A Real Options Approach to Forecast Generation Adequacy in Competitive Electric Power Industry

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This grant provides funding for developing a methodology to study long-term capacity investment in a competitive electric market. The objective is to study generation adequacy in relationship to the many complex factors in markets, such as load growth, market mechanisms, cost characteristics and physical limits of generating units, environmental policies, and competition. Specifically, three main goals will be targeted: (1) Develop a real-options based, long-term generation asset valuation tool, and use it to evaluate capacity investment decisions. (2) Develop theoretic results to define the "optimal capacity expansion," including the investment timing and the generator's type and size in a well-defined, deregulated environment. (3) Develop a model that simulates generation capacity expansion process in the competitive electric power a model that simulates generation capacity expansion process in the competitive electric power industry, and use the model to study capacity expansion related problems, and forecast generation adequacy and electricity price trend. If successful, given a well-defined market environment, the model will be used to forecast the probability distributions for electricity price and system capacity at each future time period and the probability of blackouts as well. This forecasting model will help to detect unforeseeable problems related to generation adequacy, and to serve as an early warning system.