**Status:**Published
**Citation:**Bistline, J; Comello, S., Sahoo, A. 2018. “Managerial Flexibility in Levelized Cost Measures: A Framework for Incorporating Uncertainty in Energy Investment Decisions."
Many investment decisions entail opportunities for managers to respond flexibly to changes in the economic environment. However, common levelized cost measures used to guide decision-making, such as the levelized cost of electricity, implicitly assume that the values of random economic variables are known with certainty when investment decisions are made. This paper improves levelized cost measures to evaluate individual projects to account for uncertainties (e.g., in fuel prices or the policy environment) and the value of managerial flexibility in responding to them. This method is applied in the paper to quantify the value of flexibility in two example decision problems related to power sector investments. In one, an operator of a natural gas combined cycle plant evaluates whether to invest in carbon capture capabilities. Another considers retirement decisions for existing nuclear plants. These examples illustrate that simplified cost metrics can inaccurately guide decision-making by inflating cost estimates relative to the proposed levelized cost measure that accounts for uncertainty and flexibility.
Link to Journal article: Energy.