ESD.71 Engineering Systems Analysis for Design Application Portafolio Matias Raby 1 Real Options Analysis: Diversification of Energy Power Plants in the North of Chile Final Application Portafolio Report Matías Raby December 6, 2010ESD.71 Engineering Systems Analysis for Design Application Portafolio Matias Raby 2 Real Options Analysis: Diversification of Energy Power Plants in the North of Chile Abstract: The Chilean Government is currently analyzing the possibility to develop a nuclear program to satisfy the increasing electricity demand in the north of the country. The object of this study is to provide a first approach for the analysis of a nuclear option. It applies concepts in real options analysis to evaluate the construction of a nuclear power plant in the north of Chile, considering a fixed and a flexible design. Four major sections are addressed throughout the paper. First, it defines the project. Then it identifies and models the evolution of the three principal uncertainties that affect the project. In the next section the fixed and flex ible approaches are compared using an excel simulation. Finally, the last section compares the results under multidimensional criteria. The study concludes that the flexible option is the most favorable decision in terms of profit, risk and return of investment, as shown in the following table: Fixed Option Flexible Option ENPV (millions) $1,166 $2,325 P5 ENPV (millions) $‐767 $943 P95 ENPV (millions) $2,608 $3,509 Return of Investment 0.27 0.83 ESD.71 Engineering Systems Analysis for Design Application Portafolio Matias Raby 3 Table of Contents I. Introduction…………………………………………………………………………………………….. II. Definition of the System…………………………………………………………………………… 1. The System………………………………………………………………………………………………………… 2. Uncertainties‐Contextual Factors…………………………………………………………………….. 3. Structure of the Analysis……………………………………………………………………………………. III. Evolution of the Uncertainties……….………………………………………………………………….. 1. Future Demand of Electricity………………………………… ………………………………………….. 2. Future Price of Natural Gas……………………………………………………………………………….. 3. Government Regulation of Carbon Emissions……………………………………………………. IV. Simulation ………………………………………………………………………………………………………… 1. Specifications of the Pow er Plants.……………………………………………………………………. 2. Fixed Option…… …….………………………………………………………………………………………….. 3. Flexible Option………….………………………………………………………………………………………. V. Comparison of Performance of the two Options…………………………………………………. 1. Expected Net Present Value……………………………………………………………………………….. 2. Value at Risk and Gain………………………………………………………………………………………... 3. Return of Investment…………………………………………………………………………………………. VI. Conclusions………………………………………………………………………………………………………….. VII. Course Reflections..………………………………………………………… …………………………………… VIII. References………………………………… ………………………………………………… ……………………… 5 5 6 6 6 7 7 11 14 15 15 16 19 27 27 28 29 3ESD.71 Engineering Systems Analysis for Design Application Portafolio Matias Raby 4 0 31 32 I. Introduction Chile’s rapid economic growth has caused a duplication in energy production during the last eight years. Chile's economy is mainly based on the export of minerals, which account for about half of the total value of exports. Copper is the nation's most valuable resource, and Chile is thlle world's largest producer. Copper mining activities are extremely energy‐intensive and considering that there are important future projects in this field, the demand for electricity is expected to increase even more during the following years. Most of the mining activity is located in the north of Chile, where an independent interconnected system named SING (Sistema Interconectado Norte Grande – Northern Interconnected System ), supplies power and energy to these industrial clients. However, since the generation matrix of the SING depends 99.6% on fossil fuels, the system is particularly vulnerable to variations on the supply and in the increasing volatile price of diesel and natural gas. ESD.71 Engineering Systems Analysis for Design Application Portafolio Matias Raby 5 Figure I‐1 – SING Location in the north of Chile The Chilean Government is currently analyzing different options to diversify the energy generation matrix in the SING and a special commission is currently studying the possibility to follow the nuclear path. The Nuclear alternative has become an attractive option in the north of Chile because it is able to satisfy the expected growing demand and, at the same time, create an increase in security and reliability in the energy supply of the region. The object of this study is to provide a first approach for the analysis of a nuclear option. It will apply concepts in real options analysis to evaluate the construction of a nuclear power plant in the north of Chile, considering a fixed and a flexible design. It will also determine and model some of
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