Investing in electricity production under a reliability options scheme

Fontini, Fulvio; Vargiolu, Tiziano; Zormpas, Dimitrios

doi:10.1016/j.jedc.2020.104004

Cited by 7 publications

(3 citation statements)

References 38 publications

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“…As for the structural parameters of the stochastic process capturing the evolution of the price of electricity, we refer to the Italian electricity market. In line with Fontini et al (2021), we assume that the instantaneous volatility (σ ) is in the region [0.0034, 0.0051] which is the hourly rate that corresponds to an average yearly volatility that ranges from 0.26 to 0.53. These figures are consistent with the yearly volatility of weekly-averaged day-ahead prices for the Italian continental price zones (Andreis et al, 2020).…”

Section: Calibrationmentioning

confidence: 99%

Evaluating the optimal timing and capacity of investments in flexible combined heat and power generation for energy-intensive industries

Zormpas

Oggioni

2023

Ann Oper Res

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Substantial R &D efforts are currently directed towards the development of combined heat and power (CHP) systems that automatically and seamlessly connect to the power grid. In this paper we develop a real options model to assess the impact that the operational flexibility characterizing such systems will have on the optimal timing and capacity associated with investments in CHP plants. We take the viewpoint of a manufacturer operating in an energy-intensive industry who contemplates investing in CHP. We discuss and compare investments in two types of CHP systems: a standard one that is operationally rigid and a technologically advanced one that is operationally flexible. The interaction between temporal and operational flexibility under uncertainty and irreversibility is central to our analysis. We show that operational flexibility guarantees earlier investment but has an ambiguous effect in terms of capacity. In particular, when operational flexibility is very valuable the potential investor is opting for investing in a plant with larger productive capacity. The potential investor chooses a smaller CHP unit if otherwise. A numerical exercise calibrated using data from the Italian pulp and paper and electricity industries complements our theoretical analysis.

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Section: Calibrationmentioning

confidence: 99%

Evaluating the optimal timing and capacity of investments in flexible combined heat and power generation for energy-intensive industries

Zormpas

Oggioni

2023

Ann Oper Res

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“…However, since here we are interested to a long-term optimal behavior, we interpret the average electricity produced in a generic unit of time as proportional to the installed power. All of this can be mathematically justified if we interpret our fundamental price to be, for example, a weekly average price as, e.g., in Bosco et al (2010), Fontini et al (2020), Gianfreda et al (2016), who used this representation exactly to get rid of daily and weekly seasonalities.…”

Section: Introductionmentioning

confidence: 99%

Optimal installation of renewable electricity sources: the case of Italy

Awerkin

Vargiolu

2021

Decisions Econ Finan

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Starting from the model in Koch and Vargiolu (SIAM J Control Optim 59(4): 3068-3095, 2021), we test the real impact of current renewable installed power in the electricity price in Italy, and assess how much the renewable installation strategy which was put in place in Italy deviated from the optimal one obtained from the model in the period 2012-2018. To do so, we consider the Ornstein-Uhlenbeck (O-U) process, including an exogenous increasing process influencing the mean-reverting term, which is interpreted as the current renewable installed power. We estimate the parameters of this model by using real data of electricity prices and energy production from photovoltaic and wind power plants from the six main Italian price zones. We obtain that the model fits well the North, Central North and Sardinia zones: among these zones, the North is impacted by photovoltaic production, Sardinia by wind and the Central North does not present significant price impact. Then, we implement the solution of the singular optimal control problem of installing renewable power plants, in order to maximize the profit of selling the produced energy in the market net of installation costs. We extend the results of Koch and Vargiolu (SIAM J Control Optim 59(4): 3068-3095, 2021) to the case when no impact on power price is presented and to the case when N players can produce electricity by installing renewable power plants. To this extent, we analyze both the concepts of Pareto optima and of Nash equilibria. For this latter, we present a verification theorem in the 2-player case and an explicit characterization of a Nash equilibrium in the no-impact case. We are thus able to describe the optimal strategy and compare it with the real installation strategy that was put in place in Italy.

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“…All of this can be mathematically justified if we interpret our fundamental price to be, for example, a weekly average price as e.g. in [7,19,21], who used this representation exactly to get rid of daily and weekly seasonalities.…”

Section: Introductionmentioning

confidence: 99%

Optimal installation of renewable electricity sources: the case of Italy

Awerkin¹,

Vargiolu²

2021

Preprint

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Starting from the model in [23], we test the real impact of current renewable installed power in the electricity price in Italy, and assess how much the renewable installation strategy which was put in place in Italy deviated from the optimal one obtained from the model in the period 2012-2018. To do so, we consider the Ornstein-Uhlenbeck (O-U) process, including an exogenous increasing process influencing the mean reverting term, which is interpreted as the current renewable installed power. Using real data of electricity price, photovoltaic and wind energy production from the six main Italian price zones, we estimate the parameters of the model and obtain quantitative results, such as the production of photovoltaic energy impacts the North zone, while wind is significant for Sardinia and the Central North zone does not present electricity price impact. Then we implement the solution of the singular optimal control problem of installing renewable power production devices, in order to maximize the profit of selling the produced energy in the market net of installation costs. We extend the results of [23] to the case when no impact on power price is presented, and to the case when N players can produce electricity by installing renewable power plants. We are thus able to describe the optimal strategy and compare it with the real installation strategy that was put in place in Italy.

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Investing in electricity production under a reliability options scheme

Cited by 7 publications

References 38 publications

Evaluating the optimal timing and capacity of investments in flexible combined heat and power generation for energy-intensive industries

Evaluating the optimal timing and capacity of investments in flexible combined heat and power generation for energy-intensive industries

Optimal installation of renewable electricity sources: the case of Italy

Optimal installation of renewable electricity sources: the case of Italy

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