Profitability measures and cost minimization in electricity generation investments

F.A. Campos, J. Villar, C. Cervilla

12th International Conference on the European Energy Market - EEM15, Lisbon (Portugal). 20-22 mayo 2015

Summary:

Net Present Value (NPV), Weighted Average Cost of Capital (WACC), Internal Rate of Return (IRR), and Total-Life Cost of Capital (TLCC) are economic concepts widely used in capital budgeting to measure and compare the profitability of investments. More specifically, in the electricity sector these measures, with the Levelized Cost of Energy (LCOE), are very often used to assess investments in generation assets. At the same time, electricity generation models based on mathematical programming and game theory have also been developed to determine optimal expansion plans of the generation capacity for long-term horizons. Though these two techniques have both been applied in the literature to assess generation investments in the electricity sector, taking into account, among others, investment, maintenance and operation costs, their mathematical relationships have been rarely reported or even understood. Here we provide some insight on the mathematical links existing between both approaches.

Keywords: cost minimization, electricity generation, generation expansion planning, profitability measures.

DOI: 10.1109/EEM.2015.7216602

Publication date: May 2015.

Citation:
Campos, F.A., Villar, J., Cervilla, C., Profitability measures and cost minimization in electricity generation investments, 12th International Conference on the European Energy Market - EEM15, Lisbon (Portugal). 20-22 May 2015.

IIT-15-059A