Measuring the impact of risk on LCOE (levelized cost of energy) in geothermal technology

Geothermal technology has a high level of uncertainty and, thus, requires thorough risk analysis for economic decisions. The levelized cost of energy (LCOE) is a basic economic analysis widely used in determining an investment or energy mix. Many reputable institutions and government agencies provide LCOE, to which they apply different levels of discount rates to reflect project risk. To this end, the weighted average cost of capital (WACC) is frequently used as a proxy for project risk-adjusted discount rate. However, whether using a higher discount rate for a riskier project is appropriate in calculating LCOE has not been scrutinized. The purpose of this paper is to propose a certainty equivalent method of LCOE as an alternative way for considering risk. We present a theoretical background and formula based on the utility theory, improving the probabilistic LCOE estimation methodology of previous studies. We also perform scenario analysis to show how the certainty equivalent model changes LCOE reflecting different level of risk of the individual variables, which traditional LCOE does not. Additionally, we suggest that the traditional LCOE should be used prudently, recognizing it can distort the result when an individual project has a different level of risk from the industry average.

Measuring The Impact of Risk On LCOE(Levelized Cost of Energy) In Geothermal Technology

Geothermal technology has a high level of uncertainty and, thus, requires thorough risk analysis for economic decisions. The Levelized Cost of Energy (LCOE) is a basic economic analysis widely used in determining an investment or energy mix. Many reputable institutions and government agencies provide LCOE, to which they apply different levels of discount rates to reflect project risk. It is a proxy for the Weighted Average Cost of Capital (WACC). Theoretically, determining whether using a higher discount rate for a risky project is appropriate in calculating LCOE has not been scrutinized. The purpose of this paper is to propose a certainty equivalent method of LCOE as an alternative way of reflecting risk. We present a theoretical background and formula based on the utility theory, improving the probabilistic LCOE estimation methodology of previous studies. We also perform scenario analysis to show how the LCOE with certainty equivalent model moves over the change of risk in major input factors, whereas traditional LCOE does not. Additionally, we suggest that the traditional LCOE should be used prudently, recognizing it can distort the result when an individual project has a different level of risk from the industry average.

Effects of barley and triticale silage based diets and residual feed intake on performance, profitability, and predicted CO2e emission of backgrounding steers

Background Feed costs are the largest expense in commercial beef production. Increasing cattle (Bos taurus) feed efficiency should reduce feed costs and increase beef profitability. This study used data from two years of a backgrounding trial conducted in Lacombe, Alberta, Canada. The evaluation looked at economic and predicted CH4 emission impacts of diet quality and cattle efficiency type in backgrounding systems. The hypothesis was that diet quality from use of barley (Hordeum vulgare c.v. Canmore) or triticale (x Triticosecale c.v. Bunker) silage-based diets and cattle efficiency type would interact to affect profitability and CH4 emissions. Results The experimental design was a four (cattle efficiency type; defined by residual feed intake (RFI)) by two (barley or triticale silage-based rations) factorial treatment with two replicates (pen of eight steers)/treatment/year over two years. Year was a random blocking factor. Cattle weight, intake, and diet composition data were combined with market prices to assess profitability. Methane emissions data were predicted from observed performance using a nutrient requirement model. Effects of diet and cattle efficiency type on profitability and CO2e emissions were assessed using statistical and stochastic risk simulation. By supporting greater gain and feed efficiency, the barley silage diet provided higher net revenue (NR) and lower CO2e emission (P < 0.01 for both). The NR was affected by observed pen average RFI. Risk simulation showed preference for efficient steers and use of barley silage-based diets. Conclusions The profitability of beef backgrounding was affected by cattle efficiency type and diet quality with higher quality diets also lowering CO2e emission and little evidence of interaction between cattle efficiency type and diet quality. The difference in certainty equivalent (~$30/steer) of efficient steers on barley silage and inefficient steers on barley silage or efficient or inefficient steers on triticale silage supports a beef backgrounding producer focus on diet quality and cattle efficiency type. However, inefficient steers on barley silage still generated higher certainty equivalent per steer than efficient or inefficient steers on triticale silage. This study did not address potential agronomic differences, including yield, which could provide nuance to forage choice.

The Standard Model of Rational Risky Decision-Making

Expected utility theory (EUT) is currently the standard framework which formally defines rational decision-making under risky conditions. EUT uses a theoretical device called von Neumann–Morgenstern utility function, where concepts of function and random variable are employed in their pre-set-theoretic senses. Any von Neumann–Morgenstern utility function thus derived is claimed to transform a non-degenerate random variable into its certainty equivalent. However, there can be no certainty equivalent for a non-degenerate random variable by the set-theoretic definition of a random variable, whilst the continuity axiom of EUT implies the existence of such a certainty equivalent. This paper also demonstrates that rational behaviour under utility theory is incompatible with scarcity of resources, making behaviour consistent with EUT irrational and justifying persistent external inconsistencies of EUT. A brief description of a new paradigm which can resolve the problems of the standard paradigm is presented. These include resolutions of such anomalies as endowment effect, asymmetric valuation of gains and losses, intransitivity of preferences as well as the St. Petersburg Paradox.