IDEAS home Printed from https://ideas.repec.org/a/eee/proeco/v185y2017icp21-33.html
   My bibliography  Save this article

Optimal replacement policies for an uncertain rejuvenated asset

Author

Listed:
  • Stutzman, Sarah
  • Weiland, Brandon
  • Preckel, Paul
  • Wetzstein, Michael

Abstract

A theory of asset replacement is developed to determine the optimal timing and feasible conditions to first rejuvenate and then to replace an asset. The theoretical underpinnings mate two strands of research: asset rejuvenation and real options. With the aid of comparative statistics and numerical analysis, results are linked across deterministic and stochastic costs and matched with conventional asset replacement (no rejuvenation). The theoretical model is operationalized by applying numerical analysis to the decisions of whether to rejuvenate an aging coal-fired electricity plant and then decommission, or to simply decommission. In addition, the optimal timing of potential rejuvenation and decommission are addressed. Co-firing coal with wood pellets is considered as the rejuvenating process. In this context, it is the relative difference in virgin (coal) versus rejuvenation (co-firing) initial costs and cost growth rates that determines timing and length of time the rejuvenated plant is operated.

Suggested Citation

  • Stutzman, Sarah & Weiland, Brandon & Preckel, Paul & Wetzstein, Michael, 2017. "Optimal replacement policies for an uncertain rejuvenated asset," International Journal of Production Economics, Elsevier, vol. 185(C), pages 21-33.
  • Handle: RePEc:eee:proeco:v:185:y:2017:i:c:p:21-33
    DOI: 10.1016/j.ijpe.2016.12.018
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S092552731630398X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ijpe.2016.12.018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Yatsenko, Yuri & Hritonenko, Natali, 2015. "Algorithms for asset replacement under limited technological forecast," International Journal of Production Economics, Elsevier, vol. 160(C), pages 26-33.
    2. Gregory Ibendahl & Matthew Farrell & Stan Spurlock & Jesse Tack, 2014. "Optimal replacement age of a conventional cotton harvester system," Agricultural Finance Review, Emerald Group Publishing, vol. 74(1), pages 2-16, April.
    3. Reindorp, Matthew J. & Fu, Michael C., 2011. "Capital renewal as a real option," European Journal of Operational Research, Elsevier, vol. 214(1), pages 109-117, October.
    4. Xian, Hui & Colson, Gregory & Mei, Bin & Wetzstein, Michael E., 2015. "Co-firing coal with wood pellets for U.S. electricity generation: A real options analysis," Energy Policy, Elsevier, vol. 81(C), pages 106-116.
    5. John W. McClelland & Micheal E. Wetzstein & Richard K. Noles, 1989. "Optimal Replacement Policies for Rejuvenated Assets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(1), pages 147-157.
    6. Yatsenko, Yuri & Hritonenko, Natali, 2011. "Economic life replacement under improving technology," International Journal of Production Economics, Elsevier, vol. 133(2), pages 596-602, October.
    7. G. Scott Smith & Michael E. Wetzstein, 1992. "A Stochastic Asset Replacement Model for Rejuvenated Assets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(2), pages 378-387.
    8. R. K. Perrin, 1972. "Asset Replacement Principles," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(1), pages 60-67.
    9. Atsu, Divine & Agyemang, Emmanuel Okoh & Tsike, Stephen A.K., 2016. "Solar electricity development and policy support in Ghana," Renewable and Sustainable Energy Reviews, Elsevier, vol. 53(C), pages 792-800.
    10. ., 2016. "Electric energy utilities," Chapters, in: Public Utilities, Second Edition, chapter 4, pages 69-88, Edward Elgar Publishing.
    11. Adkins, Roger & Paxson, Dean, 2011. "Renewing Assets with Uncertain Revenues and Operating Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(3), pages 785-813, June.
    12. Nguyen, T.P. Khanh & Yeung, Thomas G. & Castanier, Bruno, 2013. "Optimal maintenance and replacement decisions under technological change with consideration of spare parts inventories," International Journal of Production Economics, Elsevier, vol. 143(2), pages 472-477.
    13. Oscar R. Burt, 1965. "Optimal Replacement under Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 47(2), pages 324-346.
    14. Anthony H. Chisholm, 1966. "Criteria for Determining the Optimum Replacement Pattern," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 48(1), pages 107-112.
    15. Basu, Prabir & Butler, James & Leon, Mathias A., 2011. "Biomass co-firing options on the emission reduction and electricity generation costs in coal-fired power plants," Renewable Energy, Elsevier, vol. 36(1), pages 282-288.
    16. Mihai Burcea & Wing-Kai Hon & Hsiang-Hsuan Liu & Prudence W. H. Wong & David K. Y. Yau, 2016. "Scheduling for electricity cost in a smart grid," Journal of Scheduling, Springer, vol. 19(6), pages 687-699, December.
    17. Ian M. Dobbs, 2004. "Replacement Investment: Optimal Economic Life Under Uncertainty," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 729-757.
    18. Mauer, David C. & Ott, Steven H., 1995. "Investment under Uncertainty: The Case of Replacement Investment Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 581-605, December.
