Managing Shutdown Decisions in Merchant Commodity and Energy Production: A Social Commerce Perspective
41 Pages Posted: 13 Sep 2017 Last revised: 15 May 2018
Date Written: May 1, 2018
Merchant commodity and energy production assets operate in markets with volatile prices and exchange rates. Producers can choose in each period between production, production suspension, and permanent shutdown. Plant closures, however, 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. Our social commerce perspective towards managing shutdown decisions deviates from the commonly used asset value maximization objective in merchant operations. We formulate a high-dimensional constrained Markov decision process to manage shutdown decisions. We approximate this intractable model using unconstrained stochastic dynamic programs and define operating policies that account for preferences to delay and reduce shutdowns. Our first policy leverages anticipated regret theory in behavioral psychology 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. We also propose a reoptimization heuristic to simplify the anticipated-regret policy. We show that anticipated-regret policies possess desirable asymptotic properties absent in classification- and reoptimization-based policies. On instances created using real data, anticipated-regret and classification-based policies outperform practice-based production margin strategies and, to a lesser extent, reoptimization. Specifically, the former policies decrease the shutdown probability by 25% and, in addition, delay shutdown decisions by an average of 4 years for a 4% asset value loss. Our operating policies show that unaccounted social costs amounting to a few percent of the maximum asset value can justify delaying or avoiding the use of a plant's shutdown option by adapting its operating flexibility in our application. Thus, taking a social commerce perspective towards managing a plant's operating flexibility appears financially viable.
Suggested Citation: Suggested Citation