Planning Electric Power Systems Under

Demand Uncertainty with Different

Technology Lead Times
Douglas T. Gardner J. Scott Rogers
Algorithmics Inc., 185 Spadina Avenue, Toronto, Ontario, Canada M5T 2C6
Department of Mechanical and Industrial Engineering, University of Toronto, Toronto, Ontario, Canada M5S 1A4
gardner@algorithmics.com rogerseie@utoronto.ca

emand uncertainty is a key concern of electric utility planners. While the greater use of
short lead time technologies provides one possible way to deal with this problem, it is
not clear how they are best deployed. The approach taken in this paper is to examine a
capacity mix model that explicitly accounts for differences in technology lead times. Key
results that are obtained include the characterization of the optimal solution and the
development of a new set of technology screening criteria. In practice, the lead time order
(i.e., the set of available technologies ordered by ascending length of lead time) is typically the
inverse of the so-called merit order (i.e., the set of available technologies ordered by ascending
operating cost). We show that for this case, the optimal solution may be determined with
relative ease. A numerical example demonstrates that some short lead time technologies
screened out by standard planning methods may enter the optimal solution when differences
in lead time are considered, while some long lead time technologies may leave. In addition,
the optimal expected level of reliability may be greater.
(Lead Time; Capacity Planning; Demand Uncertainty; Electric Power Systems)

1. Introduction
Electric utility planners have paid increasing attention
to uncertainty in recent years, because of the greater
volatility of the planning environment and the inability of forecasters to accurately predict key planning
variables. Compounding the problem is the often
lengthy period needed to obtain regulatory approvals,
increasing the effective lead time of new generation
facilities. As a result, the environment in which plants
are brought online and operated often bears little
resemblance to that for which they were planned.
Given the current trend toward increased competition
in the electric power industry, uncertainty may be of
even greater importance in the future.
Electricity demand is a particularly important
source of uncertainty. One possible method of dealing
1526-5501/99/4510/1289$05.00
Copyright 1999, Institute for Operations Research
and the Management Sciences

with demand uncertainty is the greater use of short

lead time technologies. In practice, differences in technology lead time may be substantial. For example, up
to 13 years is required to bring a nuclear plant online
(more if an existing site is unavailable or approvals
cannot be obtained without undue delay), while gas
turbine units can be installed in as little as two years
(Ontario Hydro 1989). Demand-side management programs, renewable energy resources, and third-party
purchase contracts can make additional capacity available in even less time.
Short lead time technologies can help planners cope
with demand uncertainty by allowing the rapid installation of additional capacity if demand is higher than
that planned for. To date, however, there is little
understanding of how short lead time technologies are
best deployed, as well as what role, if any, long lead
Management Science/Vol. 45, No. 10, October 1999
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GARDNER AND ROGERS

Planning Under Demand Uncertainty

time technologies should fulfill. The purpose of this

paper is to provide insight into this question and to
compare our results with those of earlier authors who
have ignored differences in technology lead times.
The approach this paper takes is to examine the
electric utility capacity mix problem, taking differences in technology lead times explicitly into account.
The model that we consider applies to an all-new
thermal electric system with no restrictions on unit
size and is a target-year optimization. We assume that
the technologies available to meet demand may be
divided into two groups: short lead time technologies and long lead time technologies. Three different
cases are considered.
In the learn, then act (LA) case (also known as the
wait and see case in the stochastic programming
literature), demand is assumed known before any
capacity decisions need be made. Berrie (1968) showed
how this case could be solved using a simple graphical
technique. Subsequent authors extended this analysis
to the case in which existing units were present
(Stoughton et al. 1980, Levin and Zahavi 1984). Borison and Morris (1984) illustrated how dynamic programming could be used to take account of possible
economies of scale and restrictions on unit sizes, at the
expense of the graphical solution method. Levin et al.
(1985) examined how the optimal LA capacity mix is
affected by uncertainty in fuel prices.
In the act, then learn (AL) case (or here and
now case), demand is assumed known only after all
capacity decisions have been made. Murphy et al.
(1982) analyzed this case using a stochastic linear
programming approach and a step-wise approximation of the load duration curve. Chao (1983) considered a formulation in which the load duration curve is
a continuous function. Ahn and Nam (1988) extended
this analysis by allowing for random outages of discrete generating units. Sherali et al. (1984) and Sherali
and Soyster (1987) used the optimal dual solution to
allocate capital costs among the different demand
outcomes, for use in marginal cost pricing analyses. A
robust optimization modeling framework was considered by Malcolm and Zenios (1994).
In contrast to the LA and AL cases, the act, learn,
then act case (ALA) that is the main subject of this

1290

paper assumes that while long lead time technology

capacities must be chosen prior to the resolution of
uncertainty, decisions for short lead time technologies
need not be made until demand is known. The problem thus assumes the form of a two-stage stochastic
program with recourse. Note that if the set of long
lead time technologies is empty, the ALA case reduces
to the LA case, while if the set of short lead time
technologies is empty, the ALA case reduces to the AL
case. Hence by incorporating differences in technology lead times, the model examined here both unifies
and generalizes the LA and AL cases analyzed by
earlier authors.
Previous research on lead time and electric power
planning includes the work of Boyd and Thompson
(1980). They used a dynamic programming approach
and showed that some short lead time capacity may be
optimal when planning under uncertainty, even when
the expected value solution (i.e., that obtained using
the expected level of demand) includes only long lead
time capacity. However, temporal variability in demand, an important part of the capacity mix problem,
was ignored, nor were the properties of the optimal
solution characterized.
Our work is also related to the literature on real
options (Dixit and Pindyck 1994), in particular as it
has been applied to the energy industry (Awerbuch
and Preston 1997, Laughton 1998). Teisberg (1994)
used this approach to illustrate the benefits of shorter
construction lead time on the expected market value
of utility plant investments.
The strength of the real options approach lies in its
representation of uncertainty: Information is gained
continuously over time. Details of the system being
studied, however, must often be sacrificed for the sake
of analytical tractability. Teisbergs study, for example, considered neither the optimal production unit
size, nor the projects interaction with the remainder
of the system. The stochastic programming approach
adopted here, on the other hand, has a quite simple
representation of uncertainty but greater detail on the
system being studied. Note that the two approaches
are not inconsistent with one another (Smith and Nau
1995), but simply focus on different aspects of the
problem.

