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The energy and mining sectors play a critical role in the modern economy. As these are capital intensive sectors tied to products commonly traded on financial exchanges, advanced valuation techniques and forecasting can significantly improve economic aspects associated with the development and operation of projects. Real option analysis is especially well suited to enhance decision making in these sectors. This workshop is focused on bringing together practitioners and academics to share ideas associated with energy and mining project valuation, operation and strategic decision making.

Keynote Address

We are pleased to announce a keynote address by Stein-Erik Fleten.

Professor Stein-Erik Fleten

Stein-Erik Fleten is a professor at the Department of Industrial Economics and Technology Management at the Norwegian University of Science and Technology. He received a MSc in Technology Management at NTNU in 1995, and a PhD at NTNU in 2000 in the area of business economics. He teaches finance, energy markets, optimization and supervises graduate students. His research interests include investment under uncertainty and stochastic optimization. He has done research on market power in electricity markets, hydro scheduling under uncertainty, hedging and risk management in electricity utilities, and real options. He has been doing research on the liberalized electricity market since the 1990s. He has been a visiting scholar in University of British Columbia, University College London and University of Michigan. Fleten has extensive experience in participation and leadership of applied research projects, both nationally and internationally, within the electricity area.

Abstract

Merchant commodity and energy production assets operate in markets with volatile prices and exchange rates. Producers can choose in each period between production, production suspension, and permanent shutdown. Plant closures, however, adversely affect societal entities beyond the specific plant being shutdown such as the parent company and the local community. Motivated by an aluminum producer, we study if mitigating these hard-to-assess broader impacts of a shutdown is financially viable using the plant's operating flexibility. Our social commerce perspective towards managing shutdown decisions deviates from the commonly used asset value maximization objective in merchant operations. We formulate a high-dimensional constrained Markov decision process to manage shutdown decisions. We approximate this intractable model using unconstrained stochastic dynamic programs and define operating policies that account for preferences to delay and reduce shutdowns. Our first policy leverages anticipated regret theory in behavioral psychology while the second policy generalizes production margin heuristics used in practice using machine learning. We compute the former and latter policies using a least squares Monte Carlo method and combining this method with binary classification, respectively. We also propose a re-optimization heuristic to simplify the anticipated-regret policy. We show that anticipated-regret policies possess desirable asymptotic properties absent in classification- and re-optimization-based policies. On instances created using real data, anticipated-regret and classification-based policies outperform practice-based production margin strategies and, to a lesser extent, re-optimization. Specifically, the former policies decrease the shutdown probability by 25% and, in addition, delay shutdown decisions by an average of 4 years for a 4% asset value loss. Our operating policies show that unaccounted social costs amounting to a few percent of the maximum asset value can justify delaying or avoiding the use of a plant's shutdown option by adapting its operating flexibility in our application. Thus, taking a social commerce perspective towards managing a plant's operating flexibility appears financially viable.

Workshop Participants

We are pleased to announce the following invited speakers for the Workshop:

• Rene Aid
• Ali Bashiri
• Rupp Carriveau & Lindsay Miller
• Junhe Chen
• Mikael Collan
• Matt Davison
• Kamran Esmailei
• Behzad Ghafouri
• Verena Hagspiel
• Valery Kholodnyi
• Mariia Kozlova
• Nina Lange
• Yuri Lawryshyn
• Nicolas Merener
• Stephan Prell
• Ehud Ronn
• Michael Samis
• Nicola Secomandi
• Arvind Shrivats
• Gordon Sick
• Larry Smith
• Matt Thompson
• Tony Ware

Kimpton Hotel

Many of the organizers and speakers for this workshop are staying at at the Kimpton Hotel.