PowerOptInvest and Utility Investment Data Tool Overview Manual
Beta Version March 2012
Welcome to PowerOptInvest and Utility Investment Data Tool. PowerOptInvest is an investment
decision model that determines the least cost investment and operating strategies for electric power
generation facilities. The Utility Investment Data Tool is software that is used to enter data into
PowerOptInvest.
This manual provides an overview of PowerOptInvest and the Utility Investment Data Tool. We strongly
recommend that first time users read this overview manual and the Utility Investment Data manual
before starting the Utility Investment Data Tool.
Description of PowerOptInvest
PowerOptInvest is an investment decision model that determines the least cost investment, or series of
investments, and operation decisions that minimize total operations, capital, and emissions costs over
time across multiple scenarios for an electric power generation requirement or potential investment in
an electricity market. The model represents a rational decision maker who is attempting to minimize
costs given his or her knowledge about the likelihood of future scenarios and system constraints. The
model is generally used to represent an investment decision for an individual generation plant or the
investment decision(s) to meet a set amount of electricity demand (or capacity requirement) for a time
period in the future.1 The model user determines and enters constraints into the model to represent
environmental regulations, policy restrictions, reliability requirements or other constraints that restrict
investment and operation options in each scenario. The constraints and timing of constraints can vary by
scenario, as determined by the model user. Please note that PowerOptInvest is not a dispatch model
and is not a substitute for system wide reliability modeling.
To represent uncertainty, PowerOptInvest asks the user to:
1) Define a set of scenarios
2) Express his/her beliefs on the current likelihood of each scenario
3) Express his/her beliefs on how the likelihood of each scenario will evolve until there is no more
uncertainty and reality converges on a scenario. This must be specified for each scenario.
What is a scenario?
A scenario is a forecast of uncertain variables that affect the profitability of investment and operation
decisions. Each scenario requires forecasts for electricity prices, fuel prices, and emission allowance
prices2 for the period of uncertainty plus the planning horizon. The planning horizon is how far the
model looks into the future to determine least cost investment and operation decisions. Each
investment option included in the model requires operations cost, generation, capital cost and
emissions data for the period of uncertainty plus the planning horizon. The model assumes the decision
maker is a price taker, and any investment and operation decisions do not affect market prices for
electricity, fuel, or emissions allowances.
1
2
Example of electricity demand requirement: provide 5000 GWh of baseload generation for the next 30 years
Emissions allowances prices are not required if a scenario does not include an emissions allowance price.
Scenario Probabilities
The user must specify the initial probability of each scenario, how these probabilities change over time
as the model converges on each scenario, and when uncertainty is resolved (what year the model
converges).3 For example, the model could begin in 2012 (year 1) and resolve uncertainty in 2020 (year
9). The model runs multiple times to converge on each scenario and generates least-cost investment
and operation decisions for each convergence.4 The changes in scenario probabilities and convergence
on each scenario simulate the changes in uncertainty that occur as regulations and legislation are
enacted and technology and markets change over time, as well as the ability of the decision maker to
wait for new information and revise previous decisions.
Information Provided by PowerOptInvest
PowerOptInvest determines the optimal investment and operations decisions under certainty and
uncertainty for each of the user’s scenarios given the user’s assumptions about scenario probabilities
and constraints. Investment and operations decisions determined prior to the year uncertainty is
resolved are optimal hedging investments that minimize total cost for the user’s scenarios and
assumptions about scenario probabilities. Because the model determines optimal hedging investments,
it minimizes the range of total costs across the user’s scenarios.
PowerOptInvest also allows the user to estimate the cost of ignoring selected scenarios and sudden
shocks. Users can estimate these costs by hiding the probability of selected scenarios (set probabilities
equal to zero) prior to convergence on the scenarios and compare systems cost to model runs that do
not ignore selected scenarios or include shocks.
Recommended Steps for Using the PowerOptInvest Model
1) Formulate modeling question
Begin by determining what information you want to get from using the PowerOptInvest model. It is
important to identify the underlying need or constraint you are addressing. For example, does the user
want to know if a proposed retrofit is cost effective or what is the least cost option to meet an annual
generation requirement? It is important to identify all of the constraints affecting the investment
question you are modeling. Are there future constraints that should be considered? Are these future
constraints uncertain? PowerOptInvest is designed to determine least cost, hedging investments under
uncertainty. After determining all potential uncertainties, the user then should qualitatively determine
which uncertainties are likely to affect the question the user is answering. Often times, the impact of
these uncertainties is the information the user want to obtain from the model.
