Erik R. Larsen

From planning to strategy in the electricity industry

Abstract As more utility markets are deregulated and competition is introduced, there is an increasing need to understand how the planning methods used under monopoly have to change to take the new deregulated environment into account. Although this might seem relatively trivial, it has been a major problem for a large number of utilities which have continued using the same planning approaches that they used when they were monopolies. In this paper, we first describe the environment which, under monopoly conditions, gave rise to the use of mainly operational research methods for planning. We then argue that deregulation has changed the fundamental assumptions, making the planning methods used under monopoly less useful after deregulation. Finally, we review a number of methods that utilities should consider using when they formulate strategy in deregulated markets.

Interacting Locally and Evolving Globally: A Computational Approach to the Dynamics of Organizational Populations

We present a computational model of organizational evolution according to which the global dynamics of organizational populations emerge from simple rules of local interaction among individual orga...

Complex behaviour in a production-distribution model

Abstract The purpose of this paper is to show how the cascaded structure of a production–distribution chain can produce a wide variety of dynamic behaviours. Despite the apparent simplicity of the chain, the bounded rationality of human decision making interferes with the information feedbacks, nonlinearities and time delays of the system to produce exceedingly complex behaviour. When simulated with realistic parameter values, the model can exhibit stationary periodic, quasiperiodic as well as chaotic and hyperchaotic motions. Lyapunov exponents are used to characterize the different types of behaviour. Repeated simulation reveals how the profile of operating cost is related to the modes of behaviour and to the conditions that generate chaos. Detailed maps of parameter space graphically show the influence of inventory control policies upon dynamics and costs. The analyses illustrate why it is so difficult for decision makers to “navigate” in low-cost policy parameter regions. Suggestions are made for decision heuristics that avoid high-cost, unstable solutions.

Adaptive Learning in Organizations: A System Dynamics-Based Exploration

This paper employs a system dynamics-based framework to examine the limitations of experiential learning as a guide for decision-making in organizations. This framework departs from the more traditional approach to modelling experiential learning processes in organizations by emphasizing the systematic interaction between decision-making agents and their environments, rather than the effects of varying degrees of noise on performance. We present the results of a series of computer simulations that examined the consequences of adaptive learning in organizations by concentrating explicitly on the link between individual decisions and the system-level consequences generated by the interaction of individual choices. The results show that experience is a poor basis for learning primarily because the understanding of structural relations between individual actions and their aggregate consequences is confounded by nonlinear dynamics, time delays, and misperception of feedback.

Representing change: a system model of organizational inertia and capabilities as dynamic accumulation processes

Abstract Using system dynamics models and methods, in this paper we suggest a feedback representation of the ecological theory of organizational inertia and change. The paper pursues two main objectives related to the representation and specification of organizational theories. The first is to identify and specify dynamic elements that are left implicit in the original theoretical narrative. The second objective is to explore conceptual connections between core features of ecological and evolutionary theories of organizations that are typically believed to lead to incommensurable empirical models. We perform a series of simple simulation experiments to explore the behavioral consequences of our representations and identify issues that future research on dynamics of organizations may help to clarify. The main insight offered by our model-based exploration is that organizational inertia––defined as the tendency of formal organizations to resist change––and organizational capabilities––defined as the ability of organizations to innovate and reconfigure their internal resources––should be represented as paired concepts, each understandable only in terms of the other.

Improving firm performance in out-of-equilibrium, deregulated markets using feedback simulation models

Abstract Deregulation has reshaped the utility sector in many countries around the world. Organisations in these deregulated industries must adopt new policies which guide strategic decisions, in an uncertain and unfamiliar environment, that determine the short- and long-term fate of their companies. Traditional economic equilibrium models do not adequately address the issues facing these organisations in the shift towards deregulated market competition. Equilibrium assumptions break down in the out-of-equilibrium transition to competitive markets, and therefore different underpinning assumptions must be adopted in order to guide management in these periods. Simulation models incorporating information feedback through behavioural policies fill the void left by equilibrium models and support strategic policy analysis in out-of-equilibrium markets. As an example, we present a feedback simulation model developed to examine firm and industry level performance consequences of new generation capacity investment policies in the deregulated UK electricity sector. The model explicitly captures behavioural decision policies of boundedly rational managers and avoids equilibrium assumptions. Such models are essential to help managers evaluate the performance impact of various strategic policies in environments in which disequilibrium behaviour dominates.