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

In addition to being a contribution to the literature

on electric power planning, our results also have
important implications for the broader subject of technology choice under uncertainty. More specifically,
the problem of selecting an optimal technology under
uncertainty, where the available technologies are characterized by only two attributesfixed and variable
costs has been the subject of study for many years
(Stigler 1939, Cohen and Halperin 1986, Aranoff 1992).
Our results suggest that a third technology attribute,
lead time, is of perhaps equal importance for such
decisions.
The next section describes the model. We then
derive and interpret the optimality conditions for the
problem, characterize the optimal solution and develop screening conditions necessary for each technology to appear in the optimal solution. In practice, the
lead time order (i.e., the set of available technologies
ordered by ascending length of lead time) is usually
the inverse of the merit order (i.e., the set of available
technologies ordered by ascending operating cost).
We show that the ALA solution for this case is easily
determined given the zero of a particular univariate
function. All proofs are contained in the appendix.
Using a numerical example, the last section demonstrates that some short lead time technologies may
enter the ALA solution despite being excluded by
traditional screening criteria that ignore differences in
technology lead time. Conversely, some long lead time
technologies may leave the ALA solution, although
they are included in the LA and AL solutions. In fact
in this example, the greater the level of demand
uncertainty, the lesser the optimal long lead time
technology capacity and the greater the optimal expected short lead time capacity. It is also shown that
the optimal expected level of reliability may be strictly
greater in the ALA solution than either the LA or AL
solutions.

2. Model Description

Let I {1, . . . , n} be the available set of generation

technologies, of which I L I are long lead time
technologies, and I S I are short lead time technologies, such that I L I S A, and I L I S I. The set
of all technologies plus the outage technology (n

1) is denoted by I {1 . . . , n 1}, the set of all

short lead time technologies plus the outage technology, by I S I S {n 1}. Each technology has
one-period fixed costs of c i ($/MW), and one-period
variable costs of b i ($/MW-period), i I. Unserved
energy is assumed to incur outage costs of b n1 ($/
MW-period). The set of possible demand outcomes is
R, each outcome having probability r , r R. The
capacity of technology i in outcome r is denoted by y ir ,
i I, r R. Plant outages, either forced or planned,
are taken into account by derating capacity.
The load duration curve (LDC) in outcome r, F r ( ),
is constructed by rearranging the corresponding chronological (hour-by-hour) load curve in order of decreasing load. Each point on the abscissa, , gives the
fraction of time during the period in which the associated load is met or exceeded (see Figure 1). Defined
over the interval [0, 1], F r ( ) is assumed to be continuous and strictly decreasing. The inverse LDC in
outcome r, f r ( y), is defined as follows:
f r y

1
if
F 1
if
r
0
if

y F r 1,
F r 1 y F r 0,
y F r 0.

It gives the fraction of time in outcome r during which

a given load is equaled or exceeded. Note that the
inverse of f r ( y) is only defined on (0, 1), in which case
f r1 F r .
We may also define the expected inverse LDC as
follows:
f X y

f y.
r r

rR

It gives the expected fraction of time (over all outcomes) during which demand meets or exceeds y. As
a convex combination of inverse load duration curves,
f X ( y) is a monotonically decreasing function. Let y
max{ y: f X ( y) 1} and y min{ y: f X ( y) 0}. If
f X ( y) is strictly decreasing on [ y, y], then the
expected LDC F X may be defined as follows:
F X

y if
f X1 if
y if

0,
0 1,
1.

The merit order loading rule states that the optimal

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

Figure 1

Load and Inverse Load Duration Curves

method to meet a given instantaneous demand is to

load each unit to its capacity in order of ascending
operating cost (i.e., merit order) until either output
matches demand or the available capacity is exhausted (see Figure 1). Letting the technologies be
indexed in merit order, (i.e., b 1 b 2 b 3
. . . b n1 ), it then follows that technology i is
loaded in outcome r only when demand exceeds Z i1,r
i1
j1
y jr , and that the reliability level in outcome r,
expressed in terms of loss-of-load probability (LOLP),
is r f r (Z nr ). Note that previous analyses that ignore
differences in technology lead times invariably assume that the capital cost sequence is decreasing (i.e.,
c 1 c 2 c 3 . . . c n ), since a technology with both
higher capital and operating costs than another will
never enter the optimal solution. This assumption is
not made here, however, since it is possible that a
short lead time technology with both higher capital
and operating costs than some long lead time technology may enter the optimal solution in certain outcomes.
Let the set of durations served by technology i in
outcome r be W ir [ f r (Z ir ), f r (Z i1,r )], the closure of
the set of durations for which it is partially loaded.

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The set of expected durations served by technology i is

defined as
Wi

f Z

r f r Z ir ,

rR

r r

i1,r

rR

The energy supplied by technology i in outcome r is

ir
Y ir ZZi1,r
f r ( y)d y and the unsatisfied demand is
Y n1,r Znr f r ( y)d y. The total expected cost is then
C

cy bY
r i ir

iI rR

r i

iI rR

ir

b n1

Y
r

n1,r

rR

comprising the expected capital, operating, and outage costs, respectively. It is well known that this
function is convex (see, for example, Gardner 1995).
The capacity mix problem (CMP) may be formulated as follows:
min C
subject to y i y ir 0,
y ir 0,
y i 0,

i I L , r R,
i I, r R,
i I L.

