An approach based on robust optimization and decision rules for analyzing real options in engineering systems design

Title: An approach based on robust optimization and decision rules for analyzing real options in engineering systems design
Authors: Caunhye, AM
Cardin, M-A
Item Type: Journal Article
Abstract: In this article, a novel approach to analyze flexibility and real options in engineering systems design is proposed based on robust optimization and decision rules. A semi-infinite robust counterpart is formulated for a worst-case non-flexible Generation Expansion Planning (GEP) problem taken as a demonstration application. An exact solution methodology is proven by converting the model into an explicit mixed-integer programming model. Strategic capacity expansion flexibility—also referred to as real options—is analyzed in the GEP problem formulation and a multi-stage finite adaptability decision rule is developed to solve the resulting model. Finite adaptability relies on uncertainty set partitions, and in order to avoid arbitrary choices of partitions, a novel heuristic partitioning methodology is developed based on upper-bound paths to guide the partitioning of uncertainty sets. The modeling approach and heuristic partitioning methodology are applied to analyze a realistic GEP problem using data from the Midwestern United States. The case study provides insights on the convergence rates of the proposed heuristic partitioning methodology, decision rule performances, and the value of flexibility compared with non-flexible solutions, showing that explicit considerations of flexibility through real options can yield significant cost savings and improved system performance in the face of uncertainty.
Issue Date: 2-Mar-2017
Date of Acceptance: 4-Feb-2017
URI: http://hdl.handle.net/10044/1/67105
DOI: https://dx.doi.org/10.1080/24725854.20171299958
ISSN: 2472-5854
Publisher: Taylor and Francis Ltd.
Start Page: 753
End Page: 767
Journal / Book Title: IISE Transactions
Volume: 49
Issue: 8
Copyright Statement: © 2017 IISE.
Keywords: Science & Technology
Technology
Engineering, Industrial
Operations Research & Management Science
Engineering
Generation expansion planning
real options
robust optimization
flexibility
decision rules
finite adaptability
EXPANSION PLANNING PROBLEM
UNCERTAIN LINEAR-PROGRAMS
CAPACITY EXPANSION
POWER-SYSTEMS
CONVEX-OPTIMIZATION
LIFE-CYCLE
FLEXIBILITY
MODEL
ADAPTABILITY
MANAGEMENT
Publication Status: Published
Open Access location: http://scholarbank.nus.edu.sg/handle/10635/141094
Appears in Collections:Dyson School of Design Engineering



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