1. December 9, 2008 ESD.71 Engineering Systems Analysis for Design Term Project-- Real Option Analysis of Cape Wind Project in Massachusetts Prof. Richard de Neufville Michel Alexandre Cardin Thomas Rand- Nash Na Zhang

2. Outline 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Wind Energy Today Introduction of Cape Wind Project Indentify Uncertainties in the project Decision Tree Analysis Lattice Analysis Conclusions & Recommendations

3. Wind Energy today around the world and in U.S. 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Wind Power contributed 35% of all new U.S. electric generating capacity in 2007 and represents one of the largest new sources of electric capacity additions DOE Report: 20% Wind Energy by 2030—Increasing wind energy’s contribution to U.S. electricity supply

4. Wind Resource in U.S. and Massachusetts 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Wind resource In MA Cape Cod

5. What’s Cape Wind and why? 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Site: a shallow area of water toward the centre of Nantucket Sound, called Horseshoe Shoal. Developer: Energy Management Inc. (EMI), MA based energy company. Current expected production after construction: 468MW/per Contribution to New England’s electricity grid after construction: can supply 75% of the electricity of Cape Cod after construction generated by clean energy.

6. Indentify Uncertainties—focus on 2 dominating uncertainties 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Wholesale price of electricity Electricity demand in New England Wind energy technology development, especially breakthrough Political or regulatory incentives More other uncertainties and the former 2 are the most dominating factors that this term project focused on.

7. Indentify Uncertainties in Cape Wind 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Electricity Price Forecast method Population Ratio Electricity Demand GBM

8. Decision Tree Analysis—consider 2 stages 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Consider 2 uncertainties Use GBM to forecast the electricity wholesale price and demand in New England Monte Carlo Simulation is run to calculate the corresponding probabilities for different scenarios There will be totally 48 different outcomes at the end of the 2 nd stage, each stage has 5 years Modeling data are in the left

9. Decision Tree Analysis 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Just shows part of the decision tree, since the whole tree is too big to show in one slide

10. Decision Tree Analysis—Outcomes 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Stage 1: build big Stage 2: stay Stage 1: build medium Stage 2: stay Stage 1: build medium Stage 2: go big

11. Data for Lattice Analysis 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash

12. Lattice Analysis--VARG 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash The two scenarios have similar performance in this analysis It’s reasonable considering the scale for big and medium are in fact both very large scale for an offshore wind farm today Can reflect the real situation and trend of wind energy in U.S.

13. Conclusions and Recommendations 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Conclusions: Go Big! Reasons: Judging from the forecast of electricity price and demand in New England the conditions have a bigger trend to be favorable The VARG curves indicates build big performs similarly with build medium with flexibility Make use of Economic of Scale and decrease the price of electricity generated per MW

14. Appendix: Current Permitting state of Cape Wind 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash Cape Wind is gaining more and more public support while Ted Kennedy is strongly against it; now it’s still under permitting process Expect to get the permission at the end of 2008 and accomplish construction in 2010

15. Thank you! 12/9/2008ESD.71 Presenter: Na Zhang Instructor: Prof. Richard de Neufville Teach Assistants: Michel-Alexandre Cardin, Thomas Francis Rand-Nash