2) Develop Scenarios
PowerOptInvest requires forecasts for each scenario included in the model. These scenarios should
capture the uncertainties and constraints the model user believes are important and could affect
3
If there are 5 scenarios, there are 5 sets of scenario probabilities converging on each scenario. Convergence
occurs when there is no longer scenario uncertainty, equivalent to traditional scenario analysis.
4
If there are 5 scenarios, the model generates 5 sets of investment and operations results. If there are 9 scenarios the model
outputs 9 sets of investment and operations results.
decision making based on present knowledge about these uncertainties. Scenarios can be added or
removed for future analyses if they do not provide the user with useful information.
Each scenario forecast should be a reasonable forecast for the environmental regulations, government
policy, market conditions and technology assumptions represented in each scenario. PowerOptInvest
requires forecasts for wholesale electricity prices, fuel prices, and emissions allowance prices (if they
exist in the scenario). Scenario forecasts can come from EIA, EPA, utility IRPs, DOE, the Nicholas
Institute, or any other models or sources. The user can adjust third party forecasts to fit an analysis with
regional price differentials, etc. Users can create their own forecasts if they believe they are reasonable.
For example, if a user wants to model a high natural gas scenario, the user could add $4/MMBtu to a
Henry Hub forecast. The table below presents example forecasts for natural gas prices for 12 scenarios.
All forecast data should be in a constant dollar year that applies to all PowerOptInvest model inputs. We
recommend creating matrixes of scenario forecasts for future prices (electricity, coal, gas, emissions) in
a spreadsheet prior to starting the Utility Investment Data Tool unless projections can be described with
an initial value and a fixed growth rate.
Period of Uncertainty
Planning Horizon
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
…….
2049
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
…….
39
5.05
5.06
5.03
5.27
5.34
5.13
5.01
4.98
5.00
5.12
5.35
5.64
5.95
6.26
6.43 …….
9.24
5.04
5.04
5.03
5.28
5.34
5.38
5.34
5.14
5.03
5.14
5.30
5.53
5.82
6.15
6.32 …….
9.28
5.02
5.06
5.02
5.23
5.31
5.27
5.21
5.21
5.19
5.56
5.94
6.08
6.28
6.59
6.76 …….
8.27
5.02
5.05
5.00
5.21
5.29
5.26
5.19
5.18
5.16
5.52
5.81
5.94
6.12
6.42
6.59 …….
8.03
5.79
6.04
6.14
6.59
6.74
6.68
6.55
6.56
6.65
7.05
7.51
7.97
8.40
8.89
9.08 …….
10.77
5.80
6.01
6.15
6.59
6.74
6.85
6.87
6.74
6.72
6.98
7.32
7.76
8.21
8.73
8.95 …….
10.98
5.81
6.01
6.15
6.63
6.82
7.97
8.21
8.23
8.29
8.32
8.46
8.62
8.98
9.35
9.51 …….
11.62
5.78
5.98
6.12
6.57
6.78
8.00
8.19
8.23
8.24
8.28
8.44
8.54
8.73
9.17
9.38 …….
10.39
6.08
6.32
6.59
7.16
7.50
7.62
7.68
7.76
7.89
8.37
8.63
8.78
9.11
9.52
9.73 …….
13.76
6.09
6.34
6.61
7.12
7.47
7.81
7.87
7.93
7.99
8.38
8.59
8.71
9.06
9.43
9.66 …….
13.84
6.01
6.36
6.49
7.05
7.51
10.61
11.44
11.61
11.95
12.43
12.30
12.07
12.04
12.12
11.80 …….
10.57
6.01
6.36
6.56
7.19
7.71
10.94
11.56
11.83
12.01
12.16
11.97
11.68
11.62
11.65
11.48 …….
