INTERNATIONAL JOURNAL OF ENERGY RESEARCH Int. J. Energy Res. 2003; 27:1251–1263 (DOI: 10.1002/er.940) Generation unit selection via capital asset pricing model for generation planning Romy Cahyadi 1 , K. Jo Min 1,n,y , Chung-Hsiao Wang 2 and Nick Abi-Samra 3 1 College of Engineering, 2019 Black Engineering Building, Ames, IA 50011-2164, U.S.A. 2 LG&E Energy Corp., 220 W. Main St. Louisville, KY 4202, U.S.A. 3 Electric Power Research Institute, 3412 Hillview Avenue, Palo Alto, CA 94304, U.S.A. SUMMARY The electric power industry in many parts of U.S.A. is undergoing substantial regulatory and organizational changes. Such changes introduce substantial financial risk in generation planning. In order to incorporate the financial risk into the capital investment decision process of generation planning, in this paper, we develop and analyse a generation unit selection process via the capital asset pricing model (CAPM). In particular, utilizing realistic data on gas-fired, coal-fired, and wind power generation units, we show which and how concrete steps can be taken for generation planning purposes. It is hoped that the generation unit selection process developed in this paper will help utilities in the area of effective and efficient generation planning when financial risks are considered. Copyright # 2003 John Wiley & Sons, Ltd. KEY WORDS: generation unit selection; capital asset pricing model; generation planning. 1. INTRODUCTION The electric power industry in many parts of U.S.A. is undergoing substantial regulatory and organizational changes (see e.g. Awerbuch et al. (1996)). Such changes encourage competition in electric power operations and planning. Under competition, the price of electricity is stochastic, the corresponding demand, revenue, profit, and rate of return are also stochastic. This has led electric utilities to re-examine their generation planning. Traditional generation planning models have generally not emphasized the stochastic price of electricity. Therefore, the traditional models may not fully address the risk in capital investment decision processes. Because of the competition in the electric power industry, traditional generation planning models need to be revised to reflect the risk. We note that the level of risk may be represented by the revenue/standard deviation of profit/return. Received 29 October 2002 Accepted 5 March 2003 Copyright # 2003 John Wiley & Sons, Ltd. y E-mail: jomin@iastate.edu Contract/grant sponsor: Electric Power Research Institute and MidAmerican Energy. n Correspondence to: Dr. Jo Min, College of Engineering, 2019 Black Engineering Building, Ames, IA 50011-2164, U.S.A.