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Combined Heat and Power in Commercial Buildings: Investment and Risk Analysis

Karl Magnus Maribu and Stein-Erik Fleten

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-7
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Abstract:
Combined heat and power (CHP) systems can generate electricity locally while they recover heat to satisfy heating loads in buildings, which means they provide efficient energy. On-site generators may reduce both the expected energy costs and cost risk exposure for developers. With volatile energy prices, a deterministic modeling framework will not yield a fair value of CHP systems because flexibility in the operational response to price changes is not taken into account. In this paper, we present a Monte Carlo simulation model that is used to find the CHP value under uncertain future wholesale electricity and natural gas prices. When considering investing in a CHP system on should consider both return and risk. Clearly, both investment return and risk depend on local energy tariffs and energy loads. We highlight an example where CHP is marginally profitable and the investment decision is not straightforward. Interestingly, CHP systems were found particularly attractive with volatile electricity prices because their ability to respond to high prices provides efficient hedges to energy cost risk. Therefore, developers should not be discouraged but rather embrace on-site generation in markets with volatile prices. From the analysis, it can also be concluded that sizing of CHP systems can be related to the energy tariff structure and cost risk preferences as well as to energy loads.



Stepwise Green Investment under Policy Uncertainty

Michail Chronopoulos, Verena Hagspiel, and Stein-Erik Fleten

Year: 2016
Volume: Volume 37
Number: Number 4
DOI: 10.5547/01956574.37.4.mchr
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Abstract:
We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment. Keywords: Investment analysis, Capacity sizing, Renewable energy, Policy uncertainty



The Other Renewable: Hydropower Upgrades and Renewable Portfolio Standards

Stein-Erik Fleten, Johannes Mauritzen, and Carl J. Ullrich

Year: 2018
Volume: Volume 39
Number: Number 2
DOI: 10.5547/01956574.39.2.sfle
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Abstract:
A total of 29 U.S. states and the District of Columbia have in place mandatory Renewable Portfolio Standards (RPS) which require that a minimum amount of energy come from renewable resources. We investigate the role of hydropower vis-a-vis other renewables under RPS. Using a Bayesian multilevel model, we find that hydropower plants subject to RPS are more likely to plan upgrades. These planned upgrades appear to be a substitute for solar and wind rather than complementary reserve generation.





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