Optimal investments in power generation under centralized and decentralized decision making

This work presents a novel model for optimization of investments in new power generation under uncertainty. The model can calculate optimal investment strategies under both centralized social welfare and decentralized profit objectives. The power market is represented with linear supply and demand c...

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Bibliographic Details
Published in:IEEE transactions on power systems 2005-02, Vol.20 (1), p.254-263
Main Authors: Botterud, A., Ilic, M.D., Wangensteen, I.
Format: Article
Language:English
Subjects:
Centralized and decentralized decision making
Decentralized
Decision making
Demand
Dynamic programming
generation expansion planning
Heuristic algorithms
Investments
Marketing
Markets
Optimization
Power generation
Power markets
real options
restructured power systems
stochastic dynamic optimization
Stochastic processes
Supply and demand
Timing
Uncertainty
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Summary:This work presents a novel model for optimization of investments in new power generation under uncertainty. The model can calculate optimal investment strategies under both centralized social welfare and decentralized profit objectives. The power market is represented with linear supply and demand curves. A stochastic dynamic programming algorithm is used to solve the investment problem, where uncertainty in demand is represented as a discrete Markov chain. The stochastic dynamic model allows us to evaluate investment projects in new base and peak load power generation as real options, and determine optimal timing of the investments. In a case study, we use the model to compare optimal investment strategies under centralized and decentralized decision making. A number of interesting results follow by varying the assumptions about market structure and price response on the demand side.
ISSN:0885-8950
1558-0679
DOI:10.1109/TPWRS.2004.841217