Real Options for Planning, Operating, and Analyzing Energy Systems

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My work is about how financial and other uncertainties impact the way in which energy systems are designed and operated. My students and I have worked on optimizing operations of and valuing various types of energy infrastructure. These include hydroelectric power plants, natural gas storage facilities, corn ethanol refineries and oil tankers for storing crude oil. This optimization occurs under price uncertainty as well as uncertainties in environmental inflow uncertainty and changing government price subsidies. This dual optimize/valuation process is often called the real options (RO)  paradigm. Infrastructure real options, like financial options, gain value from their ability to react to changing prices or other environmental or regulatory uncertainties, and are priced using stochastic optimal control methodology. The coupled optimal control/valuation problem is cast as a partial differential equation which requires sophisticated solution methods. The conceptual promise of the RO paradigm for energy systems can be of real practical relevance only if sufficiently realistic models, fit to and validated by real data, are developed. Creating such models and supporting their industrial application is the long run goal of my research program. The success of this program will proceed by many stages, each suitable for training HQP.  My intermediate project goals include steps to improve RO models to deal with: economic realities (price impact, time varying subsidies; varying current and uncertain future regulations) engineering aspects (changing abilities to store commodities and predict component failures) and financial realism (the ability to transact in forward as well as spot markets). I will attack these problems using case studies drawn from the international oil market, the US corn ethanol market, and the Ontario electricity market. I will fit these models to and test them against actual data. This work will shed vital quantitative light on the interplay between technical and actor motivations on world oil markets and will be useful for policy makers in the energy-rich Canadian economy. This techniques and methodologies developed in this set of projects will help better understand the way in which market structures and the goals of market participants affect market participant behavior and hence market dynamics. The ethanol models built here, which include complexities of systems costs and related hysteresis, together with storage capacity and associated ability to trade in forward markets, will be of great value both for ethanol producers facing operational decisions and for government decision makers considering policy innovations.   Work on optimal replacement of wind turbines, with projections of future power prices and development of data driven failure predictions,  will provide crucial tools to Ontario wind energy producers and regulators alike as they face huge uncertainty about   post-feed in tariff market prices.