University Project: Decision Modelling for Electricity Generation

This project, a first assignment for a business analytics course, focuses on decision modelling for an energy company considering investing in a gas-powered electricity generation plant. The company must decide on the optimal plant size (large or medium) and whether to join an offshore gas exploration consortium. Using net present value (NPV) and estimated monetary value (EMV) calculations across various scenarios (low and high gas prices, with and without consortium membership), the analysis determines the best investment strategy. The results indicate that the company should build a large plant and become a member of the consortium, as this option yields the highest EMV. The project considers a 15-year forecast of gas prices and the plant's operational costs, providing recommendations based on the financial analysis. The project underscores the importance of decision modelling in evaluating investment opportunities within the energy sector.

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First Assignment: Gas-Powered Electricity Generation
By: Name
Course Name
Professor’s Name
University name
Department
City, State
Date

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Executive Summary
The energy company requires decision modelling to determine the optimum solution for their
problem. The problem is to manufacture either large or medium-sized plant. Furthermore, the
company needs to decide if they should join the consortium as a member. The decision model
using the net present value and estimated monetary value shows that the company should
build large plant with membership.

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Table of Contents
Executive Summary...................................................................................................................2
Table of Contents.......................................................................................................................3
Introduction................................................................................................................................4
Problem Statement.................................................................................................................4
Decision Modelling....................................................................................................................4
Findings of the Analysis.............................................................................................................5
Recommendations......................................................................................................................6
References..................................................................................................................................7

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Introduction
A large energy company is planning to invest in the Combined-cycle gas turbine
power station (the plant). The company has to make a crucial decision concerning the size of
the plant they should acquire for the purpose of producing the electricity. A major
determinant of the decision concerning large or medium-sized plant is the cost of the gas. The
company has 15 years forecasted prices of the gas in addition to the purchase and operational
costs of the plant.
Problem Statement
The company needs to determine if they should establish a large or medium-sized
plant. Furthermore, the company must decide if they should acquire the membership of the
off-shore gas exploration consortium.
Decision Modelling
The decision to manufacture a large or medium sized plant requires the estimation of
the benefits the company will reap in future. The criteria and summary of process followed to
model the decision for the problem are;
 The selling price per KW is used to determine the annual revenue for the company.
 The four scenarios are built under decision model – building large plant, building
medium plant, building large plant with membership and building medium plant with
membership (Bhaumik, 2015).

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 The net cash flows are determined for the 15 years for the four scenarios.
 The discount rate of 5.3% is used to compute the net present value of the cash flows.
 The EMV of each scenario is computed using the provided probabilities to arrive at
the optimal decisions (Stock & Watson, 2015).
Findings of the Analysis
The detailed analysis for the scenarios is presented in the models in excel sheet. The
summary of the results is presented in the below table;
Large Plant
Medium
Plant
Membership & Large
Plant
Membership & Small
Plant
Initial Estimate
EMV (in £m) 29.35 21.55 32.93 20.68
New Estimates
EMV (in £m) 24.75 18.20 32.57 20.63
Table 1: Summary of the Results
The above table demonstrates that the highest estimated monetary value is £ 32.93
million, which is for manufacturing the large plant with the membership. The optimal
decision remains same with the new estimates provided by the management. The EMV
provides the optimal decision for the problem (Bruhl, 2016). It demonstrates that considering
the 30% probability that the gas prices will be low for the next 15 years, the company will
benefit with becoming a member of the off-shore gas exploration consortium. The option
remains optimal when the probability of the gas prices being low for next 15 years is 40%.
Therefore, the results demonstrate that the optimal solution for the problem is the large plant
with membership to consortium.

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Recommendations
The analysis of the findings is used to provide the following recommendations to the
company;
 The company should take the membership of the exploration consortium and build a
large plant.
 The membership fee paid to the consortium allows the company to increase its
probability of gaining access to low gas prices.

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References
Bhaumik, S., 2015. Principles of Econometrics: A Modern Approach Using EViews. 1st ed.
Oxford: Oxford University Press.
Bruhl, R., 2016. Understanding Statistical Analysis and Modeling. 1st ed. Mason, OH:
Cengage Learning.
Stock, J. & Watson, M., 2015. Introduction to Econometrics. 2nd ed. Mason, OH: Pearson.

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