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Houston research: The future of decision making in energy operations

Future research may benefit from both analyzing and improving current decision making processes. Photo via Getty Images

Real options represent the decisions companies can make in the face of evolving risk. In the energy and commodity industries, real options are ubiquitous, including the extraction, processing and refinement, storage, and transportation of natural resources. These choices are influenced by ever-changing market and environmental conditions.

Because of these uncertainties, the energy industry has been a key focus of the operations literature on real options. Rice Business professor Nicola Secomandi, along with University of Illinois at Chicago College of Business Administration professor Selvaprabu Nadajarah, were recently invited by the European Journal of Operational Research to conduct a review of the operations literature on real options in energy. Their review included 80 papers across 10 journals active in the field. The research was mostly conducted during Secomandi’s time at the Tepper School of Business at Carnegie Mellon University.

The review examined how often different types of energy and methods of studying related business processes appeared in the operations literature. Nearly a quarter of the papers considered natural gas, more often than any other energy type. Natural gas storage was the most studied process, while the transport and sale of natural gas were less discussed.

While only 10 percent of the papers focused on electricity by itself, mostly in the context of battery management, electricity was discussed alongside emissions and the environment in 22.5 percent of the papers—almost as often as natural gas. About 11 percent of the papers examined both electricity and natural gas.

Roughly 21 percent of the papers focused on crude oil and refined products. Exploration, development, and abandonment of crude oil fields were common topics, while work on crude oil refining and gasoline logistics was rarer.

The review looked at the frequency of use of five categories: real option types, valuation methodologies, model formulations, price risk dynamics, and optimization schemes. Timing options, which irreversibly change the status of an asset when exercised, and switching options, which involve reversible changes, appeared with about equal frequency. Of the valuation methodologies, risk neutral valuation was employed the most often, appearing in nearly 78 percent of the papers. Model formulations were divided mainly between Markov decision processes, which assume that decisions are made at set times, and stochastic optimal control models, which assume that decisions are made continuously. About 63 percent of the papers discussed Markov decision processes, but at nearly 34 percent, stochastic optimal control models haven’t been entirely left out of the literature. Almost 75 percent of the papers formulated models based on spot prices as opposed to futures prices, and over 80 percent adopted normal distribution models, either alone or in combination with other models. Approximate solution approaches dominated within optimization schemes, appearing in 71 percent of the papers.

While several energy sources and analysis tools have been discussed in the literature, the possibilities for future research remain broad. The transition to clean energy sources may increase the complexity of already intricate operations. Its modeling and analysis may require more advanced models than existing ones.

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This article originally ran on Rice Business Wisdom and was based on research from Nicola Secomandi, the Houston Endowment Professor of Management – Operations Management at Jones Graduate School of Business at Rice University.

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Building Houston

 
 

This week's roundup of Houston innovators includes Gaurab Chakrabarti of Solugen, Sandy Guitar of HX Venture Fund, and Cameron Owen of rBIO. Photos courtesy

Editor's note: In this week's roundup of Houston innovators to know, I'm introducing you to three local innovators across industries — from synthetic biology to venture capital — recently making headlines in Houston innovation.

Gaurab Chakrabarti, the CEO and co-founder of Solugen

Gaurab Chakrabarti shared his entrepreneurial journey on the SXSW stage this year. Photo courtesy of the Greater Houston Partnership

Houston doesn't have too many unicorns — startups valued at $1 billion or more — in its innovation ecosystem, but Solugen, a sustainable chemicals company, is among the elite group. Gaurab Chakrabarti, the CEO and co-founder of the company, joined Houston House by the Greater Houston Partnership, to share his story on the SXSW stage.

“You do make your own luck, but you have to be putting in the work to do it," Chakrabarti says, adding that it's not an easy thing to accomplish. “There are things you can be doing to increase your luck surface area."

He shared several lessons he learned on his founder journey in the discussion. Read more.

Sandy Guitar, managing director of HX Venture Fund

Sandy Guitar shares some lessons learned from the fallout of Silicon Valley Bank. Photo via HXVF

Following the failure of Silicon Valley Bank, there's one thing Sandy Guitar can say has changed for Houston innovators: Bank diversification is going to be a must.

“We didn't think we needed one last week, but this week we know we need a resilience plan," she says, explaining that bank diversification is going to be added to "the operational due diligence playbook." Read more.

Cameron Owen, co-founder and CEO of rBIO

San Diego-based rBIO moved to Houston to take advantage of the growing ecosystem of biomanufacturing and synthetic biology. Photo courtesy of rBIO

Founded in San Diego, rBIO recently relocated to Houston and has big plans for settling in the city, says Cameron Owen, the company's co-founder and CEO.

“Companies from California like us and the coastal areas were converging here in Houston and creating this new type of bioeconomy,” he tells InnovationMap.

He shares that Houston wasn't originally on his radar, until it was. A visit turned into a relocation, and it's just the beginning for the biotech startup that's focused on using synthetic biology for pharmaceuticals. Read more.

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