Option-game-based method for generation investment analysis considering uncertain carbon reduction policy in the electricity market

Greenhouse gas, especially CO₂, emissions impact on global climate has been widely recognised. Emissions reduction has become an important issue. Efforts have been made globally in establishing emission policies and protocols. However, considering the fact that different countries have different carbon reduction schemes, and significant variations are still possible for existing schemas, future CO₂ prices can be highly uncertain. The power generation sector will be significantly affected by changing policies and therefore significant uncertainties will be involved in the operation and investment processes. Moreover, investments in thermal power plants are also influenced by many other uncertain factors such as fuel prices, spot electricity prices and the investment behaviours of rival generation companies. An appropriate method is urgently needed to model these uncertainties in the investment process. A novel framework of generation investment decision-making is proposed herewith. The option game theory is employed to handle multiple uncertain factors. The investment decision making will be solved with a Barraquand-Martineau option pricing model-based method. Case studies are conducted to assess the performance of the proposed framework.