Generation investment evaluation under uncertainty in a competitive environment

This paper proposes a new explicit, step-by-step approach for a generating company to evaluate investments considering uncertainties and future expected investment from its competitors. We introduce a probabilistic valuation model to provide to the generating company a wider analytical framework as well as to incorporate risk assessment in the evaluation. The new framework consists of i) defining statistical distribution in future load growth and plant technologies´ fuel cost; ii) anticipating competitors´ future expansion using dynamic programming; iii) generating future cash-flow for the new plant by clearing the market every year with respect to the anticipated system expansion over the life time of the plant; iv) computing the plant´s rate of return and expected profit of the company within the simulation period; v) performing a Monte Carlo simulation to capture the statistical fluctuations of the rate of return; vi) analyzing the profit distribution and making decision.