A model-referenced procedure to

support adversarial decision

processes
Application to electricity planning

D. W. Bunn and K. Vlahos

In public enquiries concerning major facilities, such as the construction of a new

electric power plant, it is observed that a useable decision model should be made
commonly available alongside the open provision af data and assumptions. The
protagonist, eg the electric utility, generally makes use of a complex, proprietary
model for detailed evaluation of options. A simple emulator of’ this, based upon a
regression analysis of numerous scenarios, and validated by further simulations is
shown to be feasible and potentially attractive. It would be in the interests of the
utility to make such a model-referenced decision support method generally available.
The approach is considered in relation to the recent Hinkley Point C public enquiry
jar a new nuclear power plant in the UK.
Kcywrds: Decision support; Electricity capacity planning; Nuclear power; Uncertainty analysis

In considering the planning process for major public Both MIXLP and EGEAS are proprietary, unfriendly
facilities, such as a new electric power plant, the and require large, mainframe computer resources. It is
adversarial nature of public hearings poses several therefore evident that, whilst the utility’s case for new
conflicting modelling requirements. On the one hand, capacity is put forward in considerable detail, covering
the electric utility’s own need to undertake a careful castings and assumptions, access to, or even docu-
and consistent cost evaluation has generally necessi- mentation of, the modelling process behind this
tated the use of large-scale optimization techniques economic evaluation is not provided at the public
based upon software which is generally inaccessible hearings.
(for technical or proprietary reasons) to opposition Nevertheless, the nature of such public hearings is
groups. In the UK, large-scale, long-term linear one of persistent questioning of the validity of the
programming methods have been used for many years protagonist’s assumptions and repeated reformulation
to evaluate electricity planning options. The CEGB of the economic case. For example, the recent Public
(Central Electricity Generating Board) developed its Inquiry in the UK on the possible construction of a
own ‘MIXLP’ for this purpose, whereas in the USA, PWR nuclear plant at Hinkley Point C (Barnes [2])
the ‘EGEAS’ software was developed by EPRI was characterized by numerous adjournments whilst
(Electric Power Research Institute) for similar purposes. the electric utility was asked to re-cost according to
changing circumstances and to counter the calcula-
tions of various interest groups. Thus, considerable
controversy existed with respect to the use of an
The authors are with the London Business School, Sussex appropriate discount rate, at a time when the utility
Place, Regent’s Park, London NW1 4SA, UK. was moving from the public to the private sector.
Final manuscript received 24 February 1992. The premise of this paper is that it may be in the

