The effect of operational considerations on the return of electricity generation investment

Electricity generation investment decisions are driven by the net present value (NPV) of each generation technology. The value of each technology depends, however, not only on the characteristics of the plant in question but also on the rest of the generation portfolio. Thus the correlations between various generation technologies, as well as the characteristics of the technology itself, will drive the final generation portfolio. Monte Carlo analysis is employed to determine the distribution of returns of and correlations between various electricity generation technologies. The operational costs of each technology are arrived by means of a unit commitment and economic dispatch algorithm. The revenues of each generation unit are calculated according to the marginal cost of electricity provision at each hour; ie a perfectly competitive market is assumed, and the NPV of each generation technology is determined. Significant anti-correlation exists between the value of different technologies depending on operational considerations, while anti-correlation due to varying fuel-types does not feature in the results.