Economic Decision Making of Renewable Power Producers Under Uncertainty by Chenlu Lou A dissertation submitted to the graduate faculty in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Major: Industrial Engineering Program of Study Committee: K. Jo Min, Major Professor Michael Dorneich John Miranowski Sarah M. Ryan John R. Schroeter Ananda Weerasinghe Iowa State University Ames, Iowa 2014 Copyright © Chenlu Lou, 2014. All rights reserved. ii TABLE OF CONTENTS LIST OF FIGURES ............................................................................................................................... iv LIST OF TABLES ................................................................................................................................. v ACKNOWLEDGEMENTS .................................................................................................................. vi ABSTRACT ......................................................................................................................................... vii CHAPTER 1 . INTRODUCTION .......................................................................................................... 1 1.1 Optimal Entry and Exit Decision Making .................................................................................... 3 1.2 Optimal Repowering Decision Making ........................................................................................ 4 1.3 Repowering Under Policy Uncertainties ...................................................................................... 6 1.4 Structure of Dissertation ............................................................................................................... 7 CHAPTER 2 . AN EXIT AND ENTRY STUDY OF RENEWABLE POWER PRODUCERS: A REAL OPTIONS APPROACH ............................................................................................................. 9 2.1 Literature Review ....................................................................................................................... 10 2.2 Modeling and Analysis of Exit Decision .................................................................................... 11 2.3 Sensitivity Analysis of the Exit Decision on αC, σC, and W ........................................................ 17 2.4 Modeling and Analysis of the Entry Decision ............................................................................ 18 2.5 Sensitivity Analysis of the Entry Decision on αC, σC, and W ..................................................... 21 2.6 Numerical Analysis: The Case of a Wind Farm ......................................................................... 22 2.6.1. Parameter Values ................................................................................................................ 23 2.6.2. The Entry/Exit Decisions ................................................................................................... 23 2.6.3. Monte Carlo Simulation ..................................................................................................... 29 2.7 Discussion on Policy Implications and Assumptions ................................................................. 30 2.8 Concluding Remarks .................................................................................................................. 34 CHAPTER 3 . REPOWERING AND EXIT DECISIONS FOR RENEWABLE POWER PRODUCERS ...................................................................................................................................... 37 3.1 Literature Review ....................................................................................................................... 38 3.2 Basic Model Formulation and Solution ...................................................................................... 39 iii 3.3 Basic Model Sensitivity Analysis ............................................................................................... 47 3.4 Extension of Basic Model: Two Alternatives ............................................................................. 49 3.5 Extended Model Sensitivity Analysis ......................................................................................... 52 3.6 Policy Implications ..................................................................................................................... 54 3.7 Numerical Example .................................................................................................................... 56 3.8 Concluding Remarks .................................................................................................................. 60 CHAPTER 4 . REPOWERING UNDER POLICY UNCERTAINTY ................................................ 62 4.1 Literature Review ....................................................................................................................... 63 4.2 Repowering Under Policy Renewal Possibility .......................................................................... 64 4.3 Repowering Under Policy Expiration Possibility ....................................................................... 73 4.4 Case Study: A Wind Farm Repowering Project ......................................................................... 79 4.5 Concluding Remarks .................................................................................................................. 83 CHAPTER 5 . EMPIRCAL STUDY OF THE WIND INDUSTRY ................................................... 85 5.1 On The GBM Assumption of O&M Cost .................................................................................. 85 5.2 On The Poisson Arrival Assumption of the PTC ....................................................................... 87 CHAPTER 6 . CONLCUSION ............................................................................................................ 89 APPENDIX .......................................................................................................................................... 92 A.1 Proofs in Chapter 2 .................................................................................................................... 92 A.1.1 Proof of Proposition 2.1 ...................................................................................................... 92 A.1.2 Proof of Proposition 2.2 ...................................................................................................... 93 A.1.3 Proof of Proposition 2.3 ...................................................................................................... 93 A.1.4 Proof of Proposition 2.4 ...................................................................................................... 94 A.2 Effect of Planning Horizon on Repowering Decisions .............................................................. 95 CHAPTER 7 BIBLIOGRAPHY ........................................................................................................ 101 iv LIST OF FIGURES Figure 2.1 Value of the project vs. the O&M cost .................................................................. 25 Figure 2.2 Entry/exit thresholds vs. the volatility of O&M cost ............................................ 25 Figure 2.3 Entry/exit thresholds vs. the growth rate of O&M cost ........................................ 26 Figure 2.4 Entry/exit thresholds vs. the exit fee ..................................................................... 27 Figure 2.5 Entry threshold vs. the growth rate and volatility of O&M cost ........................... 28 Figure 2.6 Exit threshold vs. the growth rate and volatility of O&M cost ............................. 28 Figure 2.7 Sample path of a wind farm’s O&M cost in 20 years ........................................... 29 Figure 3.1 Basic model timeline ............................................................................................. 41 Figure 3.2 Extended model timeline ....................................................................................... 49 Figure 3.3 Comparison of project values in the extended model ........................................... 58 Figure 4.1 Current plant value functions given λ0=0.04, λ 1 = 0.05 ........................................ 82 Figure 5.1 Normal Q-Q plot and ACF plot for class A .......................................................... 86 Figure 5.2 Normal Q-Q plot and ACF plot for class B ........................................................... 86 Figure 5.3 Normal Q-Q plot and ACF plot for class C ........................................................... 87 v LIST OF TABLES Table 2.1 Parameters and corresponding values ..................................................................... 23 Table 2.2 Numerical results of the entry/exit decisions .......................................................... 24 Table 3.1 Parameters and corresponding values ..................................................................... 57 Table 3.2 Numerical results of the basic model ...................................................................... 57 Table 3.3 Numerical results of the extended model ............................................................... 58 Table 3.4 Numerical results of sensitivity analysis ................................................................ 59 Table 3.5 Numerical results of sensitivity analysis (continued) ............................................. 60 Table 4.1 Parameters and corresponding values ....................................................................