Flexibility and real options analysis in power system generation expansion planning under uncertainty

Aakil M. Caunhye, Michel-Alexandre Cardin and Muhammad Rahmat

IISE Transactions, 2022, vol. 54, issue 9, 832-844

Abstract: Over many years, there has been a drive in the electricity industry towards better integration of environmentally friendly and renewable generation resources for power systems. Such resources show highly variable availability, impacting the design and performance of power systems. In this article, we propose using a stochastic programming approach to optimize Generation Expansion Planning (GEP), with explicit consideration of generator output capacity uncertainty. Flexibility implementation - via real options exercised in response to uncertainty realizations - is considered as an important design approach to the GEP problem. It more effectively captures upside opportunities, while reducing exposure to downside risks. A decision-rule-based approach to real options modeling is used, combining conditional-go and finite adaptability principles. The solutions provide decision makers with easy-to-use guidelines with threshold values from which to exercise the options in operations. To demonstrate application of the proposed methodologies and decision rules, a case study situated in the Midwest United States is used. The case study demonstrates how to quantify the value of flexibility, and showcases the usefulness of the proposed approach.

Date: 2022
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DOI: 10.1080/24725854.2021.1965699

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