The first set of constraints are nonanticipativity

constraints, requiring that the capacity of each long
lead time technology be the same in all outcomes. In

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

the scenario approach, a method commonly used by

electric utilities for planning under uncertainty on
problems of similar type (Mobasheri et al. 1989),
these constraints are temporarily ignored. This assumption renders the problem separable by scenario, simplifying the analysis considerably. The
solutions to the individual scenarios are later combined, generally in an ad hoc fashion, to arrive at an
implementable solution in which the nonanticipativity constraints are respected. For problem CMP,
eliminating the nonanticipativity constraints is
equivalent to assuming I S I, which is the LA case.
Hence the LA solution to CMP, which is optimal if
I S I, may be used to obtain an approximate
solution when I S I.
An alternative standard planning approach for developing a target-year capacity mix is to assume that
nonanticipativity constraints apply to all technologies
(Murphy et al. 1982, Ahn and Nam 1988). Users of this
method typically discard the results for the short lead
time technologies, since decisions for these plants
need not be made until later. Extending the nonanticipativity constraints to all technologies considerably
simplifies the problem, since by substituting y i for y ir ,
i I, r R, it is possible to reduce the problem to the
form of a single outcome (deterministic) problem with
inverse LDC f X ( y). For problem CMP, including nonanticipativity constraints for all technologies is equivalent to assuming I L I, which is the AL case. Hence
the AL solution, which is optimal if I L I, may be
interpreted as an approximate solution when I L I.
By ignoring the lead time advantage of short lead time
technologies, however, the AL solution is likely to
overestimate the optimal capacity of long lead time
technologies, as is shown later.
Let C LA, C AL, and C ALA be the objective function
values of the LA, AL, and ALA solutions, respectively,
where the ALA solution is the optimal solution to
CMP. (The same superscripts will also be used to
distinguish the optimal technology capacities and
LOLPs for the three cases, as well.) Since the objective
function is identical in all three cases, but the feasible
region in the AL case is a subset of that in the ALA
case, which in turn is a subset of that in the LA case,
the following relationship must hold.

Theorem 1. The minimum expected cost in the AL,

LA, and ALA cases obey the following bounds: C LA C ALA
C AL.
Theorem 1 implies that the LA solution is likely to
provide an underestimate of the expected cost,
while the AL solution is likely to provide an overestimate. 1 The difference C ALA C LA is the expected
value of perfect information (EVPI) for problem
CMP. It gives the expected value of learning what
demand will be before the long lead time technology capacities need be chosen. Equivalently, this is
the expected value of reducing the lead time of the
long lead time technologies to that of the short lead
time class, assuming their discounted capital costs
remain unchanged. An important insight of the real
options approach is that in general, the value of a
technology increases as its lead time decreases (Teisberg 1994). Moreover, this increase may be significant.
The difference C AL C ALA is the expected value of
having the short lead time technologies in the short
lead time class, rather than the long lead time class.
Hence it may be interpreted as the expected value of
short lead time (EVSLT) for problem CMP. EVSLT is
conceptually similar to the value of flexibility
measure used in option pricing analyses (Dixit and
Pindyck 1994), although the latter measure is independent of design decisions for other projects or
technologies, while EVSLT depends on the design of
the complete system (i.e., capacity mix).

3. Optimality Conditions
Since C is convex and the constraints in problem CMP
are linear, it follows that a set of capacities that satisfy
the Karush-Kuhn-Tucker (KKT) conditions is a global
optimal solution. By substituting y i for y ir , i I L , r
R, it is possible to eliminate the nonanticipativity
1

Theorem 1 may be regarded as an application of the inequalities of

Madansky (1960). This follows, since, were a step function approximation to the LDC used, problem CMP could be formulated as a
two-stage stochastic linear program with recourse, with first stage
variables the long lead time technology capacities, and second stage
variables the short lead time technology capacities.

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

constraints in problem CMP. The KKT conditions for

this form of problem CMP are as follows:

b b

with respect to a change in the capacity of technology

i must be zero.

rc i r

j1

f r Z jr 0,

i I S , r R, 1

ji

b b

rc i r

j1

f r Z jr y ir

ji

0,

i I S , r R,

b b

(2)

ci

j1

r f r Z jr 0,

ji rR

b b

ci

j1

y i 0, i I L

and

y ir 0,

(3)

i I L,

i I S , r R.

P j if
P j if
P j if

ij ,
ij ,
ij .

(5)

We then define the minimum cost sets:

(4)

If technology i I S enters the optimal solution in

outcome r (i.e., y ir 0), then the inequality (1) must
hold as an equality, due to the complementary slackness condition (2). The first term of (1) is simply the
(probability-weighted) capital cost of technology i.
The marginal change in technology is energy production in outcome r(Y ir ), with respect to a change in its
capacity ( y ir ), is f r (Z ir ), the fraction of time it is fully
loaded (see Figure 1), resulting in a marginal change
in operating cost of b i f r (Z ir ). For technology i 1, a
change in technology is capacity results in a marginal
change in operating cost of b i1 ( f r (Z i1,r ) f r (Z ir )).
The operating costs of the remaining technologies
lower in the merit order are affected in a similar
fashion, resulting in the second term of (1), the
(probability-weighted) marginal change in operating
plus outage cost with respect to a change in the
capacity of technology i in outcome r. Thus, if technology i I S enters the optimal solution in outcome r,
the marginal change in capital, operating plus outage
cost with respect to a change in its capacity in this
outcome must be zero.
If technology i I L enters the optimal solution (i.e.,
y i 0), then (4) implies that (3) holds as an equality.
In words, the marginal change in capital cost plus the
expected marginal change in operating plus outage cost

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The cost of power from technology i I , as a

function of time operated , may be written as P i ( )
c i b i , where c n1 is defined to be zero. The
breakeven point duration for which P i ( ) P j ( ) is ij
(c i c j )/(b j b i ) ( ji ). Since i j if and only if
b i b j , it follows that
i j N P i

r f r Z jr y i 0,

ji rR

i I L,

4. Characterization of the Optimal

Solution

V i 0 1: P i P j , j I ,

i I ,

V Si 0 1: P i P j , j I S ,

i I S .

