ESD.71Engineering Systems Analysis for Design Real Options Analysis:Diversification of Energy Power Plants in the North of ChileFinal Application Portafolio ReportMatías RabyDecember 6, 2010Application Portafolio Matias Raby 1ESD.71Engineering Systems Analysis for Design Real Options Analysis:Diversification of Energy Power Plants in the North of ChileAbstract: The Chilean Government is currently analyzing the possibility to develop a nuclearprogram to satisfy the increasing electricity demand in the north of the country. The objectof this study is to provide a first approach for the analysis of a nuclear option. It appliesconcepts in real options analysis to evaluate the construction of a nuclear power plant inthe north of Chile, considering a fixed and a flexible design. Four major sections areaddressed throughout the paper. First, it defines the project. Then it identifies and modelsthe evolution of the three principal uncertainties that affect the project. In the nextsection the fixed and flexible approaches are compared using an excel simulation. Finally,the last section compares the results under multidimensional criteria. The studyconcludes that the flexible option is the most favorable decision in terms of profit, risk andreturn of investment, as shown in the following table:Fixed Option Flexible OptionENPV (millions) $1,166 $2,325P5 ENPV (millions) $-767 $943P95 ENPV (millions) $2,608 $3,509Return of Investment 0.27 0.83Application Portafolio Matias Raby 2ESD.71Engineering Systems Analysis for Design Table of ContentsI. Introduction……………………………………………………………………………………………..II. Definition of the System……………………………………………………………………………1. The System…………………………………………………………………………………………………………102. 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 Power 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……………………………………………………………………………………………………………5566677111415151619272728293Application Portafolio Matias Raby 3ESD.71Engineering Systems Analysis for Design 03132I. IntroductionChile’s rapid economic growth has caused a duplication in energy productionduring 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 mostvaluable resource, and Chile is thlle world's largest producer. Copper mining activities areextremely energy-intensive and considering that there are important future projects in thisfield, the demand for electricity is expected to increase even more during the followingyears. Most of the mining activity is located in the north of Chile, where an independentinterconnected system named SING (Sistema Interconectado Norte Grande – NorthernInterconnected 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 isparticularly vulnerable to variations on the supply and in the increasing volatile price ofdiesel and natural gas. Application Portafolio Matias Raby 4ESD.71Engineering Systems Analysis for Design Figure I-1 – SING Location in the north of ChileThe Chilean Government is currently analyzing different options to diversify theenergy generation matrix in the SING and a special commission is currently studying thepossibility to follow the nuclear path. The Nuclear alternative has become an attractiveoption 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 theregion. The object of this study is to provide a first approach for the analysis of a nuclearoption. It will apply concepts in real options analysis to evaluate the construction of anuclear power plant in the north of Chile, considering a fixed and a flexible design. It willalso determine and model some of the uncertainties and contextual factors faced in aproject like this. The major goal is to compare the results of the two different designapproaches and evaluate flexibility in an environment affected by uncertainties. II. Definition of the System1. The System The system under analysis in this study is the evaluation of two investment
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