Generation Capacity Expansion Planning in Deregulated Electricity ...

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Generation Capacity Expansion Planning in Deregulated Electricity ...

Total Profit, $

2.5E+08

2.0E+08

1.5E+08

1.0E+08

5.0E+07

0.0E+00

1.0E+05 5.0E+05 1.0E+06 5.0E+06 1.0E+07 5.0E+07 1.0E+08

Emission Cap, tons/year

Fig. 11 Effect of emission cap on firm’s total profit

Fig. 11 shows the total profit of the firm with change in the emission cap. It can be seen that up to a

certain emission cap of 1.0E+7 tons/year, the firm’s profit increases continuously. This increased

profit is attributed to increased investment in coal-based capacity which consequently results in cheap

generation, and hence more revenue. However beyond 1.0E+07 tons/year of emission cap the

allowable budget becomes a binding constraint for further coal-based capacity addition, and firm’s

profit see a gradual steady level.

2.3.6 Trade-off between financial risk and financial return

As mentioned before, in order to alleviate the financial risk, the cost recovery period for new capacity

investment has been considered to be 5 years in previous sections, since the recovery period directly

influences the financial risks involved in the investment. In order to have a trade off between financial

risk and return, the recovery period is varied from 5 to 8 years and its impact on IRR and firm’s profit

is analyzed. Fig. 12 shows that the IRR increases if the investor is ready to take more risk by allowing

a longer cost recovery period. This is because with a longer cost recovery period a significant amount

of annual cost gets shifted from investment to operation to increasing energy production. So, rather

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