October 9, 2009
Published by BC3Research at October 9, 2009
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Jose Manuel ChamorroLuis Mª Abadie.Efficiency gains have put a limit on fuel consumption growth in the past. In addition to energy savings, these improvements have another basic impact, namely the avoiding of the greenhouse gas (GHG) emissions that go hand in hand with fossil fuel combustion. To the extent that there is a price for these emissions, curbing them has economic value for firms that operate in an emissions-constrained environment. This holds also where no such price exists currently but there is a chance that climate restrictions will be imposed in the future.
There is a broad consensus that energy efficiency can play a significant role in curbing GHG emissions while paying for itself. However, investments that at first glance seem worthwhile are frequently not undertaken. This situation can be traced back in part to the challenge of attracting sufficient interest from the investment community. Fortunately, though, energy-efficiency investments lend themselves to financial analysis. We analyse investments in efficiency (and savings in energy) from the viewpoint of a firm or individual that behaves rationally, i.e. in his/her best economic interest.
The investment or project is valued as a (real) option that is only exercised at the optimal time and is irreversible (the firm cannot disinvest should market conditions turn). The return on this investment is highly uncertain. Uncertainty emanates from energy prices and emission allowance prices, but regulatory uncertainty may top them all. We aim to determine the optimal time to invest or, in other words, to learn the conditions under which the investment should be made.
Our theoretical model comprises two stochastic processes for fuel (say, natural gas) price, and emission (say, carbon) allowance price, respectively. With regard to the carbon price, we consider a standard geometric Brownian motion (GBM) in two different scenarios: within a given commitment period (e.g., 2008-2012), and between two successive periods (i.e. the current one and the immediate post-Kyoto period), presumably separated by a change in climate regulation with an ensuing jump in carbon prices. As for the natural gas price, we assume a mean-reverting process in which the long-term equilibrium level grows deterministically over time. The key underlying parameters in these processes are estimated from actual market prices. We can then assess energy-efficiency investments in a fairly realistic setting. As a case study, we consider a potential investment in either of two different gas-fired power stations that differ in their efficiency levels. In particular, we derive the total return to an increase of a percentage point in thermal efficiency as a function of the plant's production factor or availability rate.
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May 7, 2012
Published by BC3Research at May 7, 2012
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Prof. Jose Manuel Chamorro UPV/EHUTransmission investments are currently needed to meet an increasing electricity demand, to address security of supply concerns, and to reach carbon emissions targets. A key issue when assessing the benefits from an expanded grid concerns the valuation of the uncertain cash flows that result from the expansion. We develop a valuation model which combines optimization techniques, Monte Carlo simulation over the expansion project lifetime, and market data from futures contracts on commodities. The model allows for random failures in generation and transmission infrastructure. Uncertainty stems also from nodal loads, fuel prices, allowance prices, wind generation, and hydro generation. Thus the model accounts for the stochastic dynamics on both the demand side and the supply side. To demonstrate the model by example, we consider a simplified network with two nodes. It is intended to broadly resemble the power generation sectors in England/Wales and Scotland. We then focus on the proposed Western HVDC subsea link. We simulate the whole distribution of effects on system costs, carbon emissions, and unserved load.
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May 14, 2012
Published by BC3Research at May 14, 2012
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Prof. Jose Manuel ChamorroUPV/EHUTransmission investments are currently needed to meet an increasing electricity demand, to address security of supply concerns, and to reach carbon emissions targets. A key issue when assessing the benefits from an expanded grid concerns the valuation of the uncertain cash flows that result from the expansion. We develop a valuation model which combines optimization techniques, Monte Carlo simulation over the expansion project lifetime, and market data from futures contracts on commodities. The model allows for random failures in generation and transmission infrastructure. Uncertainty stems also from nodal loads, fuel prices, allowance prices, wind generation, and hydro generation. Thus the model accounts for the stochastic dynamics on both the demand side and the supply side. To demonstrate the model by example, we consider a simplified network with two nodes. It is intended to broadly resemble the power generation sectors in England/Wales and Scotland. We then focus on the proposed Western HVDC subsea link. We simulate the whole distribution of effects on system costs, carbon emissions, and unserved load.
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