242 0140/9883/92/040242-06 (~1 1992 Butterworth-Heinemann Ltd

 Adversarial decision processes: D. W. Bunn and K. Vlahos

interest of the utility to provide, alongside the data uncertainty analysis if many more faster simulations
and castings, a simple planning model that can be of a simpler, but reliable MIXLP emulator were used.
reliably used by others to approximate the results of
In the next section we give some of the background
the utility’s own optimization software under different
to the Hinkley Point C Inquiry and its costing
background assumptions. Adversarial groups can be
controversies. We are using this only as example,
very persuasive, and the press are quite impression-
however, and the methodology presented in sub-
able, even when alterative ‘expert’ opinion is based
sequent sections is more generally applicable.
upon over-simplified models. By preserving the exclu-
siveness of their own modelling technique, it not only
invites suspicion but also precludes the early dismissal
The Hinkley Point C Inquiry
of unrealistic counter options. Referring to the credi-
bility of US forecasts in the context of public hearings Following the approval in 1987 (Layfield [l 11) to
Abromaitis [l] states that ‘It has become essential to build a PWR nuclear plant at Sizewell, the CEGB
. . . convince various outside interest groups that the submitted a proposal for a further PWR plant at
forecast is indeed reasonable, from the standpoint of Hinkley Point in 1988. The subsequent public inquiry
both approach and results’, and such is the concern opened in October 1988. Insofar as the Sizewell ‘B’
with external credibility that Rasmussen [13] speaking inquiry had been seen generally as the test-case for a
on behalf of Kansas City Power and Light stated that subsequent family of PWR plants in the UK, the
without it, ‘. . . we may find the forecasting responsi- CEGB, in facing the Hinkley Point Inquiry had
bility taken away from the utilities and placed under expected that a decision in principle had already
the direct control of regulatory agencies’. been made. Issues of safety, environmental impact,
In this paper we develop a simple linear model, economic and diversity of supply advantages over coal
calibrated against a full-scale optimization model as had already been covered at Sizewell and only, it
previously used by the CEGB in England and Wales, seemed, did local issues remain. Since there was
to re-consider the economic case which became such already a nuclear facility at Hinkley Point, this
a point of contention in the Hinkley Point C Public additional plant was not thought to be too con-
Inquiry. We are concerned not with a re-evaluation troversial. Furthermore, the government policy was
of that debate, but to show how such a simple model for diversity of supply in electricity generation, the
could be created and used to facilitate: country having been reliant upon coal for so long and
thereby vulnerable to the price, supply and industrial
(i) Improved adversarialdebate. For reasons mentioned
relations problems which that entailed. So, providing
above, wider access to a reliable long-term planning
there was a case of need, then the CEGB did not feel
model may be in the interests of all concerned and is
that it had to make a very strong case on these other
a natural extension of the repeated plea for a full
factors. Thus, for example Jenkin [lo] chose not to
disclosure of information.
implement Layfield’s suggestion of a probabilistic
(ii) Extensive uncertainty analysis. Following the
analysis, and initially tried to avoid making even an
previous public inquiry into the building of a PWR
economic case at all by reliance on the principle of
nuclear plant at Sizewell, the public inspector recom-
the government’s ‘diversity of supply’ policy.
mended (Layfield [l 11, Ch 109, recommendation 8)
That they did not succeed in avoiding economic
that all future studies ‘should provide a probabilistic
controversy was largely because the government, at
analysis of the costs of generation from new capacity’.
the same time (autumn 1988) initiated its plans to
This was inspired by the simulation study undertaken
privatize the electricity supply industry. This immedi-
by Hanson and Seston [9] to supplement the CEGB’s
ately created discussion on whether nuclear power was
case at that inquiry which followed closely the
too expensive in a privatized context. The House of
approach of Evans [7].’ It took the form of 30
Commons Energy Committee Report (1990) provides
simulations of the MIXLP optimization model under
a thorough review of the controversies in costing
simple probability distributions for 15 key input
nuclear power during the period 1987-90. Prior to
variables, in order to give a better representation of
privatization, the government had directed public
the uncertainty in overall costs. Although more
utilities to use a 5% discount rate for evaluating new
simulations could give better representations, running
projects. In the private sector the rate would be higher
a program such as MIXLP is very time-consuming.
(Dimson [S]), not only because of the higher real rates
It would, therefore, facilitate much more extensive
required in general in the private sector, but also from
the special business risks that a private nuclear
‘Ford and McKay [S] pursued a similar theme in the US company would entail for its investors. During the
context. inquiry, the CEGB re-submitted calculations at 8%

