37 Yeshambel Melese, Delft University of Technology
Flexibility – for Smart Infrastructure Planning and Development Under Uncertainty Cases of Port Expansions and Carbon Capture and Storage Projects
Y.G.Melese@tudelft.nl Personal Profile
Yeshambel Melese (MSc) is currently a PhD student at Delft University of Technology as part of the Erasmus Mundus Joint Doctoral Program, coordinated by University of Comillas in Spain, Delft University of Technology in the Netherlands, and Royal Institute of Technology in Sweden. His research focus on flexible design of large-scale energy and industrial infrastructures such as carbon capture and storage and power transmission expansion.
Dr. ir. Rob Stikkelman is researcher at the Delft University of Technology. He Completed his PhD on distillation subject, worked at Shell Pernis (1989/1991). He joined the Clean Technology Institute, from 1996 as managing director. In 1998, he was a founding father of the Port Research Centre, a successful collaboration between the Port of Rotterdam authority and the Delft University of Technology. In 2004, he started the Centre for Port Innovation. He is currently, Director of Center of Port Innovation/Port Research Centre, Delft University of Technology. In 2010, he did the preliminary work for the Next Generation Port Infra, Powered by Maasvlakte 2 program.
PhD research and relevance for PoR
The Port of Rotterdam and industrial complex around it provides a significant value for competitiveness of the Netherlands and the region. It is a massive infrastructure market in constant development. The PoR is expecting the port to grow from 430 mill. tones (2010) to anywhere between 475 and 750 mill. tones by 2030 or an implied CAGR of 0.5% to 2.8%. Rotterdam Port not only holds future potential for investors with interest in traditional port investments, there are many other opportunities to consider. As a result , there are various infrastructure developments (new and expansion) in an effort to keep the competitiveness of the port. This includes major energy and industrial infrastructures such as carbon capture and storage infrastructures and heat /cold exchanging pipeline networks, natural gas distribution networks and expansion of the port. However, decisions about large scale (infrastructure) projects have to be taken while future developments are uncertain. As these projects are implemented over several years, sometimes decades, there are many factors that can change in the meantime: technological advances, changing stakeholders, political shifts, and economic fluctuations. It is believed that in recent times these uncertainties have only increased, making decisions even more risky for private businesses and the port authority.
In port expansion as well as other large-scale projects uncertainty and flexibility are hardly taken into consideration. The traditional infrastructure projects planning and analysis methods are based on requirements that are unrealistically deterministic and does not systematically consider uncertainties. The common practice consists of three major phases. First, after relevant data is collected and analyzed , the most likely scenarios are identified, which include projections of major endogenous and exogenous drivers of the system. Then, according to those predictions, systems designers generate design concepts and select design parameters that enable the system to perform
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optimally under the predictions Economic evaluation of the design is then conducted, of which standard methodology, like discounted cash flow (DCF) analysis, optimization, and scenario planning, is applied to achieve the best optimal design.
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Flexibility helps to proactively deal with uncertainties. The real options method provides a useful systematic framework for quantifying and operationalizing flexibility. The technical concept of an “option” is a right, but not an obligation, to do something for a certain cost within or at a specific period of time. The method provide designers and decision makers the extra degree of freedom of systematically considering and designing flexibility elements that worth the cost. In port expansion and other similar large-scale projects there are two major valuable real options.
· Timing or phasing of investments in infrastructure and superstructure;
· Building in flexible options in the port infrastructure, i.e. extra investments that can be utilized at a later stage, such as a deeper quay walls for larger future ships and stronger structures for greater loads in the future (also called building in margins);
A prime example of real option application in the Port of Rotterdam is a phased construction of Maasvlakte 2, which gives it the option to abandon the following phase of the project, and avoid a part of the capital expenditure if the market deteriorates. It shows the willingness apply new methods and techniques for investment decisions and the concept of uncertainty is being increasingly mentioned in the port sector. However, flexibility and real options analysis have not gained favor in practice.
The problem is largely due to the fact that project appraisal is mostly carried out at the feasibility stage (mostly on the basis of a concept master plan) while technical design of port infrastructure is carried out at a later stage, almost always by a third party (consultants or advisors). The increasing popularity of various forms of design and construct contracts is reinforcing this trend. The motivation of the third party is generally limited to looking for an adequate and reasonably priced design alternative that meets the specifications, and flexibility is not high in the list of objectives. Moreover, a flexible option identified and incorporated in the technical design stage cannot be included in the initial project evaluation.
In this research we aim to develop useful flexibility (real options ) identification, integration method for large-scale infrastructure development projects that are faced with dynamic uncertainties that involve significant risk for investors. Through this research we aim to develop useful tools, methods for stakeholders ( especially private business ) to investigate systematically uncertainties and device pro-active management strategies. The output of the research will help decision makers to make informed decisions and by so doing able to minimize down side risks (such as over capacity commitment, lock-in and path-dependency ) and utilize the most of the upside opportunities (new markets, benefits from collaborations). Such smart investment strategies within the PoR will contribute to its competitiveness and encourage investment in carbon foot print reducing infrastructures: main goals of the PoR.
