# Presentation: 772847

## Sensitivity Analysis andValue of Information:What Assumptions in the NEMS EMM Matter Most? 

**Benjamin F. Hobbs**
**Dept. Geography & Environmental Engineering**
**Whiting School of Engineering**
**The Johns Hopkins University**
**Baltimore, MD**
**bhobbs@jhu.edu**

## Outline

**I.**** ****	****Framework: Value of information & sensitivity analysis**
**II.****	****NEMS EMM analysis framework**
- Sensitivity of performance, variables
- Sensitivity of differences between policies
**III.****	****Results**

## Value of Information about Uncertain Parameters

- VOI: Expected improvement in decisions if reduce uncertainty
- VOI considers:
- Uncertainty expressed probabilistically (“priors”)
- How decisions made (alternatives, criteria, decision rule)
- How much uncertainty can be reduced
*Not* same as sensitivity of outputs to parameter changes.  E.g.,
***Resource planning:*** Costs most sensitive to fuel costs, but *decisions* most sensitive to demand forecasts (_Energy_, 1990, p. 785)
***NEMS:*** Power prices most sensitive to natural gas prices, but price *differences between alternatives* most affected by maximum capacity factor

***I. Framework***

## Alternative VOI Indices

- E(Value) under perfect information
- E(Value) under improved information
_*E(Value) under present uncertainty*_
- E(Value) if naïvely assume certainty (e.g., “base assumptions”)

***EVPI***

***EVII***

***EV of Including***
***Uncertainty***

## Difficulties in Using VOI for NEMS

- What are the decisions?
- Who is making them?
- How will they use NEMS results?

## Sensitivity Analysis as a Screen For VOI Assessments

**1.****	****Define objectives & variables of interest X**
**2.****	****Define uncertain assumptions θ**
**3.****	****Is X sensitive to θ? **
**4.****	*****If***** **_**X**_** sensitive, define alternatives A; **
**   ****Then ask: Are *****differences***** between alternatives  (X(A****m****) - X(A****n****)) sensitive to θ?**
**5.****	*****If***** **_**differences**_** sensitive, define decision rule;**
**   ****Then ask: does the *****decision***** among A depend upon θ?**
**6.****	*****If***** **_**decision**_** sensitive, then can do full-blown VOI**

## Analysis Overview

- Sensitivity analysis of X:
- Define X
- Define θ, and alternative scenarios for each component θi (e.g., “low,” “high”)
- Evaluate which θi affect X most
- For θi with most effect: Sensitivity analysis of differences among alternatives
- Base case vs Resource Portfolio Standard                        (7.5% by 2010)

***II. NEMS EMM Analysis***

## Objectives, Variables X

**1.  Electricity Prices **
- Average Prices, marginal costs, regional prices                          (New England, ECAR, WPCC)
**2.  Unplanned capacity additions and retirements**
- Additions: CC, Coal, CT, Renewables, Wood & Biomass, Solid Waste, Geothermal, Coal
- Retirements: Nuclear
**3.  Electricity Trade (GWh)**
**4.  Generation by type**
- Gas, Petroleum, Coal, Renewable, Nuclear
**5.  Emissions**
- NOx, CO2, SO2

## Categories of EMM Parameters

**Capacity markets, reliability**
**Demand**
**Capacity reliability**
**Capacity economics**
**Capacity costs**
**Other parameters**
**Fuel**
**Demand**
**DSM**
**Pricing**
**Operations**

## Sensitivity Results

****

**X**

***III. Results***

## Comparison of Base and RPS Cases: Six θ Scenarios

- _Base assumptions_
- High _capital cost_ of combustion turbines and combined cycles:  (+$50/kW)
- Low _discount rate:_ (-100 basis points)
- Decreased _maximum capacity factor_:           (-5% from AEO2000 reference case)
- Decreased _market share logit parameter_: (changed from 20% to 10%)
- High _natural gas prices_: (+20% by 2020)

## Sensitivity Analysis of X vs. Sensitivity of Differences between Alternatives (X(ARPS)-X(Abase))

*Sensitivity Analysis: *Assumption ranks in terms of effect upon prices (US, WPCC); coal, CC, & renewable additions; NOx & CO2:
*Sensitivity of Differences:* Assumption ranks in terms of effect on differences between alternatives for the same variables:

_*All variables:*_
*1.  P(Gas) *
*2.  Max Cap. Factor *
*3.  Disc. Rate*
*4.  CC/CT Cost*
*5.  Logit Share Para.*

_*All variables:*_
*1.  CC/CT Cost*
*2.  Disc. Rate*
*3.  Max Cap. Factor *
*4.  Logit Share Para.*
*5.  P(Gas)*

_*US price only:*_
*1.  P(Gas) *
*2.  Disc. Rate*
*3.  Max Cap. Factor *
*4.  CC/CT Cost*
*5.  Logit Share Para.*

_*US price only:*_
*1.  Max Cap. Factor *
*2.  CC/CT Cost*
*3.  P(Gas)*
*4.  Logit Share Para. *
*5.  Disc. Rate*

## Effect of RPS and Assumptions Upon US Electricity Prices

***RPS***

***Base Case***

## Effect Upon Average US Electricity Prices (2000-2020)

**X**

**X(A****RPS****)-X(A****base****)**

## Effect Upon Average WPCC Electricity Prices (2000-2020)

## Effect Upon Unplanned Coal MW Additions (2000-2020)

## Conclusions

- Do sensitivity analysis with policy choices in mind
- Sensitivity          information is decision relevant
- What assumptions in NEMS EMM matter most?
*Caveats: *
- Only some θ
- Only two A
- Interactions among θi disregarded
- Not a VOI analysis
- Outcomes X most sensitive to *natural gas prices*
- Differences in prices between alternatives most sensitive to *capacity cost, max capacity factor*