Incorporating Electricity Demand Dynamics into Capacity Expansion and Electrification Planning Models in Developing Countries: the Case

of Tanzania
Rhonda Jordan Engineering Systems Division, MIT Building E40-252, 77 Massachusetts Avenue, Cambridge, MA 02139-4307 917.915.0342 rjordan@mit.edu Abstract This paper describes an interdisciplinary approach to capacity expansion and electrification planning in developing countries over a medium to long-term horizon. It describes the development of an integrated simulation model that captures the interplay between social and technical factors in the system: the technical details of power grid operation and endogenous electricity demand dynamics (often left out of planning models) that result from social processes of technology diffusion. I use this model to simulate electric power system development and performance in the United Republic of Tanzania. Finally, this paper presents future research plans to utilize this holistic representation of the power system to inform electrification planning and to demonstrate the importance of incorporating electricity demand dynamics into capacity expansion models. Keywords: developing countries, electricity demand, capacity expansion, electrification planning Introduction There are an estimated 1.5 billion people without electricity; one quarter of the worlds population. In Africa alone, there are more than 500 million without access to modern energy services (UNDP and WHO 2009). The range of impacts electricity could have on their livelihoods is tremendous, and, while there is still debate surrounding the causal relationship between the provision of electricity and economic growth, access to electricity is agreed to be a necessary but not sufficient condition for economic development (Barnes 2007). As a result, national goals in most developing countries include developing the power system. Energy sector efforts in developing countries are broadly aimed at (1) increasing access to modern energy services and (2) improving the attributes of basic grid supply. This is a common challenge faced in developing countries around the world and also a complex one because of large-scale poverty and urbanization, limited resources, antiquated infrastructure, and elastic demand for electricity (Barnes 2007, Brown 1980). As Minister of Energy in a developing economy, you wonder: What are the tradeoffs between focusing on (1) increasing access as opposed to (2) improving supply? What are the impacts of such actions on the evolution of electricity adoption, the rate of electrification, equity and distribution of access, power company cash flow, government debt and power grid performance? I hypothesize that focus on improving access alone could cause the power system to enter a death spiral in which: the grid infrastructure will deteriorate and off-grid options will dominate the market; demand for new grid connections will saturate as the reliability of the power system declines; non-served demand will skyrocket; the investment needed to create an
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operational grid network will be more than what was required at the start of the time horizon to improve system reliability; and power company cash flow will decline over time. The concept of the grid death spiral was originally observed by K. Steel in 2008 when she found that there is a clear winner and dominant choice between grid & off-grid electrification in Kenya (Steel 2008). On the other hand, I hypothesize that focus on improving the basic attributes of power supply could result in a different dynamic process, in which there is a growing demand for grid connections; power company cash flow becomes positive by the end of the time horizon and will be in a relatively improved state from the previous case; infrastructure becomes more efficient as new capacity becomes operational; and electricity demand increases. I model the canonical decision problem of achieving national energy targets as (A) a choice of the level of investments in specified projects and (B) a choice of which policies and standards to implement within the sector. Electric power systems development is informed by the use of quantitative models, and researchers have used modeling to explore policy questions for decades. The literature includes a rich collection of models that address a variety of energy policy concerns for developed countries, including capacity expansion, improvement of operational performance, and the impact of fuel/technology mix on system performance (Momah 2001). However, such optimization planning models assume that electricity demand is an exogenous variable and, in the context of a developing country, this assumption may not be appropriate. In addition to the factors identified by Barnes and Brown, the effect of word of mouth on technological diffusion and the heavy reliance on kerosene, batteries and other more affordable off-grid sources of energy make forecasting the demand for electricity extremely difficult (Pandey 2002, Steel 2008). On the other hand, system dynamics models have, in the past, incorporated such social factors and represented electricity demand in developing countries as an endogenous variable. These models, however, lack the detailed representation of the power grid, which is critical in assessing capacity expansion needs. Thus, the use of (i) optimization planning models that represent the grid network but do not represent the complex dynamics of consumer demand in developing countries or (ii) simulation models that represent endogenous consumer dynamics but not the operation of the power grid may provide misleading results when used to inform planning. I hypothesize that incorporating electricity demand dynamics into traditional planning models will result in strategies leading to improved power system performance with respect to electricity adoption, the rate of electrification, equity and distribution of access, power company cash flow, government debt and power grid performance. Therefore, while my domain-specific research questions are: 1. What are the tradeoffs that exist between efforts (i.e., policies and investments) in developing countries aimed at improving the basic attributes of power supply versus those aimed at improving access to electricity? 2. In which projects and when should the Minister of Energy invest over time to reach national targets (electrification and grid capacity expansion projects are considered)? My overarching research questions are: 1. Is it possible to develop an integrated tool for sequential decision-making (within a system characterized by feedbacks and path dependencies) that incorporates elements of both traditional optimization (to represent technical power system operation) and system dynamics models (to capture electricity demand dynamics in developing countries)?
