Generation capacity expansion under demand, capacity factor and environmental policy uncertainties

Abstract

Abstract This paper presents an extension and application of the two-stage stochastic optimization methodology to determine electricity generation technology choices and capacity additions under sequential and multiple uncertainties. Specifically, the model presented in this paper addresses how uncertainties in electricity demand, capacity factor of wind and solar technologies, and environmental policy combine to affect the capacity additions of electricity generation technologies. This study unpacks the impact of these uncertainties to find that, on the one hand, when policy uncertainty is isolated from uncertainties in demand and capacity factor, neither of the two uncertainties dominates the other; instead they are complementary. Capacity factor uncertainty will dictate the types of technologies to be deployed while demand uncertainty will determine the amount of capacity to be installed or purchased. On the other hand, a combination of the three dimensions of uncertainty highlights intriguing insights that demonstrate the dominance of one uncertainty over the other. Under two different environmental policies, emissions standards and carbon taxes, the optimal prescription of generation technology combinations with respect to capacity additions are varied. However, we find that carbon tax will be more efficient at reducing CO2.