ENERGY ECONOMICS October 1992 243

 Adversarial decision processes: D. W. Bum and K. Vlahos

and 10% real rates of return. Other controversial performance of a full, large-scale optimization model.
issues concerned length of life of plant, its ‘availability’ The approach we have taken, therefore, is to run the
(probability of meeting load when required), capital large-scale optimization model described in Bunn and
costs as well as the comparative coal costs, all of Vlahos [3] to cost the diversity objective (ie the
which caused the nuclear plant to be less attractive non-fossil fuel obligation), many times under different
economically in a privatized context. The CEGB input parameters. Then we fit a regression model to
seemed to find itself in the position of trying to argue the results in order to give a good approximation of
coherently for a low public sector cost for PWR (to the cost of diversity as a simple function of these input
keep the nuclear programme going) and a high private values. The large-scale optimization software (‘ECAP-
sector cost for its nuclear commitments( to maintain PC’) was developed at the London Business School4
favourable government guarantees and privatization and was fully validated against the CEGB’s MIXLP
terms). Estimates of the cost of PWR nuclear power (Vlahos and Bunn [lS]). It is based upon Bender’s
varied by a factor of 2.5 during 1988889 (see House of decomposition and runs about 100 times faster than
Commons Energy Committee, 1990). The public MIXLP, a factor which is desirable when setting up
inquiry itself became in danger of losing its consistent all of the simulations needed for the regression
framework of analysis in the light of so many un- estimation and validation. Altogether, 1000 runs of
certainties, changing assumptions and widely differing ECAP were taken with variations of six input
‘expert’ testimonies. parameters, and the regression analysis was undertaken
The government’s response, on becoming aware of in SAS to estimate several ‘candidate’ linear models.
the higher nuclear power costs in a private market, These simple linear models were further validated on
was to maintain its commitment to diversity and the basis of 250 new runs of ECAP, generated at
impose a ‘non-fossil fuel obligation’ on all distribution random within the parameter ranges specified initially.
companies to purchase a certain percentage of energy The time spent in developing the data base and
from non-fossil plants (ie mostly nuclear). This, in validating a good simple model may therefore seem
turn, would be associated with a ‘fossil fuel levy’ considerable, even with a fast optimization algorithm,
which, despite its environmentally friendly connota- but this investment pays off in terms of the ease with
tion, would provide revenue to subsidize the nuclear which the subsequent equation can be used for
programme. The European Commission agreed to extensive uncertainty analysis and alternative scenario
this, at least until 1998, despite being a clear subsidy simulation. It can; for example, be used by anyone
to an uncompetitive technology. The argument thus with access to a PC spreadsheet to generate multiple
became a political one of how much should the country scenarios.
pay for diversity.’ Bunn and Vlahos [3] published the In several respects the approach is similar to those
results of a series of long-term capacity plans with and used by Merrill and Schweppe [12] for multiple
without the non-fossil fuel obligation, over various objective modelling of energy scenarios, Cote and
discount rates. At a 10% real rate, the long-term Laughton [4] for approximating the ‘load carrying
annual levy was evaluated at about &250 million (in capacity’ of various power plants and Thompson [ 141
1988 prices) for a new PWR programme, taking no to develop a simple forecasting model for industrial
account of the ‘back-end’ costs (including those for output forecasting.
existing plant) for fuel re-processing and plant de- There are several advantages of this approach, both
commissioning.3 It is this annual, average cost of as an approximation technique and as a means into
diversity, that we will concentrate on in this paper, uncertainty analysis. As an approximation technique,
since ‘diversity’ became the crucial rationale for the because we start from a full model, there is no
continuation of the PWR programme in the UK. a priori choice of simplification which could be
disputed later. The simplification is in the level of
approximation chosen in the regression modelling. As
A model-referenced approach a means into uncertainty analysis, the simple linear
In seeking to open out the debate on the ‘cost of model can be the basis of extensive simulations,
diversity’ in a consistent way to multiple assumptions capturing cross variations in parametric variation
and extensive uncertainty analysis, we put forward the which can go beyond the few carefully chosen
need earlier for a simple linear model to emulate the sensitivity analyses which generally accompany normal
‘proofs of evidence’. Of course, the choice and extent
of parametric variation is still an initial issue.
‘In 1990, the fossil fuel levy amounted to 10.6% of electricity
bills, generating about &900M.
‘These calculations were also based upon the earlier ‘optimistic’
figures from the Hinkley Point C Inquiry. 4For details of ECAP-PC, please contact the authors.

