A three-tier model for electricity generators and decision makers

Abstract

The aim of this study is to develop, demonstrate and recommend a three-tier planning model for the electricity generation expansion planning (EGEP) which consists of: costs evaluation of the existing portfolio of power plants, the EGEP and evaluation of investment costs for new capacity technologies. The long term EGEP problem is solved by optimisation models which determine energy technologies, size and when should the electricity generation plants be available during the planning horizon under certain constraints. The first step seeks to influence the selection of potential technologies by assessing the fuel costs of existing fleet of power plants; where portfolio theory model is utilised for energy sources such as coal, hydro, nuclear and gas/diesel. The portfolio evaluation period ended in 2013, coinciding with the year the electricity generation capacity expansion planning period started. The results of portfolio evaluation showed that the 2013 portfolio fuel costs are not efficient because of both high costs and risks.

The second step is the actual planning for new electricity generation capacity. Two stage stochastic programming (TSSP) model is used for planning amidst of uncertainty in electricity demand. The TSSP model is contrasted with a traditional deterministic model for the EGEP which is used for the period, 2013 to 2050. The planning data is sourced from South African Integrated Resource Plan (IRP) update published in 2013. The cost results emanating from the TSSP model are lower than the deterministic model’s cost results.

The third step evaluates the investment costs for projects emanating from TSSP results. Real option (RO) models are used in this tier to provide decision makers with options in projects implementation dates. Sequential compound RO model is applied to new capacity with increments and a binomial option pricing model is used for technologies where new capacity occurs once in the period. RO model is compared to the net present value (NPV) model. The NPV results suggest that all the investment projects be rejected; whereas the RO results show that they can also be deferred.