Analyzing the Tradeoffs Between Economies of Scale, Time-Value of Money, and Flexibility in Design Under Uncertainty: Study of Centralized Versus Decentralized Waste-to-Energy Systems

Abstract

This paper presents and applies a simulation-based methodology to assess the value of flexible decentralized engineering systems design (i.e., the ability to flexibly expand the capacity in multiple sites over time and space) under uncertainty. This work differs from others by analyzing explicitly the tradeoffs between economies of scale (EoS)—which favors designing large capacity upfront to reduce unit cost and accommodate high anticipated demand—and the time value of money—which favors deferring capacity investments to the future and deploying smaller modules to reduce unit cost. The study aims to identify the best strategies to design and deploy the capacity of complex engineered systems over time and improve their economic lifecycle performance in the face of uncertainty by exploiting the idea of flexibility. This study is illustrated using a waste-to-energy (WTE) system operated in Singapore. The results show that a decentralized design with the real option to expand the capacity in different locations and times improves the expected net present value (ENPV) by more than 30% under the condition of EoS α = 0.8 and discount rate λ = 8%, as compared to a fixed centralized design. The results also indicate that a flexible decentralized design outperforms other rigid designs under certain circumstances since it not only reduces transportation costs but also takes advantage of flexibility, such as deferring investment and avoiding unnecessary capacity deployment. The modeling framework and results help designers and managers better compare centralized and decentralized design alternatives facing significant uncertainty. The proposed method helps them analyze the value of flexibility (VOF) in small-scale urban environments, while considering explicitly the tradeoffs between EoS and the time-value of money.