Capacity Investment Decisions in Renewable Energy Technologies

Abstract

We study an organization’s one-time capacity investment in a renewable technology with supply intermittency and net metering compensation. The renewable technology can be coupled with conventional technologies, such as purchasing electricity from the grid, to form a capacity portfolio that is used to meet stochastic demand for energy. Some factors that complicate this decision include the variability in the energy demand, energy prices, compensation for over-production by the energy producing technology and the intermittency of renewable energy producing technologies. We show how to reduce this problem to a single-period decision problem, and how to estimate the joint distribution of the stochastic factors using historical data. We obtain solutions that are simple to compute, intuitive, and provide managers with a framework for evaluating the trade-offs of investing in renewable and conventional technologies. We illustrate our model using a case study for investing in a solar rooftop system for a bank branch.