(6)
The former (V i ) is the set of durations for which
technology i provides electricity at minimum cost
compared to all other technologies. The latter (V iS ) is
the set of durations for which technology i I S
provides electricity at minimum cost compared to all

Figure 2

Cost of Power and Minimum Cost Sets

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

short lead time technologies. Figure 2 illustrates these

sets for a problem involving two technologies, where
I L {1} and I S {2}. Lemma 1 shows how the
minimum cost sets may be calculated.
Lemma 1. Let

i max 0, ij ,

i I ,

S
max 0, ij ,
i

i I S ,

i min ji , 1,

i I ,

S
min ji , 1,
i

i I S .

ji,jI

ji,jI S

ji,jI

ji,jI S

V Si

Vi

if
i , i
i i ,
A
otherwise.

S
S
if S
S
i , i
i
i ,
A
otherwise.

The following relations are necessary for the results

that follow; their derivation is relatively simple (see
i ( i , i ) and
Gardner 1995). First define the sets V
S
S
S
i ( i , i ). Then
V
1a

i A,
V

If

then

i , j I , j i.
P i P j , V
1b

Si A, i I S ,
V

If

(7)

then

iS, @jI S, ji.

P i Pj(), V
2a

If

i j,
2b

If

i j,

i1
i1,i

i i1,i
3b

Let
Then

i I S

(9)

(10)

if V i A.
V i1 A.

(11)

and j mink I S , k i.

S
ij
i

S
ij
j

if

if

if

(13)

Among these relations, the first is the most important:

it gives the set of durations for which technologies are
the unique minimum cost technology among either all
technologies (Relation 1a) or just short lead time
technologies (relation 1b).
The following theorem provides conditions for the
optimal LOLP in each outcome, r , and the expected
LOLP rR r r . 2

In words, the optimal expected LOLP must lie

among the set of durations for which the outage
technology provides power at minimum cost, the
optimal LOLP in any particular outcome, among the
set of durations for which it provides power at minimum cost compared against only short lead time
technologies.
The following theorem gives conditions that technologies must satisfy to enter the optimal solution and
sets bounds on the set of durations that they may
serve.
Theorem 3. If, in the optimal solution, y ir 0 for
some i I S and some r R, then W ir V iS . If, in the
optimal solution, y ir 0, for some i I and all r R,
then W i V i .
The first statement in Theorem 3 says that each short
lead time technology can only serve those durations
for which it is a minimum cost technology among all
short lead time technologies. The second statement
says that the set of expected durations served by long

then

S
ij S
i, j I S .
i
j
3a

(8)

i ij j i, j I .

then

S
n1
.
0 n1

Theorem 2. The optimal expected loss-of-load probability satisfies V n1 . The optimal loss-of-load probability
S
in outcome r satisfies r V n1
, r R.

Then
1

V Sj A

and

V Si A.

(12)

This result is dependent on the assumption of linear outage costs,

an assumption that is commonly made for lack of better information. Kleindorfer and Fernando (1993) explicitly disaggregate outage costs into rationing costs, disruption costs, and consumer
surplus losses (all of which are implicitly contained in b n1 ) and
then proceed to derive the optimal level of reliability for the AL
case. Such a framework implies that knowledge of the LDC in each
outcome is insufficient to determine the optimal level of reliability.
Instead, one requires knowledge of demand as a function of price
and outcome, and the price of electricity, because of the dependence
of consumer surplus losses on these factors.

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

lead time technologies (and those short lead time

technologies that appear in every outcome) must be a
subset of those for which it is a minimum cost technology among all technologies. A number of corollaries follow.
Corollary 1. 1) If i I S , then
y ir

F r S
if
i
S
F r S
if
i F r i

S
1,
i
S
1.
i

2) If {1, . . . i} I L and technology i enters the optimal

solution, then [ f X (Z i ), f X (Z i1 )] V i . If, in addition, F X
is well defined, then
yi

F X
if
i

F X
if
i F X i

i 1,

i 1.

This corollary allows bounds to be placed on the

optimal capacity of all short lead time technologies by
outcome. Depending on the problem, it is possible
bounds may also be placed on the durations served
by, and the capacities of, some, possibly all, long lead
time technologies. The next corollary follows immediately from Theorem 3.
jS A for all
Corollary 2. If y ir 0, then W ir V
i, j I S such that i j. If y ir 0 for all r R, then
j A for all i, j I such that i j.
Wi V
The first statement in Corollary 2 states that, other
than technology i I S , no short lead time technology
that enters the optimal solution in outcome r may
serve any durations for which technology i is the
unique minimum cost technology (among all short
lead time technologies). The second statement says
that, other than technology i I, the expected set of
durations served by any long lead time technology (or
short lead time technology that enters every outcome)
cannot overlap those for which technology i is the
unique minimum cost technology among all technologies.
Theorem 3 provides a set of screening criteria, since
it implies that for technology i to enter the optimal
solution, it is necessary that V i A, i I L , or V iS A,
i I S . In fact, we can further limit the technologies
i A, i I L or V
iS
considered to those satisfying V
A, i I S , since otherwise, technology i is the
unique minimum cost technology for no duration,

1296

implying that an optimal solution exists in which

technology i plays no part (Gardner 1995). Note that
iS A only requires that a technology be a
since V
minimum cost technology among all short lead time
i A requires that a technology
technologies while V
be a minimum cost technology among all technologies,
the screening criteria for long lead time technologies
are more stringent than those for short lead time
technologies.
The difference between these screening criteria and
those traditionally used (which do not account for
lead time differences) may be illustrated using an
example (see Figure 3). The ALA minimum cost sets
are shown for the case in which I L {1} and I S
{2, 3}. According to Theorem 3, all three technologies may possibly enter the optimal ALA solution. In
the LA and AL minimum cost sets, however, technology 2 is excluded. Hence some short lead time technologies may be screened out of the LA and AL
solutions. The numerical example described later illustrates the circumstances under which a short lead
time technology enters the ALA solution but is
screened out of the LA and AL solutions.

