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