Capital Flexibility in Municipal Waste to Energy Projects

waste-to-energy
Source: arena.gov.au

Municipal waste-to-energy (WTE) systems incorporate significant uncertainty and risk. However, they provide ways to achieve significant environmental and economic sustainability for communities. With growing uncertainty, there are significant challenges around when and how to exercise flexibility.

Flexibility is important because as a mechanism it helps ensure better sustainability for WTE systems with long-term lifecycles. Flexibility of capacity expansion, in particular, is an important consideration given the expenditures that are typically required. Multi-stage stochastic modelling can help develop an optimal decision rule to guide decision making on capacity expansion using a real options approach.

Research on the expected net present value (ENPV) arising from flexible design suggests significant improvements are possible over the fixed rigid design in terms of economic lifecycle performance. The ability to make multi-stage decisions in any time period based on available information as uncertainties are resolved is an advantage over lifetime capital investment decisions that are typically set in the first year of WTE projects.

Through work with UTL Utilities, we bring strong cost benefit analysis and real asset option approaches to this kind of infrastructure investment.

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