Figure 3

Minimum Cost Sets by Solution Type

Management Science/Vol. 45, No. 10, October 1999

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

5. Optimal Solutions
In this section, we use the above results to derive
solutions to the LA, AL, and the most common instance of the ALA case in practice. While the LA and
AL solutions are well known, we repeat them here for
comparison purposes and because the reasoning used
for their proofs is employed in the analysis of the ALA
case.
iS A, i I S ,
Theorem 4. 1) Let I S I. Then if V
the optimal LA solution is
y ir F r i,i1 F r i1,i ,

i I, r R,

where F r ( 01 ) 0. In addition, r n,n1 , r R, and

n,n1 .
i A, i I L , and F X is well
2) Let I L I. Then if V
defined, the optimal AL solution is
y i F X i,i1 F X i1,i ,

i I,

where F X ( 01 ) 0. In addition, n,n1 .

Note that the AL case may be regarded as a special
form of the LA case in which only a single outcome
exists with LDC F X . A graphical procedure may be
used to obtain both the LA and AL solutions. Figure 4
Figure 4

illustrates the procedure for the LA solution for the

case n 2.
We now examine the instance of the ALA case in
which the lead time order is the inverse of the merit
order. 3 In particular, suppose that I L {1, 2, . . . ,
m} and I S {m 1, m 2, . . . , n} for some m I,
meaning that every short lead-time technology is
lower in the merit order than any long lead-time
technology. Such a grouping may be expected to
arise if the set of technologies under consideration
are all generation technologies, since long lead
times usually imply high capital costs, which in turn
imply low variable costs (and hence high merit
order), if such technologies are to avoid being
screened out of the optimal solution. For example,
long lead-time technologies under consideration
might include nuclear or coal-fired generation, short
lead-time technologies, gas turbine plants or combined cycle units.
i A, i I L , V
iS A, i I S , and
We assume that V
F X ( ) is well defined. The first two assumptions,
together with (11) and (12), imply the following relations:

0 i1

i i i1
S
S
0 i1
S
S
i1
,
i
i

Graphical Solution to the LA Case

for

i 1, m 1,

for

i m 1, n,
(14)

S
where 0 1 and m1
1. Let

g
h

i I L:
if
i i
1
if

i I S : S
S
if
i
i
m 1,
if

m 1,
1,
0 1,
1.

The function g( ) gives the index of the highest

merit order long lead-time technology, among those
that provides power at minimum cost for the duration . Similarly, h( ) gives the index of the highest
merit order short lead-time technology that pro3

In general, numerical methods are required to solve problem CMP

when both long and short lead-time technologies are available. Note
that problem CMP is convex, has only simple lower variable
bounds, and that analytic expressions are available for the objective
function gradient (and possibly Hessian). As a result, the problem
may be solved numerically relatively easily using Newton methods.

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

vides power at minimum cost among that which

provides power at minimum cost for the duration .
It follows that P g( ) ( ) gives the minimum cost of
providing power for the duration among all long
lead-time technologies, P h( ) ( ), among all short
lead-time technologies.
We then define the function ( y) on [0, F X ( m )] as
follows:

P f y
min P f y min P f y.

y P g f Xy f X y

h f r y

yi

y ir

rR

iI L

rR

iI S

(15)

The function ( y) gives the expected difference in

cost between serving some load level y with a long
lead-time technology chosen before demand is
known versus serving it with a short lead-time
technology that need not be chosen until after
demand is known. Since f r ( y), f X ( y) and P i ( ) are all
continuous, it follows from (15) that ( y) is as well.
Letting y max{ y: f X ( y) 1}, we have the
following lemma.
Lemma 2. Suppose I L {1, 2, . . . , m} and I S {m
i A, i
1, m 2, . . . , n}. Further suppose that V
S
i A, i I S , and F X ( ) is well defined. Then
I L, V
( y) is a monotonically increasing function on
[0, F X ( m )], and ( y) 0 has a unique solution on
( y, F X ( m )].
Lemma 2 states that a unique load level y* exists
such that the expected cost of serving it with either a
long or short lead-time technology is the same. Furthermore, the expected cost of serving all load levels
less than y* is less with a long lead time technology
than a short lead time technology and vice versa
(noting that m is the minimum duration for which a
long lead time technology provides power at minimum cost). It is now possible to state the optimal
solution.
Theorem 5. Suppose I L {1, 2, . . . , m} and I S {m
i A, i
1, m 2, . . . , n}. Further suppose that V
S
i A, i I S , and F X ( ) is well defined. Then the
I L, V
optimal ALA solution is

1298

F X i,i1 F X i1,i ,
i 1, . . . , g f X y* 1,
y* F X i1,i ,
i g f X y*,
0,
i g f X y* 1, . . . , m,

0,

i m 1, . . . , h f r y* 1, r R,
F r i,i1 y*,
i h f r y*, h f r y* n, r R,
F r i,i1 F r i1,i ,
i h f r y* 1, . . . , n, r R,

where y* ( y, F X ( m )] is the unique solution to ( y)

0.
Theorem 5 implies that the optimal ALA solution is
immediately available after solving the equation ( y)
0 for y*, the optimal total capacity of long lead time
technologies. The long lead time technology capacities
are chosen using the expected LDC as in the AL
solution, starting with technology 1 and moving down
the merit order until the total capacity matches y*. The
short lead time technologies are chosen using the
realized LDC in each outcome, as in the LA solution,
starting with technology h( f r ( y*)) and moving down
the merit order until technology n.
Corollary 1. Under the conditions of the theorem,
y ALA
y AL
i
i ,

i 1, . . . , g f X y* 1,

y ALA
y AL
i
i ,
y ALA
y AL
i
i ,

i g f X y*,

i g f X y* 1, . . . , m.

Corollary 2. Under the conditions of the theorem,

rLA, r R, and ALA LA AL.

ALA
r

Corollary 1 is of significant interest, given that the

AL solution is commonly used as a basis for planning.
In particular it demonstrates that the optimal total
capacity of technologies 1 through m in the AL solution is greater than or equal to that in the ALA
solution. Intuitively, the greater the total long lead
time technology capacity, the more likely it is to end
up providing high cost power (or possibly not even
being needed) in outcomes in which demand is low.
The flexibility provided by short lead time technolo-

Management Science/Vol. 45, No. 10, October 1999

Copyright 1999. All rights reserved.

