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ID163536
Title ProperInvestment in electricity capacity under fuel cost uncertainty
Other Title Informationdual-fuel and a mix of single-fuel technologies
LanguageENG
AuthorGal, Nurit
Summary / Abstract (Note)We study the effect of the price and price volatility of natural gas on investment in electricity capacity in two technology scenarios: (1) dual-fuel units that use natural gas and diesel; and (2) a mix of single-fuel plants that use coal or natural gas. We develop a two-stage (capacity and operation) model and derive analytical solutions for both scenarios. Based on the observed log-normal distribution of the natural gas price, we show that optimal capacity investment increases moderately with natural gas price volatility, countering a commonly held view that fuel cost uncertainty tends to discourage capacity investment. Thus, higher volatility of the natural gas price tends to reduce the 'missing money' problem. We use Texas data to show that higher gas price volatility implies higher profits and consumer surplus in the first scenario, even when the per MWh diesel cost is much higher than the expected value of the per MWh gas cost. In the second scenario, firms invest only in gas capacity, unless the per MWh coal cost is significantly below the expected per MWh gas cost, thus explaining the popularity of gas generation.
`In' analytical NoteEnergy Policy. No.126; Mar 2019: p.518-532
Journal SourceEnergy Policy 2019-03 126
Key WordsInvestment Under Uncertainty ;  Natural Gas Price Volatility