    19. Richardson, Steven & Kefford, Adrian & Hodkiewicz, Melinda, 2013. "Optimised asset replacement strategy in the presence of lead time uncertainty," International Journal of Production Economics, Elsevier, vol. 141(2), pages 659-667.
    20. Sekar, Ram C. & Parsons, John E. & Herzog, Howard J. & Jacoby, Henry D., 2007. "Future carbon regulations and current investments in alternative coal-fired power plant technologies," Energy Policy, Elsevier, vol. 35(2), pages 1064-1074, February.
    21. Paul A. Samuelson, 1937. "Some Aspects of the Pure Theory of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 51(3), pages 469-496.
    22. Robyn McLaughlin & Robert A. Taggart & Jr., 1992. "The Opportunity Cost of Using Excess Capacity," Financial Management, Financial Management Association, vol. 21(2), Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yatsenko, Yuri & Hritonenko, Natali, 2020. "Optimal asset replacement: Profit maximization under varying technology," International Journal of Production Economics, Elsevier, vol. 228(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Weiland, Brandon & Sesmero, Juan Pablo & Preckel, Paul & Wetzstein, Michael E., 2017. "Can Wood Pellets Save Coal?," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258250, Agricultural and Applied Economics Association.
    2. Yatsenko, Yuri & Hritonenko, Natali, 2017. "Machine replacement under evolving deterministic and stochastic costs," International Journal of Production Economics, Elsevier, vol. 193(C), pages 491-501.
    3. Yuri Yatsenko & Natali Hritonenko, 2016. "Asset replacement under improving operating and capital costs: a practical approach," International Journal of Production Research, Taylor & Francis Journals, vol. 54(10), pages 2922-2933, May.
    4. Adkins, Roger & Paxson, Dean, 2017. "Replacement decisions with multiple stochastic values and depreciation," European Journal of Operational Research, Elsevier, vol. 257(1), pages 174-184.
    5. Adkins, Roger & Paxson, Dean, 2013. "Deterministic models for premature and postponed replacement," Omega, Elsevier, vol. 41(6), pages 1008-1019.
    6. Yatsenko, Yuri & Hritonenko, Natali, 2020. "Optimal asset replacement: Profit maximization under varying technology," International Journal of Production Economics, Elsevier, vol. 228(C).
    7. Reindorp, Matthew J. & Fu, Michael C., 2011. "Capital renewal as a real option," European Journal of Operational Research, Elsevier, vol. 214(1), pages 109-117, October.
    8. Tran, Thomas T.D. & Smith, Amanda D., 2017. "fEvaluation of renewable energy technologies and their potential for technical integration and cost-effective use within the U.S. energy sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 1372-1388.
    9. Yatsenko, Yuri & Hritonenko, Natali, 2015. "Algorithms for asset replacement under limited technological forecast," International Journal of Production Economics, Elsevier, vol. 160(C), pages 26-33.
    10. Wild, Phillip, 2017. "Determining commercially viable two-way and one-way ‘Contract-for-Difference’ strike prices and revenue receipts," Energy Policy, Elsevier, vol. 110(C), pages 191-201.
    11. Crane, Donald R. Jr. & Spreen, Thomas H., 1979. "A Conceptual Model Of The Stubble Replacement Decision For Florida Sugarcane Growers," 1979 Annual Meeting, July 29-August 1, Pullman, Washington 277828, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Bell, Keith & Gill, Simon, 2018. "Delivering a highly distributed electricity system: Technical, regulatory and policy challenges," Energy Policy, Elsevier, vol. 113(C), pages 765-777.
    13. Di Lullo, Giovanni & Zhang, Hao & Kumar, Amit, 2016. "Evaluation of uncertainty in the well-to-tank and combustion greenhouse gas emissions of various transportation fuels," Applied Energy, Elsevier, vol. 184(C), pages 413-426.
    14. Adkins, Roger & Paxson, Dean, 2013. "The effect of tax depreciation on the stochastic replacement policy," European Journal of Operational Research, Elsevier, vol. 229(1), pages 155-164.
    15. Rosenow, Jan & Bayer, Edith, 2017. "Costs and benefits of Energy Efficiency Obligations: A review of European programmes," Energy Policy, Elsevier, vol. 107(C), pages 53-62.
    16. Hilden, Mikael & Huuki, Hannu & Kivisaari, Visa & Kopsakangas-Savolainen, Maria, 2018. "The importance of transnational impacts of climate change in a power market," Energy Policy, Elsevier, vol. 115(C), pages 418-425.
    17. Mellal, Mohamed Arezki, 2020. "Obsolescence – A review of the literature," Technology in Society, Elsevier, vol. 63(C).
    18. Etherington, Dan M., 1977. "A Stochastic Model For The Optimal Replacement Of Rubber Trees," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(1), pages 1-19, April.
    19. Ben Abdallah, Skander & Lasserre, Pierre, 2016. "Asset retirement with infinitely repeated alternative replacements: Harvest age and species choice in forestry," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 144-164.
    20. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

    More about this item

    Keywords

    Asset replacement; Coal; Real options; Wood pellets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:proeco:v:185:y:2017:i:c:p:21-33. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/ijpe .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijpe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.