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Page 39
Volume 3
Journal of Environmental Chemistry and Toxicology
oil and gas
August 05-06, 2019 | Singapore
International Conference on
Oil Gas 2019
August 05-06, 2019
J Environ Chem Toxicol, Volume 3
Investment in electricity capacity under fuel cost uncertainty: Dual-fuel and a mix of
single-fuel technologies
Nurit Gal
Public Utility Authority – Electricity, Israel
W
e study the effect of the price and price volatility of natural gas on investment in electricity capacity in two technology
scenarios: (1) dual-fuel units that use natural gas and diesel; and (2) a mix of single-fuel plants that use coal or
natural gas. We develop a two-stage (capacity and operation) model and derive analytical solutions for both scenarios. We
show, based on the observed log-normal distribution of the natural gas price, that optimal capacity investment increases
moderately with natural gas price volatility, thereby disputing a commonly held view that fuel cost uncertainty tends
to discourage capacity investment and reducing the “missing money” problem. We use Texas data to show that higher gas
price volatility implies higher profits and consumer surplus in the first scenario, even when the per MWh diesel cost is much
higher than the expected value of the per MWh gas cost. In the second scenario, firms invest only in gas capacity, unless
the per MWh coal cost is significantly below the expected per MWh gas cost, explaining the popularity of gas generation.