10.37
Scen 1
Scen 2
Scen 3
Scen 4
Scen 5
Scen 6
Scen 7
Scen 8
Scen 9
Scen 10
Scen 11
Scen 12
Example matrix natural gas price forecasts, 2010 dollars
In addition to the price forecasts, the user must specify how environmental regulations under different
scenarios constrain the operation of each investment/generation option. For every option included in
the model, the user must determine if the constraints in the user’s scenarios make an investment option
unavailable in the future. For example if there is an existing plant that does not meet a new
environmental regulation constraint included in one or more of the user’s scenarios, the user will need
to enter the year the option is no longer available for those scenarios. The year an option is no longer
available may vary by scenario and the user may include constraints that only apply to select scenarios.
3) Planning Horizon and Uncertainty Period
The user determines the planning horizon, how far the model looks into the future when estimating the
expected net present value of each investment and operation decision, and the period of uncertainty.
The planning horizon is typically set equal to generation finance periods, often 20 or 30 years, or
expected lifetime of the investment options. The period of uncertainty is the time in years before the
model converges on each scenario in the year uncertainty is resolved (1 + period of uncertainty). The
period of uncertainty is constant for all scenarios but some scenarios can converge earlier if the user
sets their probability equal to 100% prior to the year uncertainty is resolved. The model projection
period, the number of years into the future the model estimates least cost investment and operations
data for, is equal to the period of uncertainty + the planning horizon, or year uncertainty is resolved – 1
+ planning horizon.
4) Initial Scenario Probabilities and How Uncertainty is Resolved
The user determines that initial probabilities of each scenario and the probability matrixes for
convergence on each scenario. The initial scenario probabilities are the same for each convergence. The
user should set initial probabilities based on his or her beliefs about the probability of each scenario
included in the model. Similarly the user should set convergence probabilities based on his or her belief
about how probabilities change over time as the model convergences on each scenario. Additionally,
users can test how different assumptions about initial scenario probabilities and scenario convergence
affect model results by adjusting these values. We recommend creating matrixes of scenario
probabilities for each scenario convergence in a spreadsheet prior to starting the Utility Investment Data
Tool unless all initial scenario probabilities are equal and linearly converge on each scenario.
Period of Uncertainty
Year
2011 2012 2013 2014 2015 2016
Year
1
2
3
4
5
6
Scen 1
50% 50% 50% 50% 60% 60%
Scen 2 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 3 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 4 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 5 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 6 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 7 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 8 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 9 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 10 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 11 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Scen 12 4.55% 4.55% 4.55% 4.55% 3.64% 3.64%
Example probability matrix converging on scenario 1
2017
7
60%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
3.64%
2018
8
80%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
1.82%
2019
9
90%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
Uncertainty
Resolved
2020
10
100%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
To model sudden shocks, set the probability of the convergence scenario equal to zero and then change
the probability of the convergence scenario to 100% in the final years of uncertainty or when
uncertainty is resolved. To model the effect of ignoring selected scenarios representing different
constraints or uncertainties5, set the probabilities of these scenarios equal to zero until the model
converges on these scenarios for all scenario convergences and then rerun the model without setting
these scenario probabilities to zero during the uncertainty period and compare results.
5
For example the user can hide scenarios with or without different environmental regulations to simulate the effect
of ignoring these regulations.
5) Investment and Operations Options
List all the potential options to meet the need, constraint or investment question you are modeling. This
should include potential new generation investment options, the existing unit (if there is one), any
potential retrofits of existing generation or new construction, different operations configurations for all
options and potentially combinations of options.
An important feature of PowerOptInvest is the ability to represent sequential investment (or investment
in stages) in the same power plant. For example, the user can include investment options that require
prior investments by assigning prerequisites. A prerequisite tells the model it cannot invest in a
particular investment option unless the model has invested in the prerequisites or one of the
prerequisite already exists. Including all potential investment options and interdependencies of these
options captures the full range of options available to a decision maker in the real world. For example
the table below illustrates the options and corresponding pre-requisites that would need to be specified
to represent the alternative of retrofitting an existing pulverized coal-fired power plant with 1)wet flue
gas desulfurization system (WFGD), 2)selective catalytic reduction (SCR), and 3)Carbon Capture and
Sequestration (CCS), in any sequence. The table shows that Investment Option 3 is a pre-requisite of
generation/investment option 5. It also shows that there are three alternative pre-requisites for
investment option 7 (i.e. investment option 7 can be chosen if and only if one of the alternative prerequisites has been installed).
