Generation Capacity Expansion Planning in Deregulated Electricity ...

any market power, but at the same time has enough budgets to **in**vest **in** some reasonable generat**in**g

capacity with**in** a 5-year time frame. In this work, the first sub-period (5-year) budgetary allocation

has been assumed to be $100 million because at this value the active **in**vestments take place for the

**in**vestor, while for any lower budgetary allocation, there are no **in**vestments. It is further assumed that

the budgetary allocation for later sub-periods (each 5-year period) is twice the amount of the previous

sub-period. This assumption is fairly generic **in** nature.

2.3.2 Base Case

The optimal **in**vestment decisions of the firm are obta**in**ed from the solution of the model discussed **in**

Section-2.2. First, the model is solved by choos**in**g a low value of IRR and optimal decisions are

obta**in**ed while maximiz**in**g the firm’s profit, J. Let us denote the maximum value of J, obta**in**ed for a

given IRR as J * .

The IRR is **in**creased **in** small steps and the model is solved to maximize J and the correspond**in**g J *

is obta**in**ed. It is observed that the firm’s maximum profit, J * , **in**creases as the IRR is **in**creased, atta**in**s

a maximum, and with further **in**crease **in** IRR, starts decreas**in**g. This value of IRR where J * atta**in**s a

maximum, denoted by J *Max represents the optimal solution **in** the base case.

Total Profit, $

2.5E+08

2.0E+08

1.5E+08

1.0E+08

5.0E+07

0.0E+00

10%

13%

16%

19%

22%

25%

28%

31%

34%

37%

IRR, %

Fig. 1 Effect of IRR on firm’s profit

17

40%

43%

46%

49%

52%

55%

58%