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2. What are the differences in results and advantages of integrating the two (simulation and decision analysis) methods? These research questions necessitate the development of (a) a simulation model that captures both the technical details of electric power grid operation as well as electricity demand dynamics in developing countries and (b) a tool for sequential decision-making that utilizes the simulation model of part (a) to determine a strategic investment plan that allows the nation to reach national energy targets. I will apply this tool to the electric power system in Tanzania over a 15 year time horizon and use it to answer the domain-specific questions above. The sections that follow outline existing power system models, detail the development of a simulation model, and propose methods to develop the decision-making framework. The paper will end with anticipated results and the expected contributions of this research. Multiple Perspectives on the Same Problem However a Gap Remains Major decisions dealing with the development of power systems are normally indicated through the use of models. Mathematical modeling, in particular, finds wide applications in this area due to the complexity of the problem-contexts. There are generally three major levels of model application: single-generation sites, local/municipality level, and the national level, and they can be used to explore short, medium, and long-term horizons (Normally short and mediumterm models address operational planning while long-term models address capacity expansion). Reports by Morch, Pandey and Garg, Ghosh, and Shukla provide an extensive review of the various state-of-the-art modeling tools and platforms utilized today. Here I will summarize and highlight the differences between the major modeling approaches. Macro-economic models focus on the energy sector as part of a national or international economy, and attempt to determine the consequences of policies based on macroeconomic feedback and market equilibrium across industry sectors. These models effectively characterize the impacts on economic growth, price feedback, and trade and represent macroeconomic interlinkages between aggregate production sectors of an economy, consumers, and the government, with endogenous representations of prices and demand elasticity (Pandey 2002). These models are generally computable general equilibrium models. GLOBAL2100 (Manne and Richels 1990) and EPPA are two examples of these types of model (Paltsev et al 2005). Another approach uses the system dynamics methodology. Overall, these models are used to assess macro-level policy analysis by simulating multiple feedbacks and the behavior of market agents, such as utilities and power companies, consumers, and government. For example, they are equipped to address capacity expansion planning (Coyle 1996), the impact of market measures and trade policies on economic cost and national emissions (Naill 1992), the impact of market structure, competition, and uncertainties on capacity investment, technology-mix and cost to consumers (Bunn, Larsen and Vlahos 1993), and regional utility conservation planning (Ford, Bull and Naill 1987). The time scales of these macro models are on the order of years; these models, however, are weak in their representation of technology and fuel details as they have greater aggregation. They are generally not well-suited for micro-level planning.
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On the other hand, there are models that take a detailed view of the technological resources and capabilities, end-use demand categories, and external constraints of the energy network. The Market Allocation (MARKAL) model (Berger, Haurie and Loulou 1987) and Long-range energy alternatives planning (LEAP) model (Raskin 1986) are two examples of this approach. Such models are used for: system dispatch, power flow using numerical method algorithms, optimal system operations like equal incremental cost-loading, medium to long-term capacity expansion, and improvement of voltage profile using reactive power resources (utilizing linear programming) (Momah 2001). The time scales of these models range from seconds to years; they minimize total discounted system costs and are solved using optimization techniques (Morch 2005). While these optimization models capture the technical detail needed to understand grid operation, they generally make simplified assumptions about demand growth (often treated as an exogenous variable) and determine the optimal action(s) to take given demand and supply. Social scientists have studied the factors impacting electricity demand in developing economies for decades (Louw et al 2008) and recent systems dynamics models have been used to characterize and capture such features of human behavior and endogenous electricity demand growth. In these models, the Bass Diffusion model, often used to model the spread of infectious disease and technology diffusion (Sterman 2000), is used to model electricity adoption. Once homes adopt electricity, consumer choice is captured using a conditional logit function to represent the boundedly rational weighing of the relative merits of electricity options (Steel 2008). The factors impacting consumer choice are price, unit costs of electricity, perceived reliability, backlog of customers awaiting supply, and perceived supply quality. After reviewing existing literature and state-of-the-art power system models, it is clear that there is no model that captures detailed power system operation and planning along with an endogenous representation of demand in developing countries. It is critical that annual power system operations (generator production, optimal power flow, unmet electricity demand throughout the network) are characterized in order to obtain a representative measure of grid reliability, which is a major factor impacting electricity consumption and the choice to connect to the grid. In turn, understanding the evolution of electricity demand is critical in order to ensure that power supply meets demand. This is a feedback loop that if omitted, could result in counterproductive investment strategies. In 2007, Dimitrovski, Ford and Tomsovic successfully combined system dynamics and optimization methods to simulate power plant construction in the WECC while capturing detailed transmission operation (Dimitrovski, Ford and Tomsovic 2007). This model indeed captures agent (supplier) behavior in a liberalized market and detailed power system operation but it does not capture consumer behavior. However, a similar approach will be utilized in this research to incorporate both the dynamics of customer behavior and the detailed operation of the electric power grid in Tanzania.

