How to effectively invest in renewable energy

A two-stage framework

Professor Wang and Professor Swaminathan proposed a comprehensive framework to help suppliers achieve their renewable energy targets and service level requirements while minimising costs. After combining theoretical modelling with practical simulations and case studies, the researchers came up with a two-stage stochastic programme. In the first stage, utility suppliers shall decide to invest in various energy sources based on expected needs. Next stage, the suppliers adjust the plan according to actual supply and demand.

“This framework includes dispatching existing resources and purchasing additional conventional resources from the market at a price higher than using on-hand sources,” Professor Wang says.

“In practice, utility suppliers trade off lower costs against higher output stability in resources.”

Professor Wang Shixin

Several variables play a role in influencing investment outcomes. On the supplier’s side, the features of renewable sources impact the overall costs as the fluctuations in energy sources directly impact the operations. As such, renewable sources with less variability and more stability would make supply more predictable and eventually help to lower overall costs.

On the consumer’s end, the relationship between demands and renewable energy goals influences power outcomes. When consumer demands are negatively correlated, it helps to save costs compared to when the demands are independent or positively correlated. For instance, the demand for heating goes up in winter while air conditioning demand decreases and conversely in summer, residential energy demand peaks in the evening while commercial energy demand drops and vice versa.

This trade-off can help utility companies manage their supply more efficiently, as they are less likely to face simultaneous high demand from consumers. When demands are negatively correlated, utility companies can optimise their resource allocation by investing in fewer resources by focusing on the resources that will be needed most based on the expected demand patterns or relying less on expensive power sources, leading to lower overall costs.

Diversifying energy sources

Based on their findings, Professor Wang and her collaborator propose three strategies to realise optimal resource allocation. Firstly, they advocate for diversifying renewable energy sources. Professor Wang notes that the integration of multiple renewable sources can significantly reduce the total investment costs compared to those associated with a single renewable source.

Although a diversified renewable energy portfolio may pose challenges like substantial initial investment costs, Professor Wang highlights the opportunities for suppliers. For example, the government often offers subsidies or other incentives for companies to incorporate different types of renewable energy.

“Such diversification not only lowers the overall costs but also enhances the system’s ability to adapt to fluctuations in energy generation from various sources, thus providing a more resilient and reliable energy supply,” she says.

Perfection is not always the best

As customers demand more renewable energy, the extra cost of reaching higher targets would also increase faster. Meanwhile, increasing the renewable energy target becomes more expensive if the current target is already high. The team thus suggests their second strategy: decreasing renewable energy targets from one hundred percent.

The analysis showed that marginally reducing renewable energy targets can result in substantial cost savings, particularly when the power generators face intermittency issues.

However, while reducing the targets may seem advantageous, she also highlights that such benefits diminish as the target is further lowered. “It would be more cost-effective to lower a renewable energy target slightly below 100 per cent, like 99 per cent,” Professor Wang suggests.

Thirdly, the team found that resource pooling, where multiple consumers share renewable energy systems and collectively manage their energy needs, would be beneficial in making renewable energy more accessible and affordable. “Resource pooling results in lower investment costs as it mitigates the variability effect of total demand,” she says. “However, it becomes less advantageous in the presence of high intermittency when demand is high and generation is low.”

The trade-off between costs and stability

In shifting towards renewable energy sources, most utility companies still use the traditional coal-fired generator to its stability. The researchers then applied their theoretical framework to the real-world scenario, where power companies mix non-renewable sources and the two most widely used renewable sources, wind and solar, and analysed how these sources vary in availability and cost.

The result shows that when the energy target is low, investing in renewable resources with lower costs, like solar, would be better. As the target gets higher, it would be more cost-effective to put more investment into renewable sources with stable output, such as wind. When the renewable target approaches 100 per cent, using a mix of different renewable sources would contribute to meeting the goal.

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The researchers observed that when there are higher goals for renewable energy and when energy availability aligns closely with demand fluctuations, suppliers tend to opt for more costly but stable energy sources. “In practice, utility suppliers trade off lower costs against higher output stability in resources,” Professor Wang adds.

The transition to renewable energy sources is a complex yet imperative journey as the world faces increasing challenges posed by climate change. “To the best of our knowledge, our research work is the first to provide near-optimal capacity investment and allocation policies for meeting renewable energy targets under supply intermittency,” says Professor Wang, adding that they hope this framework could offer a structured approach for energy suppliers navigate the challenges of renewable energy investment wisely.