244 ENERGY ECONOMICS October 1992

 Adversarial decision processes: D. W. Bunn and K. Vlahos

The optimization model of interest during construction as 4.5 years

(although the rate was varied with the discount
Using a large-scale linear programming technique, our rate - see (iii)), annual fixed operating costs
model optimizes over a 50-year horizon the schedule (&19.6/kW), fuel cost of &4.5/MWh and annual
of installation, and mix of generating capacity, both availability of 75%.
with and without a minimum non-fossil constraint. (iii) Discount rate for NPV evaluation was varied
This allows a more thorough assessment of the between 5% and 10% (real).
effective ‘subsidy’ which this non-fossil fuel constraint
(iv) Coal price was assumed to grow from a base of
imposes than that produced by simply extrapolating between $4&60 in 1995 at between 0% and
a marginal analysis of what would be saved by 2% pa. Not considered for parametric variation
replacing the next nuclear with a coal plant. A were construction costs for a standard new
marginal analysis, along the lines of the CEGB’s net station with two 840 MW generating units, taken
effective cost, eg Jenkin [lo], is an appropriate way to as &760/kW, with additional interest during
evaluate an incremental plant change to the current construction computed over three years, and
system, but as the current system configuration will annual fixed operating costs of &33/kW. An
generally not be optimal, its results cannot be initial average availability of 60% for the first
generalized in a simple way as the basis of an optimal five years, with 77% for the remainder of a 50
50 year plan. An explicit multi-period model needs to year life for new coal plant was also assumed.
be constructed for this purpose and also to model
(v) The non-fossil fuel obligation was taken to be
more complex patterns of cross-substitution between between 16% and 22%.
several types of generating plant. Furthermore, be-
cause the evaluation of the non-fossil constraint Further background assumptions, not subject to
should be based upon energy produced, not installed parametric variation, were
capacity, careful modelling of the different initial and
(vi) Gas turbine basic construction cost of &240/kW,
seasonal availabilities of new plants is necessary. interest during contruction for 1.5 years, annual
The planning horizon was split up into 12 planning fixed operating cost of &5/kW, fuel and variable
periods from 1994, the first eight of which are of three cost of &45/MWh, with 80% availability for a
years and the last four of five years. The planning life of 40 years.
horizon is thus 199442037. Each planning period (vii) We did not treat the alternative, ‘renewable’
within this has eight different seasonal components to sources of power, such as wind and tidal, as
take account both of seasonal variations in the shape decision variables, but account was taken of some
of the daily demand profile and the unavailability of progressive introduction. Specifically, the per-
plant at different times of the year for maintenance centages of energy delivered by renewables are
and other reasons. Plants are represented individually taken to be 0.3% in 2000, 3.3% in 2004, rising
in the model with their own operating costs, planned to 6.0% in 2035. Imported power of 1.5GW is
lives and reliabilities. The usual procedure of annuit- taken account of in the merit order (but not
izing capital costs over the plant life, at a predeter- treated as ‘non-fossil’) and pumped storage is
mined discount rate, is followed (Jenkin [lo]). The treated as contributing to the capacity margin (ie
data on existing plant (operating cost, plant life, reserve) which was set at 19%.
reliability) and the seasonal demand profiles are
broadly consistent with those which had become Thus, the key parametric variations were on the
available in published reports by the Electricity variables:
Council, the CEGB and others in 1988. The number Dem = demand escalation rate
of existing plants comprised the full CEGB system, as NuCap = nuclear capacity cost
it was in 1988 and three plant expansion options were Disc = discount rate
considered, ie nuclear, coal and gas turbine. Coal 1995 = world coal price in 1995
The following key issues were identified for para- CoalEsc = coal price escalation rate
metric analysis. NFFO = non-fossil fuel obligation
(“A of nuclear energy used)
(i) Peak demand growth from 51 GW in 1995 at an
annual growth rate from 0.552%.
The regression models
(ii) Nuclear capacity cost from between 10% less and
10% more than the baseline assumption of Several models of increasing dimension were fitted,
&1260/kW for a 1175 MW station. Not con- for which three ‘candidate’ models were derived, viz
sidered for parametric variation was the period ‘Base’, ‘Middle’ and ‘Full’. Their statistical specifi-

