December 9, 2008ESD.71Engineering Systems Analysis for Design

Term Project--

Real Option Analysis of Cape Wind Project in Massachusetts

Prof. Richard de Neufville

MichelAlexandreCardin

ThomasRand-Nash

Na Zhang

Outline

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

Wind Energy today around the world and in U.S.

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Wind Power contributed 35% of all new U.S. electric generating capacity in 2007 and represents one of the largest new sources of electric capacity additions

• DOE Report: 20% Wind Energy by 2030—Increasing wind energy’s contribution to

U.S. electricity supply

Wind Resource in U.S. and Massachusetts

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Wind resource• In MA• Cape Cod

What’s Cape Wind and why?

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Site: a shallow area of water toward the centre of Nantucket Sound, called Horseshoe Shoal.

• Developer: Energy Management Inc. (EMI), MA based energy company.

• Current expected production after construction: 468MW/per

• Contribution to New England’s electricity grid after construction: can supply 75% of the electricity of Cape Cod after construction generated by clean energy.

Indentify Uncertainties—focus on 2 dominating uncertainties

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Wholesale price of electricity

• Electricity demand in New England

• Wind energy technology development, especially breakthrough

• Political or regulatory incentives

• More other uncertainties and the former 2 are the most dominating factors that this term project focused on.

Indentify Uncertainties in Cape Wind

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Electricity Price

• Forecast method

• Population Ratio

• Electricity Demand

• GBM

Decision Tree Analysis—consider 2 stages

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Consider 2 uncertainties

• Use GBM to forecast the electricity wholesale price and demand in New England

• Monte Carlo Simulation is run to calculate the corresponding probabilities for different scenarios

• There will be totally 48 different outcomes at the end of the 2nd stage, each stage has 5 years

• Modeling data are in the left

Decision Tree Analysis

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

Just shows part of the decision tree, since the whole tree is too big to show in one slide

Decision Tree Analysis—Outcomes

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

Stage 1: build bigStage 2: stay

Stage 1: build mediumStage 2: stay

Stage 1: build mediumStage 2: go big

Data for Lattice Analysis

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

Lattice Analysis--VARG

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• The two scenarios have similar performance in this analysis

• It’s reasonable considering the scale for big and medium are in fact both very large scale for an offshore wind farm today

• Can reflect the real situation and trend of wind energy in U.S.

Conclusions and Recommendations

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Conclusions: Go Big!

• Reasons:

• Judging from the forecast of electricity price and demand in New England the conditions have a bigger trend to be favorable

• The VARG curves indicates build big performs similarly with build medium with flexibility

• Make use of Economic of Scale and decrease the price of electricity generated per MW

Appendix: Current Permitting state of Cape Wind

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

• Cape Wind is gaining more and more public support while Ted Kennedy is strongly against it; now it’s still under permitting process

• Expect to get the permission at the end of 2008 and accomplish construction in 2010

Thank you!

12/9/2008 ESD.71 Presenter: Na ZhangInstructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash