Optimal Production Planning and Hedging for Bio-energy Industry

Cheng, Lingfeng

Optimal Production Planning and Hedging for Bio-energy Industry

Abstract

Renewable energy has become a viable alternative to fossil fuel due to its environmental benefits, sustainability, and potential social welfare. Bioethanol, as one of the dominant renewable energy sources, have become a short and medium term solution to reduce our dependency on fossil fuel. A biorefinery is a process that embraces a wide range of technology to convert biomass to value added products such as ethanol, hydrogen, and industrial chemicals. Based on the source of feedstock, biorefineries has evolved through three main phases. The first generation of bioethanol is produced from corn and has been the main source of ethanol in US. Several second generation bioethanol plants have been established at pilot scale using feedstocks such as switchgrasses, woody crops and agriculture residues. A third generation of biorefinery producing bioproducts from algae is believed to have potential, but continues to face challenges in commercial feasibility. There is a growing consensus that carbon emission, if left unchecked, will lead to major changes in the climate system. As a result, governments are under growing pressure to enact legislation to curb the amount of carbon emissions, and energy producers worldwide are obliged to adjust their production policy in response to the change of carbon emission policy. A challenge associated with both corn and ethanol, is the existing drastic price fluctuations on the commodity markets. For a biorefinery that consumes corn and produces ethanol, if fully exposed to this price variation, could suffer from great financial loss resulting from the sudden price changes. Therefore, managing financial risk becomes an essential task for a biorefinery. Financial derivatives, such as forwards, futures, swap and options are commonly used tools in financial risk management, which help to transfer the price uncertainty to the counterparty based on mutual financial agreement. Motivated by the complications of environmental policy and financial uncertainty, the goal of this work is the development of a systematic optimization framework to help manage the financial risk for both first generation and second generation biorefineries. The solution will maximize economic viability of the process under a specified risk level and with specified carbon tax constraints. Considering different time horizons and derivative types, the framework consists of a price model, a process model, and a hedging model, which interact to generate the optimal operational and hedging strategies. The approach will be demonstrated with results from case studies and is also validated from backtesting with historical price data.

Date Issued

2017-08-30

Keywords

Chemical engineering

Committee Chair

Tester, Jefferson William

Committee Member

Anderson, Catherine Lindsay
Ahner, Beth A.

Degree Discipline

Chemical Engineering

Degree Name

Ph. D., Chemical Engineering

Degree Level

Doctor of Philosophy

Types

dissertation or thesis