Strategic Planning: sequential decision-making As stated above, my research questions necessitate that I develop a sequential decisionmaking tool in order to determine the strategic investment plan that allows the Minster of Energy in Tanzania to meet national targets. There is very little literature that explores the combination of simulation and decision theory to determine strategy over time; however system dynamics has recently been combined with real options analysis for this sole purpose. Tan et al overcame the fundamental tradeoff of between detailed and dynamic complexity when evaluating risky projects by combining system dynamics and binomial tree approximation to evaluate wind power industry investments (Tan et al 2010). In the case of the Tanzania power system, however, system states cannot be combined as the evolution of the system depends on the decisions taken in the system over time. In short, this approach is not appropriate for the case under consideration because it does not handle path dependence. Osgood successfully encapsulated a system dynamics model within a dynamic programming framework for rapid strategy selection (Osgood 2005). Using his approach, a modeler uses a decision tree to incorporate choices, uncertainties, and consequences where the consequences are computed by a system dynamics model. This method indeed captures path dependence; unfortunately this method is not appropriate for problems suffering from the curse of dimensionality as the simulation model must be run many times to determine the value of each potential system evolution; in a case where there are 50 investment options that can happen each year for 15 years, the number of simulation runs must be 5015. Summary A thorough review of literature demonstrates the need to develop (1) a simulation model that incorporates both electricity demand dynamics and detailed power system operation as well as (2) a decision framework appropriate for problems with large dimensionality and path dependence. The development of this model and application to the Tanzania power system are the objectives of this research. Development of an Interdisciplinary Simulation Model The current research has developed an interdisciplinary model for simulation studies of the long-term performance of the electric power system in Tanzania. Tanzanias power system has been increasingly unable to meet the rapidly expanding power demand of a growing economy. Currently 10 percent of the population has access to electricity and the population and demand for electricity are expected to grow at approximate rates of 2.0% and 5% per annum, respectively (CIA 2010, Mwasumbi and Tzoneva 2007). Tanzania Electric Supply Company Limited (Tanesco), a vertically integrated commercial utility wholly owned by the government, is responsible for the generation, transmission, and distribution of electricity via the national grid. Understanding power system performance involves monitoring the evolution of electricity demand for both grid and off-grid resources (especially in such a poverty-stricken and budget constrained economy that relies on kerosene, biomass and dry cell batteries as substitutes), power grid operation (such as the production of generators and optimal power flow of electricity throughout the grid network), power company cash flow, and external resources required to supply electricity.

