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Investment and upgrade in distributed generation under uncertainty

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  • Siddiqui, Afzal S.
  • Maribu, Karl

Abstract

The ongoing deregulation of electricity industries worldwide is providing incentives for microgrids to use small-scale distributed generation (DG) and combined heat and power (CHP) applications via heat exchangers (HXs) to meet local energy loads. Although the electric-only efficiency of DG is lower than that of central-station production, relatively high tariff rates and the potential for CHP applications increase the attraction of on-site generation. Nevertheless, a microgrid contemplating the installation of gas-fired DG has to be aware of the uncertainty in the natural gas price. Treatment of uncertainty via real options increases the value of the investment opportunity, which then delays the adoption decision as the opportunity cost of exercising the investment option increases as well. In this paper, we take the perspective of a microgrid that can proceed in a sequential manner with DG capacity and HX investment in order to reduce its exposure to risk from natural gas price volatility. In particular, with the availability of the HX, the microgrid faces a tradeoff between reducing its exposure to the natural gas price and maximising its cost savings. By varying the volatility parameter, we find that the microgrid prefers a direct investment strategy for low levels of volatility and a sequential one for higher levels of volatility.

Suggested Citation

  • Siddiqui, Afzal S. & Maribu, Karl, 2009. "Investment and upgrade in distributed generation under uncertainty," Energy Economics, Elsevier, vol. 31(1), pages 25-37, January.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:1:p:25-37
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fleten, Stein-Erik & Näsäkkälä, Erkka, 2003. "Gas fired power plants: Investment timing, operating flexibility and abandonment," MPRA Paper 217, University Library of Munich, Germany, revised Jun 2006.
    2. Westner, Günther & Madlener, Reinhard, 2012. "Investment in new power generation under uncertainty: Benefits of CHP vs. condensing plants in a copula-based analysis," Energy Economics, Elsevier, vol. 34(1), pages 31-44.
    3. Mancarella, Pierluigi, 2014. "MES (multi-energy systems): An overview of concepts and evaluation models," Energy, Elsevier, vol. 65(C), pages 1-17.
    4. Xiaojia Guo & Alexandros Beskos & Afzal Siddiqui, 2016. "The natural hedge of a gas-fired power plant," Computational Management Science, Springer, vol. 13(1), pages 63-86, January.
    5. Madlener, Reinhard & Stoverink, Simon, 2012. "Power plant investments in the Turkish electricity sector: A real options approach taking into account market liberalization," Applied Energy, Elsevier, vol. 97(C), pages 124-134.
    6. Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2017. "Stepwise investment and capacity sizing under uncertainty," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(2), pages 447-472, March.
    7. Niall Farrell, Mel T. Devine, William T. Lee, James P. Gleeson, and Sean Lyons, 2017. "Specifying An Efficient Renewable Energy Feed-in Tariff," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    8. John Foster & Liam Wagner & Liam Byrnes, 2014. "A Review of Distributed Generation for Rural and Remote Area Electrification," Energy Economics and Management Group Working Papers 3-2014, School of Economics, University of Queensland, Australia.
    9. Carpaneto, Enrico & Chicco, Gianfranco & Mancarella, Pierluigi & Russo, Angela, 2011. "Cogeneration planning under uncertainty. Part II: Decision theory-based assessment of planning alternatives," Applied Energy, Elsevier, vol. 88(4), pages 1075-1083, April.
    10. Chen, Yen-Haw & Lu, Su-Ying & Chang, Yung-Ruei & Lee, Ta-Tung & Hu, Ming-Che, 2013. "Economic analysis and optimal energy management models for microgrid systems: A case study in Taiwan," Applied Energy, Elsevier, vol. 103(C), pages 145-154.
    11. Gal, Nurit & Milstein, Irena & Tishler, Asher & Woo, C.K., 2017. "Fuel cost uncertainty, capacity investment and price in a competitive electricity market," Energy Economics, Elsevier, vol. 61(C), pages 233-240.
    12. William E., Lilley & Luke J., Reedman & Liam D., Wagner & Colin F., Alie & Anthony R., Szatow, 2012. "An economic evaluation of the potential for distributed energy in Australia," Energy Policy, Elsevier, vol. 51(C), pages 277-289.
    13. Michail Chronopoulos, Verena Hagspiel, and Stein-Erik Fleten, 2016. "Stepwise Green Investment under Policy Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    14. Safaei, Amir & Freire, Fausto & Antunes, Carlos Henggeler, 2013. "A model for optimal energy planning of a commercial building integrating solar and cogeneration systems," Energy, Elsevier, vol. 61(C), pages 211-223.
    15. Zhu, Lei & Fan, Ying, 2011. "A real options–based CCS investment evaluation model: Case study of China’s power generation sector," Applied Energy, Elsevier, vol. 88(12), pages 4320-4333.
    16. Naito, Yuta & Takashima, Ryuta & Kimura, Hiroshi & Madarame, Haruki, 2010. "Evaluating replacement project of nuclear power plants under uncertainty," Energy Policy, Elsevier, vol. 38(3), pages 1321-1329, March.
    17. Francesco Pasimeni, 2017. "Adoption and Diffusion of Micro-Grids in Italy. An Analysis of Regional Factors Using Agent-Based Modelling," SPRU Working Paper Series 2017-09, SPRU - Science and Technology Policy Research, University of Sussex.
    18. Akbari, Kaveh & Jolai, Fariborz & Ghaderi, Seyed Farid, 2016. "Optimal design of distributed energy system in a neighborhood under uncertainty," Energy, Elsevier, vol. 116(P1), pages 567-582.
    19. Fleten, Stein-Erik & Näsäkkälä, Erkka, 2010. "Gas-fired power plants: Investment timing, operating flexibility and CO2 capture," Energy Economics, Elsevier, vol. 32(4), pages 805-816, July.
    20. Siddiqui, Afzal & Takashima, Ryuta, 2012. "Capacity switching options under rivalry and uncertainty," European Journal of Operational Research, Elsevier, vol. 222(3), pages 583-595.
    21. Rocha, Paula & Kaut, Michal & Siddiqui, Afzal S., 2016. "Energy-efficient building retrofits: An assessment of regulatory proposals under uncertainty," Energy, Elsevier, vol. 101(C), pages 278-287.
    22. Rezvan, A. Taghipour & Gharneh, N. Shams & Gharehpetian, G.B., 2012. "Robust optimization of distributed generation investment in buildings," Energy, Elsevier, vol. 48(1), pages 455-463.

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