the help of financial evaluation model; (4) strategic evaluation of Fusion RDDD programme, taking into account both spillover benefits and real options value, and policy recommendations.

EPFL2010

Investment decisions with flexibility under uncertainty in the competitive electricity supply industry

Jun Dong

The restructuring of the electricity supply industry (ESI) has introduced new actors and market mechanisms. Electricity prices are more market oriented and fluctuate greatly. These changes bring about more uncertainties and risks to the market participants. When there are high risks in the future, the actors tend towards short-term decisions in which the risks are relatively easier to be coped with than in the long-term decisions. Much research has been carried out on short and medium-term risk management. The contracts of financial derivatives are managed for hedging risks. However, the development of long-term planning and risk management methods in the liberalised ESI has so far not attracted much attention. Long-term anticipations and planning have always been a significant issue given the specific characteristics of the ESI and the importance of security of supply. In liberalised electricity markets, the traditional centralised least-cost generation capacity planning is less relevant. The planning activities have become decentralised, i.e., individual actor makes planning for achieving its goals under certain risks. The ESI is in a transition from monopoly to competitive market and the liberalised electricity market has a short history. It is dominated by structural changes and actors' game behaviour, which are usually not of a random nature. Therefore, it is not always able to model the long-term uncertainties with the widely used probability methods in risk management. Under the large uncertainties and with the difficulty of uncertainty modelling, how would the actors make long-term investment decisions and manage risks? This thesis is an attempt to answer this question. The problem under study in this research is generalised as "investment planning with flexibility in the competitive electricity market". We argue that to select a flexible alternative strategy is one of the ways for managing long-term risks. The flexibility means that the actor is capable of adapting the investment decisions under different market situations in the future. For example, a project can be deferred to wait for more information, be expanded if the market situation becomes favourable or be abandoned if the market situation becomes unfavourable. For an electricity generator, the problem is capacity planning, for example, to construct a new power plant. For a consumer, it is energy portfolio planning. The alternatives may include different purchasing contracts and investment for self-generation. The purpose of this research is to develop a new approach for dealing with these kinds of problems. The requirements of the new approach are proposed in this thesis as: The flexibility of the investment projects or strategies should be accounted in the decision-making; The uncertainty modelling should reflect the long-term trends and characteristics of the liberalised electricity markets; Electricity price forecasting should reflect the interactions among the market players; The approach is an integration of scenario building, market simulation, strategy evaluation and decision-making. The new approach is developed within a conceptual framework of an intelligent decision support system proposed by Dr E. Gnansounou. The framework consists of four modules: Scenario builder, Problem formulator and attributes evaluator, Electricity market multi-agent system and Decision making aid. The principal researches focus on the methods of attributes evaluation taking into account flexibility actions and agent-based market simulation. The attributes evaluation of investment alternatives emphasizes the incorporation of uncertainty modelling and flexibility actions. Two types of attributes evaluation methods are developed using real options theory and fuzzy set theory respectively. Real options theory, in which uncertainty is modelled with probability methods, is introduced for computing and incorporating the flexibility value. In addition, a new method is developed for attributes evaluation taking into account the flexibility actions, using fuzzy set to represent imprecise or vague knowledge in electricity markets. For a long-term perspective, the main factors influencing investment decisions, such as electricity prices, are affected mainly by the structural changes and strategic behaviours of the actors in the market. It is not pertinent to forecast the values of these variables from the historical data using statistic models. The agent-based market simulation system is developed to simulate the interactions among the market participants and to provide electricity price scenarios. Three applications are dealt with by applying the proposed approach. Firstly, agent-based market simulation is applied to an illustrative power system. Secondly, a generation capacity planning and project evaluation for an electricity generator is performed. Thirdly the energy portfolios of a consumer is evaluated and compared. The research found that the new method to take into account flexibility actions is practical. It incorporates the flexibility actions into the cash flows. The flexibility cost is given exogenously. The value of a base strategy with flexibility actions is calculated. The alternatives are compared with these values. It is different from the real options method. The real options method assumes that the future value of the strategy is known with a predefined probability distribution and the value of the option is calculated. It deals with the pricing of a contract or a project. Differently from that, the new method deals with the comparison of portfolio given the prices and the costs are assumed as known and included into the cash flows, and how to consider the flexibility in the portfolio comparison. The real options method is operative for incorporating flexibilities in investment decisions if the uncertain variables follow the Wiener stochastic process. The advantages of this method are that it provides flexibility values and optimal timing of a project; it models the future value of the project with the stochastic process therefore it does not require the estimations on the values of driving variables for the lifetime of the project; it uses risk-free rate that is easier to estimate than the discount rate used in the DCF method. The limitations are that the assumptions of probabilistic distributions of the future value of the project are not always satisfied. The determination of the stochastic process and the estimation of the volatility of the value of the project are not straightforward. As a complement to the real options method and dealing with a different problem, the fuzzy method is proved in this thesis to give a "softer" approach when modelling the imprecision with fuzzy numbers. This method is suitable to electricity markets with incomplete information, lack of sufficient data and non-random movement. It is found that the agent-based simulation model is effective for giving "what if" scenarios on electricity market states in the future. The model is flexible in simulating imperfect electricity markets where game play exists. The main contributions of the research are summarised as follows: A new approach of investment decision support is developed fitting to electricity markets with regard to uncertainty and flexibility modelling. Incorporation of flexibility into the investment decisions is developed as a way for managing long-term risks. Uncertainty modelling with the real options method and imprecision data modelling with the fuzzy method can be applied according to the pertinence to the situation of electricity markets. The attributes evaluation of the investment strategies is based on agent-based market simulation. Instead of traditional least-cost centralised planning, the generation expansion planning is considered as decentralised planning where the individual agent makes expansion planning, taking into account other agents' plans.