In order to represent this system, I developed a simulation model that consists of four major modules: (1) Regional Adoption & Customer Allocation (2) Electricity Demand Profiles (3) Power Grid Performance and (4) the Financial Model. Regional Adoption & Customer Allocation: This module consists of 6 subsystems (also called blocks). The Urbanization and Population Growth block keeps track of regional population growth due to birth and death processes as well as urbanization. The Adoption block captures the residential customer dynamics of each major region in Tanzania. The residential adoption block takes as input (i) Total Residential Households with Electricity (ii) Households without Electricity and (iii) the Total Population; using this information, I employ the Bass Diffusion model in equation [1] to determine the number of new households adopting electricity each year

where c is the contact rate of households, i is infectivity (ie the probability that an interaction will result in electricity adoption), A is the stock of customers who have already adopted electricity, P is the stock of potential adopters of electricity, and N represents the total number of households in the region. The Residential Attractiveness & Market Share block determines the indicated market share of each of the electricity options; it uses a logit choice function to determine the fraction of customers that will choose to purchase either a grid connection, a PV system, or a diesel generator. This subsystem takes as input: (i) grid reliability (ii) grid backlog ratio (the ratio of desired grid connections to the capacity of the power company to connect new customers), (iii) grid connection subsidy (if one exists) and (iv) per unit energy price paid by customers. Indicated share is determined as follows:

= /

-- [1]

where j is the factor impacting choice (capital cost, unit price, reliability, perceived backlog, quality of connection), i is the supply option, and Aij is the attractiveness of option i with respect to factor j. This subsystem outputs the fraction of electricity adopters choosing to connect to the grid, a single-user diesel generator, or a PV solar home system. The Residential Customer Allocation & Backlog block keeps track of the stock of grid, diesel, PV, and off-grid customers. This subsystem takes as input: electricity adopters, indicated market share for each option, and new electrification projects. Internally, the module will determine the number of grid connections that are made in the various regions in Tanzania; this is based on the capacity of the electric utility, Tanesco, to perform new connections. Tanescos capacity to connect new customers is currently 100,000 per year (Tanesco 2009). There can be no more connections than this limit (and obviously no less than zero). The customers who desire a grid connection but are not connected will go into a backlog of customers awaiting a
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-- [2] -- [3]

connection; we assume that they resort to kerosene and dry cell batteries to meet their electricity needs until they are connected. Industrial customers are treated as a separate population from the residential households. In 2008, Steel observed that the industrial customers in Kenya were extremely sensitive to grid reliability, there was the potential for them to switch multiple times between electricity sources, and that these customers are likely to split their consumption between several sources (Steel 2008). Therefore, I assume this to be true in Tanzania and model industrial consumers as units of energy instead of firms. The Industrial Choice block assumes no social dynamics and no questions of ability to pay. Growth in industrial electricity consumption is assumed to increase at the rate forecasted by Tanesco in the 2009 Power System Master Plan (here they consider industrial growth and the increase in mining activity over the next ten years) (Tanesco 2009). The indicated market share of industrial consumption is determined as prescribed by equations [2] and [3] above; however those factors impacting the industrial decision to be supplied by either the grid, off-grid diesel generator, or off-grid renewable is impacted by capital cost, the unit price of electricity and reliability. The Industrial Allocation block keeps track of those energy units met by the grid, off-grid diesel, or off-grid renewable sources. There is flow to and from each of the options to represent the potential of industrial consumers to switch between options to meet demand in a reliable and cost-effective manner. Electricity Demand Profiles Once regional adoption and customer allocation is determined for a single year, the energy units consumed by industrial consumers and the number of new and previously existing grid and off-grid customers is passed into this module to determine off-grid energy consumption and the overall electricity demand profile of grid customers.