ENERGY ECONOMICS October 1992 245

Adversarial decision processes: D. W. Bunn and K. Vlahos

cations are as follows: 40 t

‘Base’ model
30 -
Subsidy = - 522.8 + 23.54 (Dem) T= 13
+ 375.85 (NucCap) T=21
G
+ 25.53 (Disc) T=47
2
- 190.01 (Coa11995) T= -27 20 -
i+
- 35.36 (CoalEsc) T= -25 if
L
+ 12.79 (NucCon) T=25
R2 (adjusted)=84% SE=35
10 -

‘Middle’ model
n- -
Subsidy = 63 + 23.54 (Dem) T=16 ”
I I I

+ 375.85 (NucCap) T=32 -20 80 180 280 380

- 52.59 (Disc) T=-13
Subsidy
- 190.01 (Coal1995) T= -33
- 35.36 (CoalEsc) T= -30 Figure 1. Frequency histogram of the 250 validation
- 18.04 (NucCon) T=-11 scenarios.
_ 4.11 (NucCon*Disc) T = 20
R2 (adjusted) = 89% SE = 29
Compared to a sample standard deviation of &62
million on the 250 validation observations, RMSE
‘Full’ model of &13 million seems to be a reasonable approximation
error for a relatively simple equation. Examination of
Subsidy = 649 - 16.94 (Dem) T= -3.6
the residuals did show some slight evidence of
- 181.80 (NuCap) T= -5
- 144.94 (Disc)
misspecification with respect to non-linearity, which
T=-19
- 88.02 (Coa11995) T=-5 would be of concern if the models were extrapolated
- 22.23 (CoalEsc) T= -6 outside their estimation ranges.
- 18.04 (NuCom) T= -14
+ 1.80 (Disc*Disc) T=7
Final comments
+ 5.40 (Disc*Dem) T=9
+ 74.35 (Disc*NuCap) T=16 The use of a model-referenced technique to provide a
- 13.60 (Disc*Coall995) T= -6 simple linear approximation to the full optimization
_ 1.75 (Disc*CoalEsc) T= - 4 evaluation would seem to provide feasible decision
_ 4.11 (Disc*NucCon) T = 24 support to complex public decision problems. The ‘fit’
R2 (adjusted) = 92% SE = 24 appears to be adequate, and would be improved if
more parameters were included. Particularly pertinent
To cross validate the models, a further 250 scenarios
to the Hinkley Point debate would have been the
were generated at random from the optimization
inclusion of parameters on ‘availability’, interest
model, within the same parametric variations. Figure 1
during construction (whether to include or not) and
shows the frequency distribution of these 250 new,
the length of life of nuclear plant, since all of these
model-based scenarios for the NFFO subsidy. The
became issues of controversy. Later, the inclusion of
regression models, since they were based upon ordin-
combined cycle gas turbine technology in the overall
ary least squares, ‘predict’ several observations with
model would have been essential.
negative NFFO subsidies. Rather than use a restricted
The ‘useability’ of the simple model is an obvious
least squares procedure, we adopted the rule of
advantage. It could readily be used in a spreadsheet
truncating to zero any negative fitted values. Our error
context, for example, for incorporation with other
statistics for the three models were:
costing evaluations or even simulations of uncertainty
(using for example the @RISK add-in for Lotus 123).
Error statistics Base Middle Full
Indeed, the issue of making such a model generally
Average 7.2 7.9 4.4 available could be seen as a natural extension of the
RMSE 21 19 14 desire for public hearings to facilitate a full exchange
RMSE* 17 15 13 of data and assumptions to all interested parties. Full
*With truncation of negative subsidies. diagnostics on fit and validation, particularly over

246 ENERGY ECONOMICS October 1992

 Adversarial decision processes: D. W. Bunn and K. Vlahos

‘extreme’ scenarios would be necessary. It appears to in stating that the case for the plant was quite simply
be the general case that the longer public hearings one of interpreting government policy!
continue, the more likely ‘extreme’ scenarios will
become ‘central’.
The provision of such a model, in facilitating easy References
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ENERGY ECONOMICS October 1992 247