EPFL2004

Preliminary Study of a Solar Trough/Tower Power Plant

Jorge López Moreno

The possibility of combining both the advantages of a solar tower thermal power plant and of a solar parabolic trough power plant could be interesting from an energetic point of view as well from an economic point of view. The preliminary study of this combination feasibility is the goal of this project. The study of the project viability consist first of all on the modeling of the trough system, the energy balance of the parabolic troughs will be established at first. Secondly, and choosing a perfect solar day simulating a day when the solar radiation is rather stable, with no cloudy periods along the day, the power available from the trough plant can be calculated. Once we have estimated the power that we can introduce into the cycle of the tower plant, the main issue consists on how and where it is better to use this energy in the cycle. Several possibilities seem to be interesting a priori, however a more detailed study of each one is to be done in order to get to the most economic and efficient layout. The work related to the tower thermal power plant will be done taking as starting point the master thesis of James Spelling, who did an incredible work in this field and whose work will be a valuable help to continue the research on the proposed concept in this project of combining two plants, tower and trough. The main advantage of the tower design compared to the parabolic trough design is the higher temperature. As it will be explained further, thermal energy at higher temperature can be converted more efficiently, the exergy efficiency is better. In terms of storage, the high temperature results in a cheaper and a more efficient storage system. Nevertheless, the set up of the field of heliostats is more complex than the set up of the parabolic trough lines even though the area for a trough plant must be previously flattened. The lower temperature level that entails an inconvenient itself for a parabolic trough power plant may become an advantage when combining both types of concentrating solar power plants. If the results are positive enough that it seems interesting to combine both types of power plants, another step forward will be done towards the use of the sun energy as a renewable source thus making it a more interesting choice for power generation. Sun potential has already shown as an important technology not only at the present time but also in the future. Commercial solar plants have already achieved levelized energy costs around 12-15 UScts/kWh, and the potential for cost reduction is expected to follow this trend even further, to costs as low as 5 UScts/kWh. In addition the taxes imposed for the non-green power should make even more interesting the use of concentrating solar power plants. The requirements of high beam normal radiation lead to a limited amount of suitable places where the implantation of this technology is possible. However many places exist on Earth where the conditions are perfectly adapted, we talk about regions such as United States (the country with more carbon dioxide emissions in the world), some regions in Mexico, North Africa, India, Australia, northeastern Brazil and some locations around the Mediterranean, especially in the south of Spain. The challenge is therefore set for a change in our energy production scheme.

2010