First Advisor

Gerald Sheble

Term of Graduation

Spring 2008

Date of Publication


Document Type


Degree Name

Doctor of Philosophy (Ph.D.) in Electrical and Computer Engineering


Electrical and Computer Engineering




Energy industries -- Risk management, Capital budget, Energy industries -- Deregulation, Energy industries -- Economic aspects



Physical Description

1 online resource (xi, 179 pages)


The United State energy industry is experiencing a major paradigm shift. This conventional vertically integrated energy industry is gradually transformed to a competitive market environment—a deregulated energy market. The market and regulatory frameworks are expected to continue to evolve in the future. Market participants are emphasizing more on profit maximization as returns on investment are no longer guaranteed. Therefore, risk management and capital budgeting play critical roles in energy system planning. Planning always involves uncertainties. When there are uncertainties, there are risks involve. This dissertation concentrates on the application of Real Options Analysis, ROA, especially lattice method, to energy system capital budgeting.

Lattice method has one major weakness: massive bush of lattice. This dissertation proposes a method known as Binomial Lattice-Value at Risk approach to solve the curse of lattice dimensionality. Due to deregulation, market participants' incentives have changed. Generation companies, GENCOs, are no longer willing to release their cost information or strategic plans. Thus, this dissertation introduces the implementation of Profit at Risk ideology into decision analysis, which created an efficient approach known as Binomial Lattice-Profit at Risk, BL-PaR.

With the price of fuels soaring and environmental concerns growing larger, the expansion of ROA into renewable energy sector is desirable. Renewable energy has significant advantages as it does not contribute to greenhouse gases. This research focuses on wind energy, which is uncontrollable and unpredictable. A decision based solution of incorporating wind energy with pump storage hydro, PSH, and financial contract hedging is introduced. This energy technology integration is capable of increasing the available-capability of wind energy to be as effective as thermal unit. A physical asset hedging known as the Look Ahead Optimization, LAO, method is then applied to both wind unit and PSH system. This optimization method minimizes the size of hedging and maximizes profit by obtaining the optimal energy storage. The combination of the LAO method with BL-PaR approach achieves several critical goals. Together with the inclusion of financial contract hedging via financial transmission rights, FTRs, a double-protections mechanism is established. The evaluation of FTRs portfolio using ROA enables the risk management process to run efficiently.


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