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Power Plant Development Options in Abu Dhabi

Power Plant Development Options in Abu Dhabi. Application Portfolio ESD.71 Engineering Systems Analysis for Design Kyle Frazier December 2007. Intro. Option Value. Concepts. Decision Analysis. Conclusions. Outline. Introduction and Background Economic & Business Context

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Power Plant Development Options in Abu Dhabi

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  1. Power Plant Development Options in Abu Dhabi Application Portfolio ESD.71 Engineering Systems Analysis for Design Kyle Frazier December 2007

  2. Intro • Option Value • Concepts • Decision Analysis • Conclusions Outline • Introduction and Background • Economic & Business Context • Identifying Uncertainties • Defining System Concepts • Concept 1 – Fixed Alternative • Concept 2 – Phased/Flexible Alternative • Decision Analysis – Demand Uncertainty • Developing the Decision Tree • Optimal Actions • Valuation of Put Option – Concept 1 • Building the Lattice Model • Option Valuation • Conclusions Image sources: http://www.wfes08.com/page.cfm/Link=7/t=m/goSection=6, http://www.industcards.com/al-taweelah.jpg

  3. Option Value • Intro • Concepts • Decision Analysis • Conclusions Economic & Business Context • Projections of sustained economic growth  increasing electricity demand • Need new electricity generating capacity • Government turning to privatization of power generation sector • Opportunities exist for independent (water and) power producers (IPPs/IWPPs) • 2006 ADWEC Demand Forecast predicts a shortfall in capacity from 2009 onwards Source: http://www.adwec.ae/forecast

  4. Option Value • Intro • Concepts • Decision Analysis • Conclusions Identifying Uncertainties Quantified Uncertainties: • fuel prices (natural gas) • demand for electric power generation capacity Key Sources: • fuel prices • technical change • privatization and regulation policy shifts • changes in the industrial or market structure • shifts in economic/financial policy and capital flow controls • end-user demand for electric power 32-Year Natural Gas Wellhead Price History Source: http://tonto.eia.doe.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm

  5. Intro • Option Value • Concepts • Decision Analysis • Conclusions Identifying Uncertainties – Power Demand Abu Dhabi Peak Demand Forecast to 2020 • IWPP targets ~ 20% of demand for capacity, or about 3350 gross MWe by 2027 Source: ADWEC Electricity Demand Forecast 2006-2020, http://www.adwec.ae/forecast

  6. Concept 1 – Fixed Single, 3000-MWe capacity, natural gas-fired power plant 20 year analysis; assume plant design live >20 years • Option Value • Intro • Concepts • Decision Analysis • Conclusions System Concepts

  7. Concept 2 – Phased Two 1000-MWe capacity, natural gas-fired power plants and one 500-MWe solar power plant at year 0 Option to add second 500-MWe solar plant at year 10 20 year analysis; assume plant design life >20 years • Option Value • Intro • Concepts • Decision Analysis • Conclusions System Concepts

  8. Option Value • Intro • Concepts • Decision Analysis • Conclusions Decision Analysis Optimal Action: Choose System Concept 2 (Flex) based on higher expected net present value

  9. Uncertainty: price of natural gas Analysis method: binomial lattice, dynamic programming approach Lattice Parameters: v = 5.04 % per year σ = 38.13 % u = 1.46419 d = 0.68297 p = 0.56609 ΔT = 1 year • Option Value • Intro • Concepts • Decision Analysis • Conclusions Building the Lattice Model

  10. Option Value • Intro • Concepts • Decision Analysis • Conclusions Building the Lattice Model Price Outcome Lattice Probability Lattice

  11. Option Value • Intro • Concepts • Decision Analysis • Conclusions Evolution of Price Distribution in Lattice

  12. Option Value • Intro • Concepts • Decision Analysis • Conclusions Valuation of Put Option Put option should be exercised when price of natural gas inputs rises to levels as identified by stage & step in the table above (correlate with actual prices on previous slide)

  13. Option Value • Intro • Concepts • Decision Analysis • Conclusions Conclusions • Two system concepts – one fixed and one flexible – were identified to provide IWPP’s targeted electricity generation capacity • Decision analysis used to explore demand uncertainty  flexible system concept optimal • Binomial lattice used to develop model of fuel price uncertainty and value a put option on the fixed system concept  option had positive value • Generally, exercises demonstrated the value (to the IWPP investors) of flexibility given uncertainty in demand and fuel prices • Flexibility allows taking advantage of upside potential (adding additional solar power plant) and/or avoiding significant losses (put option on large natural gas plant)

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