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Enron Mail |
Vince:
Have you or a member of your group had a chance to look over the forwarded = e-mail yet? We have a meeting on Thursday with another potential client wh= o plans to use his own capital. His capital budgeting issues are similar t= o those of the client who prompted my original e-mail. The more DSM projects that we can help the client get approved, the more DS= M savings we can share with the client. These DSM projects can turn a reta= il commodity contract with low profitability into a substantially more prof= itable contract for us. Would one of your GARCH analyses provide us with a quantitative solution? = One of your experts in differential equations might have devised something.= We'd really like to have something quantitative if you think it's at all = possible. Thanks, Jeff ---------------------- Forwarded by Jeff Gray/HOU/EES on 04/17/2001 12:16 P= M --------------------------- Jeff Gray 04/09/2001 04:41 PM To:=09Vince J Kaminski/HOU/ECT@ECT cc:=09Michael Moore/HOU/EES@EES, Jay Sparling/HOU/EES@EES=20 Subject:=09DSM projects as real options =20 Vince: Could you spare a few moments to look over the attached three-page Power Po= int presentation? At a minimum, we're trying to demonstrate the following:= In high-volatility electricity environments, for those EES customers who = employ their own capital, their usual capital-project IRR hurdles may be lo= wered slightly in the special case of DSM projects, to allow for the extra = value derived from reduced risk exposure stemming from reduced power consum= ption/dependence. I'm pushing the boundaries of real-option theory (and good sense) and viewi= ng a DSM project as a series of options, the values of which are additive. = First is the option to engage in the DSM project itself; which, if we exer= cise the option immediately, can be valued intrinsically through a simple N= PV analysis. Second is a strip of put options to generate "negawatts," ext= ending over the useful life of a DSM installation, the cumulative value of = which is an extrinsic value associated with the DSM project. These options= are exercised sequentially--over the life of the DSM installation--wheneve= r the customer experiences a dramatic, stochastic spike in electricity pric= e, associated with a lognormal price distribution. I'm calling the value o= f this strip a "residual time value" associated with the original DSM optio= n. If we can add this residual time value to the NPV and derive a total va= lue that is quantitatively higher than a simple NPV alone, we may be able = to help the customer get more projects approved, even at the original high = IRR hurdle. Alternatively, and more feasibly, we'd like to give these same customers a = "qualitative" tool with which they can convince their finance gatekeepers t= o lower--for DSM projects--their standard capital-project IRR hurdle . The= attached presentation is a first attempt at this qualitative argument. We intend to use this only as a sales and marketing tool, to allow at least= one of our customers who has an onerously high hurdle rate to manage aroun= d his company's internal capital-budgeting requirements. He has set aside = a large sum of money for DSM projects, but will only be able to spend a sma= ll portion of it under his company's current capital budgeting methodology,= which does not take into account forward commodity price volatility. In your opinion, is there any hope in devising a quantitative justification= , or will we have to stick with the qualitative argument as described in th= e attached presentation? In other words, is it possible to quantify "resid= ual time value" as I've defined it above? Or, even better, are you aware of= a more practical way of conceptualizing this problem? Thanks, Jeff Gray =20 =20 Vince J Kaminski@ECT 01/05/2001 03:26 PM To:=09Jeff M Gray/NA/Enron@ENRON cc:=09Vince J Kaminski/HOU/ECT@ECT, Stinson Gibner/HOU/ECT@ECT, Alex Huang/= Corp/Enron@ENRON, Gary Hickerson/HOU/ECT@ECT, Michelle D Cisneros/HOU/ECT@E= CT=20 Subject:=09Power Plant Model Jeff, A few comments on the model: 1. We have a few reservations about some features of the model but would li= ke to discuss it internally and make the improvements without giving the benefit = of our insights to the consultant. In general, the model is not unreasonable but the devil is always in the de= tails and in the inputs and calibration. The same model may produce drastically different results depen= ding on the quality of inputs.=20 2. We don't have a separate pool of programmers in the Research Group. We = were told that you would provide an IT resource. Alex would supervise this person. Vince <Embedded StdOleLink<
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