Generation/Investment Option
Pre-requisite
0. Existing
None
1. Existing retrofitted with
WFGD + SCR + CCS
None
2. Existing retrofitted with
WFGD + SCR
None
3. Existing retrofitted with
WFGD
None
4. Existing retrofitted with SRC
None
5. Existing + WFGD retrofitted
with SCR
3. Existing retrofitted with
WFGD
6. Existing + SCR retrofitted
with WFGD
4. Existing retrofitted with
SRC
7. Existing + WFGD + SCR
retrofitted with CCS
2. Existing retrofitted with
WFGD + SCR
Alternative Pre-requisite
Alternative Pre-requisite
5. Existing + WFGD
retrofitted with SCR
6. Existing +SCR retrofitted
with WFGD
Description of a set of investment options and corresponding pre-requisites
The user needs to specify capital costs and operating and maintenance costs for each of the 7
generation/investment options. The order in which investment occurs may affect the capital cost, but
should not affect performance of the resulting plant. For example, investment options 2, 5, and 6 result
in the same plant. Capital costs of option 2 may be lower than the combined capital costs of Option 3
and Option 5, or the combined capital costs of option 4 and option 6. However, the heat rate, emissions,
and operating and maintenance costs of options 1, 5, and 6 must be the same for every period of the
planning horizon. If this is not the case then the 3 options should not be considered alternative prerequisites of option 7.
This specification of investment in stages also enables the model to represent the flexibility of running
power plants without operating all the installed environmental emissions controls. For example, the
user can specify that the installation of generation/investment option 7, automatically installs options 2,
3 and 4 at no additional cost. This specification enables the model to choose to operate a plant that has
all three controls to shutdown some of them whenever it is optimal and allowed by regulatory
constraints. The model will prompt the user for these potential limited operation options by asking the
user to identify the other option that matches the limited operation.
Different configurations can be modeled by including additional options that use the same asset but
with different operating characteristics and costs.
PowerOptInvest assumes that the annual generation, heat rate and emissions rate of each option are
constant throughout the modeling period. If the user wants to include the ability to change the annual
generation, heat rate, or emissions an option, the user needs to create additional options that represent
these changes.
For each option the user must specify capital and operations and maintenance costs. Operations and
maintenance costs need to be specified for every year of the modeling period or alternatively an initial
cost in year 1 and rate at which these costs change for each scenario must be provided. Capital costs for
each investment option need to be specified as the net present value of the total cost of the investment
including financing, engineering, permitting, and funds used during construction for the planning
horizon. The user must specify these net present value costs (lump sum) for every year of the modeling
period or alternatively can specify an initial net present value cost in year 1 and a rate at which these
cost change for each scenario. We recommend creating matrixes of net present value capital cost and
operations and maintenance cost for each option if they differ by scenario or change at non constant
rates.
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Year
1
2
3
4
5
6
7
8
9
10
11
12
3024
3024
3024
3024
3024
2997.27
2958.65
2784.87
2715.06
2674.96
2631.89
2581.39
1846.18
3024
3024
3024
3024
3024
2997.27
2958.67
2786.46
2716.69
2676.61
2633.56
2583.08
1846.75
3024
3024
3024
3024
3024
2998.75
2960.10
2784.66
2710.32
2670.18
2627.07
2576.52
1850.99
3024
3024
3024
3024
3024
2998.75
2960.10
2784.66
2710.32
2670.18
2627.07
2576.52
1850.99
3024
3024
3024
3024
3024
2995.78
2957.14
2784.77
2714.93
2674.80
2631.71
2581.19
1857.50
3024
3024
3024
3024
3024
2994.29
2955.75
2782.32
2712.65
2672.63
2629.64
2579.24
1854.39
3024
3024
3024
3024
3024
2994.29
2955.75
2782.32
2712.65
2672.63
2629.64
2579.24
1854.39
3024
3024
3024
3024
3024
3000.24
2961.62
2787.84
2718.04
2677.93
2634.86
2584.36
1861.04
3024
3024
3024
3024
3024
3000.24
2961.62
2784.87
2707.64
2667.54
2624.46
2573.96
1806.08
3024
3024
3024
3024
3024
3000.24
2961.62
2784.87
2707.64
2667.54
2624.46
2573.96
1806.08
3024
3024
3024
3024
3024
3000.24
2961.62
2787.84
2710.61
2670.51
2627.43
2576.94
1825.39
3024
3024
3024
3024
3024
3000.24
2961.62
2787.84
2718.04
2677.93
2634.86
2584.36
1869.95
Scen 1
Scen 2
Scen 3
Scen 4
Scen 5
Scen 6
Scen 7
Scen 8
Scen 9
Scen 10
Scen 11
Scen 12
2049
39
Example matrix of net present value of capital costs over planning horizon for an individual investment
option for modeling period 39 years in millions of 2010 dollars
Other model assumptions
The beta version of PowerOptInvest assumes that all investment options take three years to design,
permit, and construct. However, pre-requisites do not need to be operational before a sub sequential
investment is allowed to happen. An investment/generation option can be selected one year after the
pre-requisite is installed. Future versions will allow the user to specify the construction time for each
investment option.