GARDNER AND ROGERS

Planning Under Demand Uncertainty

Figure 5

Inverse Load Duration Curves

gies allows planners to reduce the likelihood of such a

situation by following a strategy of reducing the total
long lead time technology capacity, adding whatever
remaining capacity is needed only once demand becomes known.
Corollary 2 states that the LOLP in each outcome is
as small, if not smaller, in the ALA solution than in the
LA solution. (In fact, from Theorem 5, rALA is strictly
smaller in those outcomes in which f r ( y*) n,n1 .) In
addition, the expected LOLP in the ALA solution is
not greater than that in either the LA or AL solutions.

Table 1

Hypothetical Technology Data

i (Technology)
1
2
3
4
5

(Nuclear)
(Coal)
(GCC)
(GT)
(Outage)

Figure 6

Lead
Time
Class

Annualized
Capital Cost (c i )
(000$/MW)

Operating Cost (b i )
(000$/MWy)

long
long
short
short

240
160
120
60
0

40
160
260
400
6,400

Technology Power Costs and Minimum Cost Sets

6. Illustrative Example
Suppose that three outcomes are possible. The inverse
LDC for outcome r is as follows:

f r y

if
1
y if
2
2r
0
if

y 2 r,
2 r y 4 r,

(16)

y 4 r,

where r is the scale parameter for outcome r ( 1 34,

2 1, 3 32) (see Figure 5). Outcome 2 is assumed to
have probability , outcomes 1 and 3, (1 )/2. The
highest degree of uncertainty therefore corresponds to
0, the lowest to 1.
Hypothetical technology data are shown in Table 1.
Nuclear and coal-fired generation are assumed to
be long lead time technologies, gas combined cycle
(GCC) and gas turbines (GT), short lead time technologies. The latter two have higher operating costs
than the first two, meaning that this example is an

instance of the ALA case in which the lead time order

is the inverse of the merit order. Figure 6 shows the
power cost functions and minimum cost sets for each
technology. Note that in the LA case, V 3S A, and in

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

Figure 7

Expected Cost

the AL case, V 3 A. According to Theorem 3,

therefore, GCC generation cannot enter the optimal
LA and AL solutions. In the ALA case, V 3 A but V 3S
A; hence it is possible that GCC generation may
enter the optimal ALA solution in some (but not all)
outcomes.
Figure 7 shows the expected cost for the three cases
for 0, 0.1, . . . 1. Recall that for 1, there is no
uncertainty and hence the expected cost is identical in
the three cases. As gets smaller, the amount of
uncertainty increases, reaching its maximum for 0,
as does the expected cost in the AL and ALA cases.
The expected cost in the AL case (C AL) is the highest,
followed by the ALA (C ALA) and LA (C LA) cases,
respectively, as expected from Theorem 1.

Figure 8

1300

The EVPI (C ALA C LA ) rises only gradually as

gets smaller, exceeding 5 percent of C LA for small
values of . The EVSLT (C AL C ALA ), on the other
hand, is quite significant even for large values of
and exceeds 10 percent of C LA for small values of .
Recall that EVPI may be interpreted as the expected
value of reducing the lead time of the long lead time
technologies to that of the short lead time class,
while EVSLT measures the expected worth of having short lead time technologies in the short lead
time class, rather than the long lead time class.
Figure 7 suggests that for a low-to-moderate degree
of uncertainty, the value of reducing the lead time of
nuclear and coal generation is modest. The benefit
of maintaining the short lead time of GCC and GT

Combined Cycle Capacity in the ALA Case

Management Science/Vol. 45, No. 10, October 1999

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

Figure 9

Optimal Long Lead Time Technology Capacities

Figure 9). In particular, while the total long lead time

capacity is roughly constant in the AL solution, regardless of , the mix tends to more coal generation
and less nuclear. In the ALA solution, while nuclear
generation declines steadily as decreases, the optimal coal capacity first declines sharply, then modestly
increases, before finally holding roughly constant for
0.4. Note that the optimal capacity of nuclear
generation is the same in the AL and ALA solutions
for all , as expected from Corollary 1 to Theorem 5.
There are also differences in the optimal levels of
reliability (see Figure 10 for the ALA solution). Corollary 2 to Theorem 5 states that the optimal expected
LOLPs for the LA and AL solutions (equal in this
example to 0.01) provide an upper bound for the ALA
solution. In this example, the optimal expected LOLP
for the ALA solution is strictly less than this bound for
[0.5, 0.9], due to the excessive level of reliability
in outcome 3.
To demonstrate that certain long lead time technologies which necessarily enter the optimal LA and AL
solutions may not enter the ALA solution, suppose
that the variable cost of coal generation is increased by
10 to 170 (i.e., b 2 170), all other parameters remaining the same. In the ALA and AL cases, we then have
V 2 [0.50, 0.58], in the LA case, V 2S [0.50, 0.58].
While coal generation continues to play an important
role in the AL solution, it plays only a minor role in the
ALA solution for 0.7, actually leaving the optimal
solution for 0.3, 0.4, and 0.7 (see Figure 11).

7. Conclusion

generation, on the other hand, appears to be relatively large.

