Annualized versus Overall Investment Cost in Generation Capacity Expansion Planning

Investment costs are significantly decreasing along the years for some electricity generation technologies (such as wind or solar), making them an attractive option for generation capacity expansion. Nevertheless, most of the available capacity expansion models, either minimizing cost or maximizing profit, annualize investment costs exogenously (usually distributing them uniformly along the plant life span) or consider overall investment costs, but without an adequate representation of residual value. Both approaches are misleading if investment cost decrease along the years. This paper introduces a cost minimization model for capacity expansion planning that considers overall investment costs, with a coherent representation of the residual value. This method-ology distributes endogenously the cost recovery along the years, in an optimal way. The presented case study results indicate that uniform annualization may misestimate optimal investment and it is not the most adequate option in this context. This approach opens the possibility of a deeper analysis of the optimal recovery cost path, improving planning of any electrical assets in minimization-cost planning models or market-equilibrium-based ones.