Technical Description of PowerOptInvest
PowerOptInvest is a multi-period decision model with an embedded multi-stage stochastic optimization
program that minimizes the expected total costs of plant operation, capital investments, and emissions
allowances over a time horizon across multiple scenarios. The Multi-Period Decision Making Model
(MPDM) determines the optimal sequence of decisions by a utility over a planning horizon while
uncertainty is resolved. Each year the MPDM selects the investment and operation options that
minimize Expected Net Present Value of total costs over the planning horizon6 by solving the multi-stage
Stochastic Optimization Model (SOM) described below. Once the investment and operations decisions
for a given year are determined, the MPDM moves to the next year by updating (1) the “current”
conditions, which are determined by the investments made in the “past” and (2) the probabilities
assigned to the scenarios, which change over time to converge on individual scenarios (see Table 3 for
example probabilities for converging on scenario 2). Thus, for each convergence, we assume that one of
the user’s specified S scenarios describes reality and that this reality will be revealed when the model
converges. In the last year of the MPDM (i.e., convergence year), the SOM has collapsed to a
deterministic optimization problem describing investment and operations decisions until the end of the
planning horizon. This formulation requires the specification of fuel prices, emissions allowances prices,
and capital and O&M costs for each scenario for the period of uncertainty (year uncertainty is resolved 1) plus the planning horizon.
The SOM is a mixed integer linear program that includes binary variables representing the decision to
invest in a retrofit or new generation and the decision to operate a plant (set to 1 if the control is
installed/used and set to 0 otherwise) by the decision maker. The SOM determines the capital, O&M,
fuel, and emissions costs for the current year plus the net present value of the capital, O&M, fuel and
emissions cost for the planning horizon for each investment and operations option for each scenario.
Each investment and operations option represents a combination of investment and operating
decisions.7 The SOM then calculates these expected net present values for each investment and
operating option by multiplying the expected net present value of the option by the probability of the
scenario and summing for each scenario, resulting in an expected net present value for each option over
the planning horizon. The SOM selects the lowest expected net present value investment and
operations option and relays this information to the MPDM.
Thus, at each point in time, the model determines the optimal sequence of investment and operating
decisions that account for the possibility of retrofitting an existing plant to meet new regulations or
other constraints, building a new plant, mothballing, purchasing power from the wholesale market, and
shutting down a plant at any period of the planning horizon under different environmental regulation,
6
The planning horizon is typically set equal to generation finance periods, often 20 or 30 years, or expected
lifetime of the investment options.
7
Investment and operation options represent every combination of investment and operation decisions over the planning
horizon subject to the user’s constrains.
policy, and annual generation constraints. By explicitly modeling the full flexibility of installation and
operation of plants, and the irreversibility of capital investments (represented by the total capital cost,
including financing costs at installation and a zero salvage value at shutdown), the model effectively
accounts for the “options” available to an investor to meet the constraints. The SOM model assumes all
operating plants and investment options are price takers and cannot affect market prices for fuel,
electricity, capital investments, or emissions allowances.