Valuing storage under uncertainty: a decision-support tool

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1 Valuing storage under uncertainty: a decision-support tool Lloyd Davies Doctoral Training Centre in Low Carbon Technologies, Leeds 14/06/2016

2 Objective Whole-system optimisation Find the investment choice that minimises the present and future capital and operating costs to meet a set of constraints under conditions of uncertainty in demand and the prices of gas and carbon

3 Why are deterministic models unsatisfactory? Asymmetries Electricity has a very low price elasticity of demand, so value of lost load greatly exceeds average prices Investors demonstrate risk aversion, wishing more to avoid losses of a given magnitude than gains of the same magnitude

4 Initial expectations Investment shift towards plant with lower capital costs Investments shift towards plant with lower build times The model does not capture the higher risk associated with large projects, the risks of which are asymmetric

5 Terminology A period is a discrete modelled time interval The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

6 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

7 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

8 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

9 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

10 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

11 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

12 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

13 Terminology A period is a discrete modelled time interval Period 1 Period 2 Period 3 The horizon is the time covered by all periods A state is a modelled demand condition The duration is the time modelled in a period The step size is the time between the start of two periods A pathway connects a state in one period to a state in a future period A link between the starting state and an end state is a complete pathway

14 Model components Period-and-state controller model Capacity-expansion model

15 model Least-cost, deterministic optimisation Copper-plate model Unit configurations include must-run requirement, storage and utilisation of renewable (flow) resource Overlapping optimisation blocks with discarding to mitigate endeffect problems Reserve modelling Instantaneous demand Largest instantaneous output among generators Instantaneous output from classes of units

16 Electricity generation/consumption (GW) model 45 Nuclear Coal Gas Biomass Wind Solar Storage /09/15 06/09/15 07/09/15 08/09/15 09/09/15 10/09/15 11/09/15

17 Emissions intensity (gco 2 e/kwh) State-and-period model Systematic checking of plant combinations Ensure portfolio has sufficient flexibility Enforce carbon targets Eliminate combinations likely to have very high costs Monitoring when optimisation runs are being performed

18 Capacity-expansion model Yearly granularity Construction options for individual generation units, including pausing options include mothballing

19 Capacity-expansion model

20 Capacity-expansion model

21 Generation units in portfolio Capacity-expansion model 14 Coal Gas Nuclear Storage Nuclear New gas New storage

22 Generation units in portfolio Capacity-expansion model 14 Coal Gas Nuclear Storage Nuclear New gas New storage

23 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

24 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

25 Overview Capacity-expansion modeller Period modeller State modeller List of plant that can exist in period model 1 model 2 model 3 model 4

26 Overview Capacity-expansion modeller Period modeller State modeller List of plant that can exist in period model 1 model 2 model 3 model 4

27 Overview Capacity-expansion modeller Period modeller State modeller Combinations that are feasible in state model 1 model 2 model 3 model 4

28 Overview Capacity-expansion modeller Period modeller State modeller Combinations that are feasible in state model 1 model 2 model 3 model 4

29 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

30 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

31 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

32 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

33 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

34 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

35 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

36 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

37 Overview Capacity-expansion modeller Portfolio operational costs Period modeller State modeller model 1 model 2 model 3 model 4

38 Overview Capacity-expansion modeller Portfolio operational costs Period modeller State modeller model 1 model 2 model 3 model 4

39 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

40 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

41 Overview Capacity-expansion modeller Portfolio operational costs Period modeller State modeller model 1 model 2 model 3 model 4

42 Overview Capacity-expansion modeller Portfolio operational costs Period modeller State modeller model 1 model 2 model 3 model 4

43 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

44 Overview Capacity-expansion modeller Period modeller State modeller model 1 model 2 model 3 model 4

45 Limitations Learning effects are exogenous Cost profiles are uniform or follow trajectory No aggregating effects for renewables No transmission-system constraints Very simple demand changes Stylised nature sees swings between generating sources Figure: Grubler, A., 2010

46 Research questions How is investment affected by uncertainty in demand and the prices of gas and carbon? How does risk aversion and discounting influence investment? What is the effect of different policy instruments? What attributes of storage increase its attractiveness? Low capital costs? Round-trip efficiency? Power or energy capacity?

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