400 350 300 250 200

kW

150 100 50 0 10:15 11:30 12:45 14:00 15:15 16:30 17:45 19:00 20:15 21:30 22:45 0:15 1:30 2:45 4:00 5:15 6:30 7:45 9:00 0:00

Hour

Figure 1. Average aggregate electricity consumption of 3500 residential customers in Peru 1

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Data provided by Julio Eisman Valdes, Director Gerente Fundacin Acciona Microenerga , on March 3, 2011

Lacking individual household electricity consumption patterns for residents in Tanzania posed a challenge; however, I utilized residential electricity demand data for households in rural Peru (see Figure1) to approximate demand profiles of customers in Tanzania. The electricity demand profile of residents in Peru matched the description provided by Tanesco of the typical daily load profile of residential customers, which is fairly constant through the day with an evening peak (except for Sundays which have both a morning and evening peak) (Tanesco 2009). The amplitude and peak demand values for single households were scaled using data specific to Tanzania. Guassian noise is added to the base profile to account for the fact that not each household turns on appliances at the same exact moment. As customers are connected to the national grid over each year, the demand profiles of new customers are aggregated and added to the demand of existing customers (which grows at a constant rate each year due to growth in GDP and an increase in productive use of energy). For off-grid customers, I assume that that each household with a diesel generator owns one of size 300W; for those households with solar home systems, I assume that each is served by a 50Wp solar panel (Steel 2008). The output of this module has two parts: (1) an estimate of the electricity consumed by off-grid customers and (2) an annual electricity demand profile of grid customers at each major node of power network. The grid demand profile of a single node is characterized by 72 blocks to account for electricity demand in each of 12 months, on weekdays and weekends, and during peak, shoulder, and off-peak load levels. Power Grid Performance The power grid performance module was created in General Algebraic Modeling System (GAMS). This module is a deterministic optimal power flow model (DC power flow) with block-wise unit commitment and network effects. It takes as input the newly installed generation and transmission capacity and the grid electricity demand profile to determine the power flow in each line of the transmission network as well as the level of production for each generator during every month, day type, and load level for the year. This module outputs total annual operational costs, annual electricity consumption, reliability, and total non-served energy. Financial Model This module keeps account of the monetary transactions occurring within the power system. It takes as input the following: operational (variable) costs of the grid, the number of new customers connected to the grid, diesel, and PV systems during the year, grid distribution costs for each region, annual electricity consumption (both grid and off-grid), new capacity investments, and new rural electrification investments. The module then determines and outputs the cash flow of the electric utility, total annual operational and investment costs, total expenditures of off-grid customers and the amount of external funding needed to operate the system. Equation [4] shows the elements of power company cash flow. = [ + ] [ + + & & + + + + + ] -- [4]

Power company cash flow is comprised of revenue from unit sales and connecting new customers. At the same time, Tanesco must pay variable operating and distribution costs as well as O&M fees to maintain the network. Tanesco will incur payroll costs and at the same time need to repay debt. There are also several taxes levied on the revenue stream. First, there is the
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official government tax, set at 20%, and an additional 3% tax on income from units sales that will be used to pay for rural electrification though the Rural Energy Agency. Finally, there are additional funds that are misallocated due to corrupt activity (Steel 2008). Software for a combined approach One of the main goals of this research is to develop a system of models (within a single simulation model) that illuminates the interactions among the actors and technical system operation within the Tanzanian power sector. In order to link the systems dynamics subsystems that capture electricity adoption and changing electricity demand to the GAMS power grid model, I explored two options: the Vensim simulation environment and Matlabs Simulink.
Total Populaiton + +

