SDM student helps DOE evaluate investment trade-offs - SDM Pulse Fall 2010

“The United States is, in fact, at a historical point where the nation’s energy innovation system is being examined, significantly expanded, and reshaped. As the country does this, it not only has a rare opportunity, but indeed a responsibility, to ensure that it improves the efficiency and effectiveness of this system to make sure that the country is getting the maximum payoff from its investments.”

                  —“Institutions for Energy Innovation:
                 A Transformational Challenge,” a report from
                 the Harvard Kennedy School, by Venkatesh
                 Narayanamurti, Laura D. Anadon, and
                 Ambuj D. Sagar

The Department of Energy (DOE) is in the process of making critical decisions under extreme uncertainty regarding the optimal size and shape of the nation’s public energy investment portfolio. Working with the DOE chief financial officer’s team through an independent study arrangement, SDM student Kacy Gerst had the opportunity to advise on the development of a large decision tool that will assist DOE leadership in evaluating complex investment trade-offs.

Kacy Gerst, SDM ’09, has been working to help the
US Department of Energy use systems thinking to make better
decisions about the nation’s energy portfolio.

These trade-offs address high-level questions within the DOE’s portfolio of programs and initiatives. Examples of trades investigated include: which would yield greater public benefit—a heavier investment in loan guarantees for nuclear energy generation or a larger investment in thin-film solar research and development (R&D); or which would have the greatest impact on US greenhouse gas emissions—greater funding for wind energy development or greater funding for carbon capture and sequestration R&D. Gerst’s research was guided by two knowledgeable research scientists working on tradespace exploration methodologies, Dr. Donna Rhodes and Dr. Adam Ross of MIT’s Systems Engineering Advancement Research Initiative (SEAri). Gerst’s work illuminated critical issues within the decision tool’s structure, as well as proposed methods for evolving the architecture to evaluate portfolio performance across changing futures.

A recent paper by Gerst, Rhodes, and Ross highlighted that as an organization broadens its investments—placing bets across market segments and technologies—it increases its vulnerability to market, technological, and political shifts, a risk that faces the Department of Energy. Given the DOE’s broad technology portfolio, which spans basic R&D to demonstration and deployment, investments are extremely susceptible to external policy, market, and technological disturbances. In fact, the only certainty is that such disturbances and context shifts will occur.

Several historic examples exist of market and policy shifts that dramatically affected the DOE’s ability to supply value to the public. One such example was the DOE’s investment in the Synthetic Fuels Corporation, a public-private entity that was charged with producing 500,000 barrels of oil per day by 1987. Initial cost-benefit estimates determined the investment to be economical in the static context of the day. However, when gasoline prices unexpectedly dropped, the external environment changed and the project became uneconomical. The investment decision was subsequently viewed by the public as a government boondoggle. A more robust initial analysis of possible changing futures as related to market dynamics, such as the impact of petroleum price variations, could potentially have prevented such an outcome.

Despite its place in a complex, changing environment, the results produced by the DOE’s current investment modeling approach will represent an evaluation conducted in terms of a static context. Yet it is critical for the DOE to have the ability to evaluate and select a portfolio of investments that performs robustly in the face of many possible futures. Gerst’s investigation focused on evolving the DOE’s current investment decision tool to allow for this type of scenario-based evaluation.

Using Epoch-Era Analysis methodology, developed by Ross and Rhodes, Gerst was able to make recommendations for the structural augmentation of the DOE’s decision tool. When fully applied, these enhancements will enable DOE leadership to visualize and evaluate portfolios of investments across changing needs and contexts.

According to MIT SEAri’s lead research scientist, Ross, “Epoch-Era Analysis incorporates a view of systems in the context of discrete time segments, similar to a movie composed of a series of static frames running in quick succession.” This snapshot depiction allows for the extension of a typical, static tradespace analysis to a dynamic analysis. A pictorial of viewing tradespace plots in a “movie real” format in shown in Figure 1.

Figure 1. Epoch-Era Analysis (Ross and Rhodes, 2008¹)

The investment decision tool being developed at the DOE is designed to create a portfolio optimized for the public good, as measured by utility, rather than maximum private profit. The proposed tool couples multi-attribute decision analysis methods with a global climate model, ultimately producing cost and utility trades between various investment portfolio configurations. To put it simply: the desirability of a portfolio of investments is calculated as a function of weighted benefits. Benefits, as determined by the DOE, include such things as greenhouse gas emissions reduced, jobs created, and barrels of oil saved. The value of those benefits, for each level of investment, is an output of a linked economy-energy-climate model. Portfolios with varying levels of technology investments can then be compared in a cost versus utility tradespace and the cost-utility efficient solutions identified and analyzed.

The DOE’s predicament is typical of government agencies that characteristically face highly dynamic funding and operating environments, but must frequently rely on decision making methods that do not perform well under extreme uncertainty. Gerst asserts that the proposed augmentation of the DOE’s decision tool with anticipatory analysis via applications of Epoch-Era Analysis will enable the DOE to better prepare possible responses and strategies in the face of a dynamic future.

SEAri has been evolving Epoch-Era Analysis in case applications from space, aerospace, and transportation systems. The research team looks forward to the opportunity to apply the method in other areas of the public sector. Meanwhile, Gerst is continuing to work with the Department of Energy’s Planning Analysis and Evaluation team on multifaceted strategic issues.

This article was contributed to the SDM Pulse by Donna H. Rhodes, PhD and principal research scientist; Adam Ross, PhD, SEAri lead research scientist, and Kacy Gerst, SDM ’09.

¹ Ross, A.M., and Rhodes, D.H., "Using Natural Value-centric Time Scales for Conceptualizing System Timelines through Epoch-Era Analysis," INCOSE International Symposium 2008, Utrecht, the Netherlands, June 2008