Generation Capacity Expansion Planning in Deregulated Electricity ...

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Generation Capacity Expansion Planning in Deregulated Electricity ...

3.3.6 Trade-off between financial risk and financial return

In order to consider financial risk, the cost recovery time for new capacity investment has considered

being 5 years in all previous Sections of this chapter. Investment cost recovery period directly

influences the financial risk involved in the investments. In order to have a trade off between financial

risk and return the cost recovery period varied from 5 to 8 years and its impact on the return is

analyzed. Fig. 23 shows that return on the investment is expected to increase almost linearly if cost

recovery time is increased up to 7-years, which can be attributed to increase in the investment towards

cheaper generation plants, which results in more revenue margin with lower total cost. If cost

recovery period is increased beyond 7-years, the IRR is expected to reduce because with longer

recovery time the firm is expected to invest in cheaper generation plants like coal to get higher profit,

but since such plants have higher emission coefficients, the emission cap and budget constraints come

into play and constraints the energy generation from these units.

IRR, %

70%

60%

50%

40%

30%

20%

10%

0%

5 6 7 8

Cost Recovery Time, Years

Fig. 23 Effect of financial risk (Cost recovery time) on IRR with MILP framework

In Fig. 24 it is shown that with increase in cost recovery period the firm’s total profit is excepted to

decrease, as lesser number of units are expected to be installed, resulting in lower energy production,

and hence lower revenue. Also because lesser number of units are expected to be installed, the

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