There are a number of important differences between the various solutions. One interesting result is
the significant role that GCC generation plays in the
optimal ALA solution (see Figure 8), a technology that
is screened out of the optimal LA and AL solutions.
There are also notable differences in the optimal long
lead time technology capacities, especially as the level
of uncertainty increases (i.e., gets smaller) (see

In this paper, we examined the problem of electric

utility planning with demand uncertainty and different technology lead times by analyzing a generalized
version of the capacity mix problem. First, we derived
and interpreted the optimality conditions for the problem. Second, we characterized the optimal solution
and developed a new set of technology screening
criteria that account for differences in technology lead
times. Third, we showed how some specific cases of
the problem may be solved by making use of the
solution characterization. A numerical example demonstrated that some short lead time technologies may
enter the optimal solution despite being excluded by

Management Science/Vol. 45, No. 10, October 1999

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1301

GARDNER AND ROGERS

Planning Under Demand Uncertainty

Figure 10

Optimal Loss-of-Load Probability in ALA Solution

traditional screening criteria, while some long lead

time technologies may leave. In addition, the optimal
expected level of reliability may be higher.
An important question is to what extent the results
derived in this paper are applicable to more realistic
multiperiod stochastic models that consider existing
capacity and technologies with a wide variety of lead
times. Results from a case study of Ontario Hydro,
while not directly addressing this question, do indicate that short lead time technologies offer significant
flexibility benefits, especially when emission limitations are an important planning consideration (Gardner 1996). Some long lead time technologies, on the
other hand, may have flexibility disbenefits, hence
reducing the impact of excluding them from the
optimal solution, compared to the case when demand
uncertainty and differences in technology lead times
are not explicitly considered.
For system planners, the key message of this paper
is that lead time is a key design parameter that needs
to be considered alongside capital and operating costs.
In particular, in the presence of uncertainty, technology screening criteria that ignore lead time may be
seriously flawed. Moreover, given the benefits of
shorter technology lead times, activities that reduce

1302

Figure 11

Long Lead Time Technology Capacities with Higher CoalFired Operating Cost

lead time may have significant value. Thus, for example, obtaining regulatory approvals prior to the construction decision being made, may have an important

Management Science/Vol. 45, No. 10, October 1999

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

benefit. More generally, planners need to examine the

extent to which technology lead times can be traded
off against capital and/or operating costs. Given this
information, planning models can begin to include not
just technology capacities as design variables, but also
technology lead times, thus providing planners more
degrees of freedom in designing flexible strategies for
coping with uncertainty.
Appendix. Proofs
Theorem 1 follows from the discussion in the text; Corollary 2 to
Theorem 3 is immediate.

j i,
j i.

if
if

ij

Then
min V i min : P i P j , j I

b j b j1 r f r Z nr

ji

r f r Z nr

c i b i b n1 ,
the second inequality following from the fact that b j b j1 0, j
1, . . . , n, and f r (Z nr ) f r (Z jr ), j 1, . . . , n, since f r ( y) is
monotonic decreasing. In addition, since the range of f r ( y) is [0, 1],
it follows that 0 1. We thus have

min
iI

ci
,1
b n1 b i

n1
,

and since V n1 [0, n1

], the first assertion is proved. The proof for
the second assertion is similar.

Proof of Theorem 3. We will prove the second assertion here;

the proof of the first assertion is similar. If i I L , then y ir 0, for
all r R, implies that y i 0 and hence, from the KKT conditions,
that

ci

b k b k1 r f r Z kr 0.

(17)

ki rR

ji,jI

If i I S and y ir 0, for all r R, then the KKT conditions imply

that

max 0, ij
ji,jI

i .

rc i r
In a similar fashion, it may be shown that max V i i . We now
show that V i A if and only if i i . To do this, note that if V i
A, then i min V i max V i i . Conversely, from (5) and
the definitions of i and i , it follows that
P i P j

b k b k1 f r Z kr 0

r R.

(18)

ki

Summing (18) over all r R results in (17) again. In a similar

fashion, it may be shown that optimality requires that for any j I

for
for

i
i

j i,
j i.

if
if

Hence if i i , then P i ( ) P j ( ) for i i for all j I ,

meaning that V i A. The proof of the second assertion is
similar.
Proof of Theorem 2. The KKT condition (3) states that

cj

b k b k1 r f r Z kr 0.

(19)

kj rR

Lastly c n1 0, so that (19) holds if j n 1 as well. There are two

cases to consider.
Case 1: j i. Subtracting (19) from (17), we have

b k b k1 r f r Z kr

b k b k1 r f r Z ir

j1

0 ci cj

ki rR

ji

rR

max0, max ij

ci

rR

c i b i b n1

max0, min : P i P j , j I

rR

ci

Proof of Lemma 1. We first show that if V i A, then V i [ i ,

]. Suppose V i A. From (5), it follows that

b j b j1 r f r Z jr

ji

min : P i P j

0 ci

b j b j1 r f r Z jr 0,

i I L.

j1

ci cj

rR

It may be concluded that this condition must also hold for all i I S ,
by summing (1) over all r R. We thus have, for all i I,

ki rR

c i c j b i b j

r f r Z ir ,

rR

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

the second inequality following from the fact that b k b k1 0, k

1, . . . , n and f r (Z kr ) f r (Z ir ), k i, . . . , j 1, since f r ( y) is
monotonic decreasing. Recalling that j i implies b j b i , it follows
that
P i P j

for

r f r Z ir ,

j i 1, . . . , n 1. 20

rR

Case 2: j i. Subtracting (17) from (19) we have

b k b k1 r f r Z kr

b k b k1 r f r Z i1,r

Corollaries 1 and 2 to Theorem 3 and (9), a similar argument as that

employed in part 1 may be made to obtain the stated result.
Proof of Lemma 2. Since ( y) is continuous, it is sufficient to
prove that 1) ( y) 0 for y y, 2) ( y) is strictly increasing on
[ y, F X ( m )], and 3) (F X ( m )) 0.
1) From (14), we have P g(1) (1) c 1 b 1 and P h(1) (1) c m1
b m1 . Also for y y, we have f r ( y) 1, r R. Thus for y y,
it follows that

i1

0 cj ci

y P g1 1

kj rR

c j c i b j b i

c 1 b 1 c m1 b m1
1
c 1 b 1 c m1 b m1 1,m1

r f r Z i1,r ,

0,

rR

and hence
P i P j

for

r f r Z i1,r ,

j 1, . . . , i 1.