Potential Adopters

Adopters Adoption Rate ++ + +

Contact Rate

Adoption Fraction

Figure 2. Bass Diffusion Model implemented in Vensim

Figure 3. Bass Diffusion Model implemented in Simulink The Vensim environment emphasizes information feedback and icon-based modeling with a clear portrayal of the stocks and flows , and it allows one to call external functions during the simulation via a Dynamic Link Library (Dimitrovski, Ford and Tomsovic 2007). Simulink uses icon-based modeling as well; however emphasis is on explicit mathematical
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representation of the relations among the system variables (Dimitrovski, Ford and Tomsovic 2007). Simulink has been used widely throughout academia to represent the coupled set of firstorder differential equations because of its ease of use, versatility and large library of functions (Dimitrovski, Ford and Tomsovic 2007). Simulink allows one to call external functions using either the Embedded MATLAB functions or Embedded S-blocks (these blocks include MATLAB code that generates embeddable C code). Please see Figures 2 and 3 for depictions of two equivalent models, one in Vensim and the other in Simulink. Keeping in mind that the second phase of this research involves wrapping a decision analysis framework around the simulation model, I decided to build the simulation model using the Simulink software; MATLAB has available a large optimization and heuristic optimization library of tools for decision analysis. In order to call the power grid module from within Simulink, I created an Embedded MATLAB function block that makes system calls to the GAMS model. The complete Simulink model (block diagram shown in Figure 4) simulates power system operation for 15 years, calling the GAMS model once per year. It takes as input various investment decisions (such as investments in additional generating capacity or investments in pre-specified rural electrification projects); at each major time step (ie every year), the model produces the following information: number of grid customers, number of PV customers, number of diesel customers, electrification rate, grid operational (variable) costs, grid and offgrid electricity consumption, power company cash flow, grid reliability, and grid backlog ratio. This simulation model will allow me to address the following question: What are the tradeoffs that exist between efforts (ie policies and investments) in developing countries aimed at improving the basic attributes of power supply versus those aimed at improving access to electricity? The Challenge: a sequential decision-making framework Now that the simulation model is nearly complete, I hope to answer the following overarching and domain-specific research questions, respectively: (i) Is it possible to develop an integrated tool for sequential decision-making (within a system characterized by feedbacks and path dependencies) that incorporates elements of both traditional optimization (to represent technical power system operation) and system dynamics models (to capture electricity demand dynamics in developing countries)? (ii) In which projects and when should the Minister of Energy invest over time to reach national targets? These research questions require that I use the simulation model in conjunction with a decision analysis framework for long-term strategy selection. A review of existing literature has exposed very few methods used to address sequential decision-making in this type of complex system, one characterized by large dimensionality and path dependence. For the problem at hand, I can make any combination of investments in thirty rural electrification and grid capacity expansion projects each year (for 15 years) in order to maximize the objective function, which, in this case, is a weighted sum of the indicators of interest such as electrification rate and negative costs. In order to determine the optimal investment strategy, I will implement two heuristic optimization methods: (i) approximate dynamic programming (ADP) and (ii) a genetic algorithm

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ADP, also known as neuro-dynamic programming, or reinforcement learning, is a method of operations research used to solve sequential decision-making problems that suffer from the curse of dimensionality. Instead of visiting all states exhaustively, ADP steps forward through time and iteratively samples the states to improve the optimal policy (strategy) each time (Powell 2007). The genetic algorithm solves optimization problems by mimicking the principles of natural selection, repeatedly modifying the decision vector using principles of gene combination in biological reproduction. The decision vector (also called a solution vector) is a binary vector of 0s and 1s, where 1, in this case, indicates an investment in a pre-specified capacity expansion or electrification project. Figure 5 shows the decision vector of a problem with four investment options at each of three decision years. The decision vector is of length twelve and projects 2, 1 and 4 are selected for investment in years 1, 2, and 3, respectively.

