RES-E capacity investment under uncertain renewable energy supply and volatile electricity spot price
| DOI | https://doi.org/10.1108/IMDS-06-2016-0213 |
| Published date | 10 July 2017 |
| Date | 10 July 2017 |
| Pages | 1145-1165 |
| Author | Lingcheng Kong,Zhong Li,Ling Liang,Jiaping Xie |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
RES-E capacity investment under
uncertain renewable
energy supply and volatile
electricity spot price
Lingcheng Kong
Bussiness School, East China University of Science and Technology,
Shanghai, China
Zhong Li
Shanghai University of Engineering Science, Shanghai, China
Ling Liang
Shanghai University of International Business and Economics,
Shanghai, China, and
Jiaping Xie
The School of International Business Administration,
Shanghai University of Finance and Economics, Shanghai, China
Abstract
Purpose –When the power generator faces uncertain and independent electricity spot price and renewable
energy source supply, two different conditions need to be considered: the distributions of renewable energy
source electricity and electricity spot price are independent or dependent. The purpose of this paper is to
explore the capacity investment strategy under volatile electricity spot price when renewable energy
penetration rate is low, taking into account these two conditions.
Design/methodology/approach –The authors design a capacity investment model under dual uncertainties
and consider how to optimize the investment capacity in order to maximize profit under two different conditions.
Findings –The authors find that when renewable energy supply fluctuation is unrelated to spot electricity
price fluctuation, the renewable energy power profitability is determined by the average cost of spot
electricity price and equivalent cost. When renewable energy supply fluctuation is related to spot electricity
price fluctuation, the renewable energy power profitability is determined by the market value and the
construction and maintenance cost.
Practical implications –Faced with the conflict of the renewable energy supply, the authors need to
understand how to plan the generation capacity with intermittent renewable sources. The result helps
renewable energy become competitive in the electricity market under loose regulations.
Originality/value –The authors compare two capacity investment strategies that the renewable energy
supply fluctuation is related and unrelated to spot electricity price.
Keywords Uncertain demand, Capacity planning, Intermittent energy source,
Renewable energy source electricity, Uncertain supply
Paper type Research paper
1. Introduction
Energy supply security and climate change have become global issues in the twenty-first
century. The renewable energy industry plays an important role in mitigating greenhouse
gas effect and energy shortage. Developing renewable energy source electricity (RES-E),
Industrial Management & Data
Systems
Vol. 117 No. 6, 2017
pp. 1145-1165
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-06-2016-0213
Received 12 June 2016
Revised 12 October 2016
Accepted 17 October 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
The work was supported by National Natural Science Foundation of China (Grant No. 71273091,
“Study on the pricing mechanism of the industrial chain of renewable energy power under the goal of
the carbon intensity,”Grant No. 71272015, “Contract optimization and its application research of
closed-loop product service chain based on internet of things”).
1145
RES-E
capacity
investment
which could address climate change, guarantee energy supply security and create jobs, is a
way to achieve sustainable development (Lamy, 2004). For example, wind power has been
one of the fastest growing energy technologies of the past decade (AWEA, 2002).
Wind power industry in China has doubled every year since 2005. Photovoltaic power also
shows the great commercial future. However, an essential feature of most renewable
resources is intermittency. Most intermittent RES-Es are variable and unpredictable.
Besides, electricity is hardly stored economically at present. In a word, a power system
requires high electricity supply reliability since the interruption of electricity supply would
incur huge loss. Therefore, integrating the intermittent RES-E with the power system
economically and safely is challenging. Understanding how to plan generation capacity with
intermittent renewable sources is important.
1.1 Related literature
The purpose of power capacity investment research in power industry is to seek an economical
electricity capacity investment program which is based on the forecast of power demand in
certain period and meet the premise of certain reliability. Decision variables are usually the size
of power capacity, investment time, and operational program (Van Mieghem, 2003).
Conventional power capacity model is not suitable for the strategic emerging industry of
renewable energy generated electricity. Fischer and Newell (2008) evaluated the impact of wind
power capacity size of the environment and discussed the impact on the climate warming when
the power industry is supplying either the conventional power that generates environmental
pollution or renewable energy generated electricity that is clean. Tishler et al. (2012) studied the
electricity capacity investment in perfectly competitive power market when the price is allowed
to fluctuate. Miah et al. (2012) studied the investment path of renewable energy optimal
capacity and used dynamic programming to gradually increase the penetration rate of
renewable energy with minimum cost when there is fixed initial and final penetration rate
of renewable energy. However, the penetration rate of in itial and final renewable energy is
treated as exogenous parameters and there is no evaluation ofwhether the ratio of final period
renewable energy capacity and conventional energy capacity is reasonable and economical.
These studies assume there is a stable yearly renewable energy generation and only consider
different cost structure between renewable energy and conventional energy without the
consideration of intermittency of renewable energy.
Different from hydropower and nuclear power, the new generation of renewable energies
such as wind and photovoltaic power is driven by weatherconditions which are intermittent.
Hence, they are unstable and unpredictable (Klessmann et al., 2008). The major factor that
affects the size of renewable energy investment is the intermittency of renewable energy
supply and the complexity of transaction. Gross et al. (2006)depicted a low capacity factor of
intermittent renewable energy, suggesting a limited period of its power generation. However,
intermittency of power is not only in a limited period of time, but also in instable power
generation period and not artificially controllable. In regulated monopoly power industry,
because of the intermittency the central dispatcher cannot balance the difference of demand
and supply through adjusting renewable energy. In contrast, the renewable energy becomes
the source of imbalancedsupply and demand in power industry. The systemoperator has to
schedule other powersources to compensate for the supply and demanddifference caused by
instability (Green, 2008). In the deregulated competitive electricity market, the renewable
energy is also unable to satisfy power demand according to the market signal because of its
intermittency (Klessmann et al., 2008).
Cory and Schwabe (2009) believed this random and undispatchable feature is similar to
electricity demand and treated renewable energy as negative demand. Harper et al. (2007) used
random variables with Bernoulli distribution to fit the intermittency of wind power. However,
there are different ways to generate intermittent renewable energy and they have different
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IMDS
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