George Hoberg and Guillaume Peterson
February 3, 2015
pdf Hoberg course brief – MCA final
Decision-makers must take into account a large variety of components when comparing energy choices. A simple and straightforward way to evaluate each option is to analyse the cost of each alternative. However, many uncertainties exist, such as how energy prices, abundance, and availability will vary in the future. Furthermore, a variety of social benefits and costs, referred to as externalities, are not reflected by prices and cannot be easily transformed into monetary values. This creates the need for well-organized tools for the systematic assessment of objectives, choices, and consequences.
One such tool, multi-criteria decision-making (MCDM), represents a general term to describe an assortment of approaches aimed at explicitly accounting for various criteria during decision-making analysis. MCDMs offer various advantages: they allow for the consideration of conflicting criteria, provide a structure and organization to guide a transparent analysis process and can handle both qualitative and quantitative criteria (Belton & Stewart, 2002). The MCDA process is generally separated into 5 general steps: (1) definition of decision context, (2) identification of evaluation criteria, (3) identification of alternatives, , (4) evaluation of each alternative against each criterion, and (5) trade-off analysis. This brief presents an overview of each step of a simple MCDM for comparing energy alternatives.
1. Definition of the decision context
This first step aims at defining the main question or problem that needs to be addressed by the MCDM. Simply put, it aims at identifying “what is the decision that needs to be made”? The decision context when comparing energy policy could be defined as “how to get the energy services we need at the least possible economic, environmental, and socio-political cost.”
2. Identification of evaluation criteria
The evaluation criteria are the key factors that inform the evaluation of the alternatives and the trade-off analysis. They can be understood as the “aspects that matter in the decision-making process”. A good set of criteria should (1) consider all the important factors, (2) be concise and understandable and (3) contribute independently to the overall performance of an alternative. Furthermore, the evaluation criteria have to be measurable, either quantitatively (when possible) or qualitatively. When comparing energy alternatives, seven important criteria should be considered:
- Abundance refers to the viability and availability of both current and potential future sources of energy. For instance, renewables offer unlimited reserve, whereas the abundance of fossil fuels is limited based on the world proved oil reserves. The abundance could be calculated in years of potential supply given consumption rate.
- The cost per unit of energy alludes to the societal cost of generating electricity and can be calculated quantitatively ($/MWh) for each alternative. This calculation must include all the costs, including the initial investment, the discount rate and the cost related to extraction, operation and maintenance.
- Reliability is the capacity of an energy source to generate consistent energy output to meets societal energy demand. A lack of reliability can lead to interruptions when the electricity supply is lower than the demand.
- The environmental impacts are evaluated based on the environmental footprint. An important environmental factor to consider is the contribution to climate change through GHG emissions, which can be evaluated in terms of carbon intensity (CO2eq/unit of energy). Other important environmental impacts include air, land and water pollution and toxic contamination and the impact of energy production on land use change (e.g., deforestation, forest degradation).
- Extreme events have low or unknown probability of occurrence and are often associated with serious consequences and impacts on humans and the environment. Some of their impact and risk of occurrence can be minimized, but uncertainties will always remain, highlighting the importance of considering the extreme event risk associated with each energy option.
- Geopolitical risk focuses on the impact of international politics on the attractiveness of energy options. For instance, geopolitical factors can influence the stability, reliability, availability and price of energy options. A recent example is the drastic drop in oil price caused by a complex combination of geopolitical factors.
- Public acceptability is fundamental for the implementation of any energy alternative. Public opinion on energy options varies, and the political risk associated with each of them greatly influence decision-makers.
3. Identification of alternatives
The alternatives represent the options that may offer solutions to the problem. There are four major options that can address the growing demand for energy services: (1) energy efficiency, (2) nuclear power, (3) renewables, and (4) fossil fuels. (Each of these categories has many specific technological choices.)Each of these alternatives offers advantages and disadvantages in terms of economic, environmental and socio-political components that need to be evaluated. For example, energy efficiency improvement reduces the need for energy generation, but can involve important up-front investments. Nuclear power offers energy with far fewer greenhouse gases emissions or air pollution, but presents environmental and social concerns due to nuclear waste and weapons proliferation. Renewables offer an unlimited flow of clear energy, but their reliability sometimes depends on environmental conditions such as wind or solar energy. Fourth, fossil fuels represent a very price-competitive option, but are non-renewable and generate harmful GHGs and other air pollutant emissions (Jaccard, 2005).
4. Evaluation of each alternative against each criterion
This step involves the assessment of the performance of each alternative against each criterion. To do so, each criterion should be given a unit ($/MWh) or scale (excellent, good, poor) of measurement. For instance, the following figure (reproduced from IRENA, 2015) illustrates the estimated costs of producing electricity (USD/kWh) in 2014 and 2025 (projected) for various renewable energy sources compared to fossil fuels’ electricity costs. (LCOE is the levilized cost of electricity.) Not all criteria need to be measured with the same unit or scale.
5. Analyse trade-offs
The goal of trade-off analysis is to identify the alternative that better meets the main objective. It is very rare that one alternative will be superior for all criteria, meaning that most MCDM will involve trade-offs. Many techniques can be used to evaluate trade-offs and compare the performance of different alternatives. One such approach is the use of a trade-offs matrix, a table where you list alternatives on one axis and your criteria on the other. In each cell, you should provide meaningful information about the consequences of that alternative for that particular criterion. The following table (reproduced from Jaccard, 2005) provides an example of a trade-off matrix evaluating the projected cost, the extreme event risks and the geopolitical risk of the four energy options previously presented.
In addition, MCDM approaches normally employ various weighting techniques to compare the different alternatives, ranging from simple (ranking) to extremely sophisticated (modelling, algorithms). These techniques can broadly be separated into three categories: (i) value measurement models, where numerical scores are given to each alternative through the assessment of the criteria; (ii) goal, aspiration or reference level model, where desirable levels or goals are assigned for each criterion as a basis for assessing the alternatives; and (iii) outranking models, where alternatives are compared pairwise with the criteria to identify if there is a preference for one of them (Belton and Steward, 2002, p. 9).
References
Belton, V., & Stewart, T. J. (2002). Multiple Criteria Decision Analysis: An Integrated Approach. Springer Science+Business Media Dordrecht.
IRENA. (2015). Renewable Power Generation Costs in 2014.
Jaccard, M. K. (2005). Sustainable fossil fuels the unusual suspect in the quest for clean and enduring energy. Cambridge, UK; New York: Cambridge University Press. Accessible from UBC Library
Other recommended reading:
Stagl, S. (2006). Multicriteria evaluation and public participation: the case of UK energy policy. Land Use Policy, 23(1), 53–62. doi:10.1016/j.landusepol.2004.08.007