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Figure 4. Simulation Model Diagram

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Figure 5. Sample Decision Vector of a Genetic Algorithm

Preliminary Results & Next Steps While the decision analysis frameworks have yet to be built, the simulation model is nearly complete. Preliminary model output demonstrates the following trends when observing the tradeoffs between investments focused solely on improved access versus those investments aimed at improving the basic attributes of supply:

0 0 Power Co Cash Flow (Million USD) -5 5 10 15 20

-10

-15

-20

-25 grid connection subsidy

Year generation capacity investments

Figure 6. Simulated power company cash flow 2010 2025 2

Values depicted in this figure are not representative of true cash flow levels of Tanesco over the time horizon. Simulation output used to observe trends.

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1 0.98 Reliability (dmnl) 0.96 0.94 0.92 0.9 0.88 0.86 0 5 10 Year grid connection subsidy generation capacity investments 15 20

Figure 7. Simulated grid reliability 2010 2025 3

200000 180000 160000 Number of Customers 140000 120000 100000 80000 60000 40000 20000 0 0 5 10 Year 15 20

total grid connections w/grid subsidy total grid connections w/new generating capacity total off-grid customers w/grid subsidy total off-grid customers w/new generating capacity

Figure 8. Simulated number of customers in the Tanzania power system 2010 2025 4

Values depicted in this figure are not representative of true reliability levels over the time horizon. Simulation output used to observe trends. 4 Values depicted in this figure are not representative of customer numbers over the time horizon. Simulation output used to observe trends.