Systems Modelling for Energy Policy.

Partial table of contents: Systems Modelling for Energy Policy (D. Bunn & E. Larsen). The IDEAS Model and Its Use in Developing the US Climate Change Action Plan (F. Wood & J. Geinzer). Benefits from Electricity Trade in Northern Europe under CO2 Constraints (T. Larsson). Application and Limitations of Annual Models for Electricity Capacity Development (P. Grohnheit). The Economics of the CO2 Problem: What About the Supply Side? (J. Blank & W. Strobele). The Changing Role of Simulation Models: The Case of the Pacific Northwest Electric System (A. Ford). Complementary Modelling Approaches for Analysing Several Effects of Privatization on Electricity Investment (D. Bunn, et al.). Index.

Lessons from deregulation in Colombia: successes, failures and the way ahead

We analyze and evaluate the evolution of the deregulated market for electricity in Colombia in the period from 1995, when deregulation took place, to 2002. The case of Colombia is of particular interest as it is one of the most open markets in the developing world as well as being predominantly based on hydroelectrical technology. Furthermore, Colombia has had no blackouts since deregulation, in contrast to a number of neighboring countries, even though Colombia has had periods with severe adverse weather conditions. Colombia has so far managed to adjust the regulatory environment to keep investment at a reasonable level. Finally, we discuss the prospects for the Colombian system over the next 5 years.

Modelling latent market power across gas and electricity markets

The restructuring of energy utilities into new competitive markets is a worldwide fashion of the 1990s. As a consequence, managers must learn to operate in competitive systems for which they have no experience and government agencies must begin to regulate markets where economic analogies may have limited relevance. For markets in transition, where strategic imbalances exist, system dynamics has a useful role to play in developing a better understanding of processes which might shape their evolution. In this paper we develop some insight into the market power which a dominant electricity generator might achieve from its size and ability to trade in both the electricity and gas spot markets. By selectively choosing to sell some gas, rather than generate electricity, a large diversified power company can increase the price of electricity obtained with the rest of its plant, earn returns on the gas sold and also increase the volatility in the spot markets, which should subsequently increase the returns on hedging contracts. The application is to the British case, but the implications are much wider.

Things Change: Dynamic Resource Constraints and System-Dependent Selection in the Evolution of Organizational Populations

An extensive empirical literature has demonstrated the existence of density-dependent selection in organizational vital rates. This research has also shown that historical trajectories followed by organizational populations only partly conform to the predictions of the original model. Inconsistencies with the models predictions prompt a series of questions: Why do organizational populations suddenly collapse after reaching a peak? Why do organizational populations oscillate after collapsing? What causes extinction of organizational forms? To address these questions, scholars have proposed a variety of modifications to the original model of density dependence. All have merit, but none is completely satisfying. The main objective of this study is to narrow the gap between theories, models, and observed historical trajectories by identifying a unitary analytical framework that can account for the variety of empirical trajectories typically followed by mature organizational populations. The model that we present is based on the hypothesis of system-dependent selection, according to which patterns of resource availability are produced by processes that are partly endogenous to organizational populations. The main analytical insight of the study is that under conditions of dynamic resource constraints introduced by system-dependent selection, the presence of population-level inertia leads to a rich variety of historical trajectories during population maturity. We show that this result holds in the absence of any particular assumption about the microstructure of organizational populations. Possible trajectories include sustained oscillations, resurgence, and extinction.