Generation Capacity Expansion Planning in Deregulated Electricity ...

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Generation Capacity Expansion Planning in Deregulated Electricity ...

any market power, but at the same time has enough budgets to invest in some reasonable generating

capacity within 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 investments take place for the

investor, while for any lower budgetary allocation, there are no investments. 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 investment decisions of the firm are obtained from the solution of the model discussed in

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

obtained while maximizing the firm’s profit, J. Let us denote the maximum value of J, obtained for a

given IRR as J * .

The IRR is increased in small steps and the model is solved to maximize J and the corresponding J *

is obtained. It is observed that the firm’s maximum profit, J * , increases as the IRR is increased, attains

a maximum, and with further increase in IRR, starts decreasing. This value of IRR where J * attains 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%

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