Investments in Renewable and Conventional Energy: The Role of Operational Flexibility

42 Pages Posted: 20 Oct 2016 Last revised: 26 Feb 2019

See all articles by Gurhan Kok

Gurhan Kok

Koc University

Kevin Shang

Duke University

Şafak Yücel

Georgetown University - McDonough School of Business

Date Written: February 12, 2019

Abstract

There is an ongoing debate on how providing a subsidy for one energy source affects the investment level of other sources. To investigate this issue, we study a capacity investment problem for a utility firm that invests in renewable and conventional energy, with a consideration of two critical factors. First, conventional sources have different levels of operational flexibility, i.e., inflexible (e.g., nuclear and coal) and flexible (e.g., natural gas). Second, random renewable energy supply and electricity demand are correlated and nonstationary. We model this problem as a two-stage stochastic program in which a utility firm first determines the capacity investment levels, followed by the dispatch quantities of energy sources, to minimize the sum of investment and generation-related costs. We derive the optimal capacity portfolio to characterize the interactions between renewable and conventional sources. We find that renewable and inflexible sources are substitutes, suggesting that a subsidy for nuclear or coal-fired power plants leads to a lower investment level in wind or solar energy. On the other hand, wind energy and flexible sources are complements. Thus, a subsidy for flexible natural gas-fired power plants leads to a higher investment in wind energy. This result holds for solar energy if the subsidy for the flexible source is sufficiently high. We validate these insights by using real electricity generation and demand data from the state of Texas.

Keywords: Renewable Energy, Capacity Investment, Volume Flexibility.

Suggested Citation

Kok, Gurhan and Shang, Kevin and Yücel, Şafak, Investments in Renewable and Conventional Energy: The Role of Operational Flexibility (February 12, 2019). Georgetown McDonough School of Business Research Paper No. 2856013. Available at SSRN: https://ssrn.com/abstract=2856013 or http://dx.doi.org/10.2139/ssrn.2856013

Gurhan Kok

Koc University ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Kevin Shang

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Şafak Yücel (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, N.W.
Washington, DC 20057
United States

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