(21)

rR

the third line following from (14) and the fourth line from the
definition of i .
2) Let y 1 , y 2 [ y, F X ( m )] such that y 1 y 2 . We then have
P g f Xy 1 f X y 1 P g f Xy 2 f X y 2

Since rR r f r (Z ir ) rR r f r (Z i1,r ), (20) and (21) imply that

Pi P j for

r f r Z ir

rR

r f r Z i1,r ,

j I .

P g f Xy 1 f X y 1 P g f Xy 1 f X y 2

(22)

rR

b g f Xy 1 f X y 1 f X y 2

Given the definitions of i and i , this immediately implies

rR

r f r Z ir

b m f X y 1 f X y 2 .

r f r Z i1,r i ,

rR

that is, W i V i , which completes the proof.

Similarly,

Proof of Corollary 1 to Theorem 3. Consider the case where i

I S and suppose that iS 1. Then, since f r(x) is monotonic
decreasing, f r(Z i1,r) iS implies that Z i1,r F r( iS), and f r(Z ir) iS
implies that Z ir F r( iS). Hence y ir Z ir Z i1,r F r( iS) Z i1,r
F r( iS) F r( iS). If i 1, note that f r(Z i1,r) iS 1 implies that
0 Z i1,r F r(1) and hence y ir Z ir Z i1,r F r( iS) Z i1,r F r( iS).
The second assertion may be proved in a similar manner, upon noting
that if {1, . . . i} I L, then Z i1,r Z i1, r R, and Z ir Z i, r R.
Proof of Theorem 4. 1) LA Solution. Consider technology i.
S
iS A, we have f r (Z nr ) n1
Since V
iS , the first inequality from
Theorem 2, the second from (10). This implies that one or more
technologies must serve the set of durations [ iS , iS ]. Corollary 2
to Theorem 3 implies that only technology i can serve the set of
durations ( iS , iS ), meaning that f r (Z ir ) iS , f r (Z i1,r ) iS , and
hence y ir 0. From Theorem 3, however, this implies that f r (Z ir )
iS and thus it follows that f r (Z ir ) iS . Note that iS satisfies
S
S
0 iS 1, since 0 n1
, according to (13), n1
iS , according
to (10), iS iS , by assumption and iS 1, by definition. Taking
the inverse of f r and recalling (12), we then have Z ir F r ( i,i1 ).
This further implies r f r (Z nr ) n,n1 , r R, and n,n1 .
2) AL Solution. In the AL case, I L I. Using Theorem 2,

1304

r P h1 1

c 1 b 1 c m1 b m1

i1

cj ci

rR

kj rR

P h f ry 1 f r y 1 P h f ry 2 f r y 2 P h f ry 2 f r y 1 P h f ry 2 f r y 2
b h f ry 2 f r y 1 f r y 2
b m1 f r y 1 f r y 2 .
Hence,

y 1 y 2 P g f Xy 1 f X y 1 P g f Xy 2 f X y 2

r P h f ry 1 f r y 1 P h f ry 2 f r y 2

rR

b m f X y 1 f X y 2 b m1

r f r y 1 f r y 2

rR

b m b m1 f X y 1 f X y 2
0,
the strict inequality following from the fact that f X ( y 1 ) f X ( y 2 )
given the assumption that F X ( ) is well defined.
3) Lastly, let j I S : be chosen such that m mj . (Such a
technology must exist according to the definition of m .) Then

Management Science/Vol. 45, No. 10, October 1999

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GARDNER AND ROGERS

Planning Under Demand Uncertainty

F X m P m mj

0, contradicting Lemma 2. On the other hand, y 0 implies

y g( f X ( y)) 0, which in turn implies (25) holds as an equality, or
equivalently, that (0) 0.

r P hf rF X mj f r F X mj

rR

P m mj

r P j f r F X mj

Proof of Corollary 1 to Theorem 5. The optimal capacities

for the AL and ALA cases are given by Theorems 4 and 5,
respectively. The inequality for i g( f X ( y*)) follows from Corollary 1 to Theorem 3.

rR

P m mj P j

r f r F X mj

rR

P m mj P j f X F X mj

Proof of Corollary 2 to Theorem 5. Follows directly from

Theorems 4 and 5.

P m mj P j mj
0,

References

the third line following from the fact that P j ( ) is affine.

Proof of Theorem 5. We consider in turn (1) the capacities y i , i

I L , (2) the capacities y ir , i I S , r R and (3) the condition ( y)
0.
i
(1) Corollary 1 to Theorem 3 implies that Z i j1
y j F X( i), i

1, . . . , m. One possibility is that Z i F X( i ), i 1, . . . , m.

Alternatively, if Z j F X( j) (and hence f X(Z j) j) for some j {1, . . . ,
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. . . y m 0. These two possibilities imply that the optimal solution
must satisfy Z i F X( i), i 1, . . . , g( f X( y)) 1; Z j y, i g( f X( y)), . . . ,
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reasoning as that employed in the analysis of the LA case, Theorem
3 and Corollary 2 to Theorem 3 imply that the optimal solution must
satisfy y ir 0, i m 1, . . . , h( f r ( y)) 1; y ir F r ( iS ) y, i
h( f r ( y)); y ir F r ( iS ) F r ( iS ), i h( f r ( y)) 1, . . . m.
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c g f Xy

b j b j1 f r Z jr 0,

(23)

jg f X y rR

the inequality holding as an equality if y g( f X ( y)) 0. Similarly, for

h(( f r ( y)) I S , y h( f r ( y)) 0 implies

r c h f ry r

b j b j1 f r Z jr 0.

(24)

jh f r y

Note that (24) also holds if h(( f r ( y)) n 1, since c n1 0.

Subtracting (24) for all r R from (23) then gives
c g f Xy

rR

r c h f ry

r b g f Xy b h f ry f r Z g f Xy,r 0,

rR

(25)
which is the requirement that ( y) 0, given that Z g( f X ( y)),r y, r
R. Note that y 0 cannot satisfy (25), since it would imply (0)

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Accepted by Luk Van Wassenhove; received April 8, 1996. This paper has been with the authors 15 months for 2 revisions.

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