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INCORPORATING OPERATIONAL CHARACTERISTICS AND START-UP COSTS IN OPTION-BASED VALUATION OF POWER GENERATION CAPACITY

Published online by Cambridge University Press:  27 February 2003

Shi-Jie Deng  and
Shmuel S. Oren
Shi-Jie Deng
Affiliation:
School of Industrial & Systems Engineering, Georgia Institute of Technology, Atlanta, GA 30332, E-mail: deng@isye.gatech.edu
Shmuel S. Oren
Affiliation:
Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, CA 94720, E-mail: oren@ieor.berkeley.edu
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Abstract

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We describe a stochastic dynamic programming approach for “real option”-based valuation of electricity generation capacity incorporating operational constraints and start-up costs. Stochastic prices of electricity and fuel are represented by recombining multinomial trees. Generators are modeled as a strip of cross-commodity call options with a delay and a cost imposed on each option exercise. We illustrate implications of operational characteristics on the valuation of generation assets under different modeling assumptions about the energy commodity prices. We find that the impacts of operational constraints on real asset valuation are dependent on both the model specification and the nature of operating characteristics.

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 17 , Issue 2 , April 2003 , pp. 155 - 181
Copyright
© 2003 Cambridge University Press