Managing Shutdown Decisions in Merchant Commodity and Energy Production: A Social Commerce Perspective

42 Pages Posted: 13 Sep 2017 Last revised: 8 May 2019

See all articles by Alessio Trivella

Alessio Trivella

Technical University of Denmark - Management Engineering

Selvaprabu Nadarajah

University of Illinois at Chicago - College of Business Administration

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU)

Denis Mazieres

University of London - Economics, Mathematics and Statistics

David Pisinger

Technical University of Denmark - Management Engineering

Date Written: May 5, 2019

Abstract

Problem definition: Merchant commodity and energy production assets operate in markets with volatile prices and exchange rates. Plant closures adversely affect societal entities beyond the specific plant being shutdown such as the parent company and the local community. Motivated by an aluminum producer, we study if mitigating these hard-to-assess broader impacts of a shutdown is financially viable using the plant's operating flexibility. Academic/Practical relevance: Our social commerce perspective towards managing shutdown decisions deviates from the commonly used asset value maximization objective in merchant operations. Identifying operating policies that delay or decrease the likelihood of a shutdown without incurring a significant asset value loss supports socially-responsible plant shutdown decisions. Methodology: We formulate a constrained Markov decision process to manage shutdown decisions and limit the probability of future plant closures. We provide theoretical support for approximating this intractable model using unconstrained stochastic dynamic programs with modified shutdown costs and explore two classes of operating policies. Our first policy leverages anticipated regret theory while the second policy generalizes production-margin heuristics used in practice using machine learning. We compute the former and latter policies using a least squares Monte Carlo method and combining this method with binary classification, respectively. Results: Anticipated-regret policies possess desirable asymptotic properties absent in classification-based policies. On instances created using real data, anticipated-regret and classification-based policies outperform practice based production-margin strategies. Significant reductions in shutdown probability and delays in plant closures are possible while incurring small asset value losses. Managerial implications: A plant's operating flexibility provides an effective lever to balance the social objective to reduce closures and the financial goal to maximize asset value. Adhering to both objectives requires combining short-term commitments with external stakeholders to avoid shutdown with longer-term internal efforts to reduce the probability of plant closures.

Suggested Citation

Trivella, Alessio and Nadarajah, Selvaprabu and Fleten, Stein-Erik and Mazieres, Denis and Pisinger, David, Managing Shutdown Decisions in Merchant Commodity and Energy Production: A Social Commerce Perspective (May 5, 2019). Available at SSRN: https://ssrn.com/abstract=3034869 or http://dx.doi.org/10.2139/ssrn.3034869

Alessio Trivella

Technical University of Denmark - Management Engineering ( email )

Produktionstorvet 424
room 043
Kgs. Lyngby, 2800
Denmark

Selvaprabu Nadarajah (Contact Author)

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
Chicago, IL 60607
United States

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU) ( email )

Trondheim NO-7491
Norway

Denis Mazieres

University of London - Economics, Mathematics and Statistics ( email )

United States

David Pisinger

Technical University of Denmark - Management Engineering ( email )

Produktionstorvet 424
room 043
Kgs. Lyngby, 2800
Denmark

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