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If investments are aimed at increasing electricity access via subsidized grid connections without improving and maintaining the attributes of power supply, grid reliability and power company cash flow will be less than that of the alternate case in which investments are aimed at increasing generating capacity of the power grid (as depicted in Figures 6, 7 and 8). Additionally, the gap between grid and off-grid connections in the case of the grid connection subsidy will become greater than the alternate case (ie the proportion of grid customers is lower in this case), with more customers choosing off-grid solutions due to the lower reliability of the grid. This is also attributed to the fact that the subsidy is offered to customers but this particular policy doesnt force residents to connect to the grid; they still maintain the option to choose an off-grid source of electricity. Finally, it is interesting to note that, regardless of whether the investments were aimed at increasing grid capacity or improving access, power company cash flow follows the same downward trend. Unless electricity tariffs are increased to cover the costs of supply or unless the government provides a great deal of bailout, power company cash flow will continue to decline. Once the decision analysis frameworks are incorporated, I will determine the importance of incorporating electricity demand dynamics (endogenous feedbacks) into capacity expansion planning. In order to compare capacity expansion planning with and without endogenous demand, I will perform the following steps: 1. Using the Regional Adoption and Customer Allocation module with the Electricity Demand Profiles module, I will calibrate constant measures of reliability, backlog ratio, and grid capital costs such that new connections and the existing base of customers lead to an overall average growth in grid electricity demand of 7.5%, the average electricity demand growth rate estimated in 2007 by Mwasumbi (Mwasumbi and Tzoneva 2007). Here I will assume a population growth rate of 2% and growth in GDP of 6.4% (CIA 2010). I will observe the number of new connections in each region over time and determine the corresponding grid electricity demand profiles. 2. Using the GAMS power system module (as described in the previous section) as well as the electricity demand profiles generated in step 1 (which result in a grid demand increase of 7.5% annually), I will perform capacity expansion in which I minimize total investment and operational costs while meeting growing demand. The output of this model will be a strategy of investments in new generation and transmission capacity the Base Strategy. 3. With the same population growth and GDP growth assumed in step 1, I will run the complete simulation model depicted in Figure 4 and impose the investments prescribed by the Base Strategy. I will observe the simulation model output, called Run 1 Indicators (adoption, number of new grid customers, electrification rate, electric grid operational and investment costs, grid and off-grid electricity consumption, power company cash flow, grid reliability, and grid backlog ratio). I will compare grid reliability, backlog ratio and number of new connections to those found during the calibration exercise of step 1. 4. With the same population growth and GDP growth assumed in step 1, I will run the complete simulation model encapsulated in a grid capacity expansion framework to determine the optimal strategy of investments in new generation and transmission capacity required to meet growing demand at minimum cost. The strategy prescribed by
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this run will be called Run 2 Strategy and I will observe those indicators monitored in step 3. 5. I will compare the Base Strategy to Run 2 Strategy to observe any differences in the prescribed investment strategies as well as the differences in output indicators. Conclusion & Expected Contributions While each module of the model developed in this research has been created to incorporate enough detail such that important dynamics are observed, each module can be built with fewer simplifying assumptions. For example, an agent-based model representing electricity demand dynamics will offer higher spatial resolution that can be used as input to a power grid model that represents distribution as well as generation and transmission. It is true that each model is indeed false as it cannot incorporate every aspect of reality; however, it will be important to know and understand the tradeoff between the level of detail incorporated into such models versus the time and computing power needed to simulate and solve them. Additionally, as numerous markets are becoming liberalized around the world, a model representing a more competitive electricity sector in the context of a developing country will be useful. Nevertheless, this research will have both academic and applied contributions. I hope to demonstrate a methodological approach to capacity expansion and electrification planning in East African countries. This approach will result in a strategic investment plan aimed at electrifying (over time) the country of interest. In this case study, I explore Tanzania, however there are a number of countries that have a similar power system structure and regulatory framework in place; I believe that this approach can be generalized and applied to other contexts as well. In 2008, Katherine Steel found that there is a clear winner and dominant choice between grid & off-grid electrification in Kenya. She identified the conditions leading to a death spiral of the grid and charged power system planners to (a) determine the end goal of the system and (b) determine and test policies that will generate development along that path. This research builds on (b). At the core of this research, I merge two generally separate modeling approaches for simulating the operation of a power system and, as a tool, to inform decision-making; I capture details of both consumer demand dynamics and power grid operation. In doing so, I am able to (1) extend the consideration of power system performance beyond a least-cost objective as I observe numerous indicators that are of interest to energy stakeholders in developing economies, (2) provide a platform to answer various domain-specific questions (such as exploring tradeoffs between investments in increased access versus improved supply), and (3) explicitly demonstrate the difference in and advantages of incorporating endogenous demand into capacity expansion models. This is important for two reasons. First, demand dynamics are often neglected to be considered when using traditional approaches to planning, which often reduce demand growth to a constant (an exogenous variable). This is a justified assumption when dealing with more developed countries; however, in the context of a developing country, residents are poverty
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stricken and highly sensitive to the price of electricity, the reliability of the grid, the backlog of customers awaiting service, and the initial cost to connect to the grid, among other factors (Steel 2008, Pandey 2002). Second, this research presents a unique class of complex problems that are commonly left unaddressed: sequential decision-making in systems with feedbacks and path dependency. In this research I will demonstrate how to formulate and solve this type of problem. Such a class of problems suffers from the curse of dimensionality, a situation in which exhaustively exploring the space of possible system outcomes would require large amounts of time and computing power. I use and explore two heuristic methods to solve this problem, genetic algorithms and approximate dynamic programming. Finally, the simulation results shown here are for illustration only. Although they are preliminary, the results point to some important conclusions that will be the focus of further study and policy analysis. The first insight is that increasing the electricity tariffs paid by customers may be required for the power company to have positive cash flow. Another important conclusion is that offering grid connection subsidies does not result in a tremendous increase in the grid electrification rate as consumers maintain the ability to choose off-grid options that may be more reliable or cost-effective. These results are important to the discussion of electrification planning and capacity expansion in developing countries. The tool developed in this research aims to support such policy analysis and strategic planning.

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