IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v285y2020i1p23-33.html
   My bibliography  Save this article

Structural estimation of switching costs for peaking power plants

Author

Listed:
  • Fleten, Stein-Erik
  • Haugom, Erik
  • Pichler, Alois
  • Ullrich, Carl J.

Abstract

We estimate costs associated with mothballing, restarting, abandoning and maintaining peaking power plants. We develop a real options model to explain switching and maintenance behavior of plant managers. The constrained optimization approach to estimate crucial costs accommodates non-parametric dynamics for the expectations of the plant managers regarding future profitability. The empirical analysis is based on the status of power plants reported annually to the United States Energy Information Administration (EIA) during 2001–2009. We arrive at economically meaningful estimates of maintenance costs and switching costs, and discuss these in light of rates used in the Pennsylvania-New Jersey-Maryland capacity market.

Suggested Citation

  • Fleten, Stein-Erik & Haugom, Erik & Pichler, Alois & Ullrich, Carl J., 2020. "Structural estimation of switching costs for peaking power plants," European Journal of Operational Research, Elsevier, vol. 285(1), pages 23-33.
    • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:23-33
    DOI: 10.1016/j.ejor.2019.03.031
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722171930270X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2019.03.031?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
    2. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    3. Bontemps, Christian & Robin, Jean-Marc & van den Berg, Gerard J, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 305-358, May.
    4. Elodie Guerre & I. Perrigne & Q.H. Vuong, 2000. "Optimal nonparametric estimation of first-price auctions [[Estimation nonparamétrique optimale des enchères au premier prix]]," Post-Print hal-02697497, HAL.
    5. Bansal, Ravi & Gallant, A. Ronald & Hussey, Robert & Tauchen, George, 1995. "Nonparametric estimation of structural models for high-frequency currency market data," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 251-287.
    6. Che‐Lin Su & Kenneth L. Judd, 2012. "Constrained Optimization Approaches to Estimation of Structural Models," Econometrica, Econometric Society, vol. 80(5), pages 2213-2230, September.
    7. Ullrich, Carl J., 2012. "Realized volatility and price spikes in electricity markets: The importance of observation frequency," Energy Economics, Elsevier, vol. 34(6), pages 1809-1818.
    8. Gamba, Andrea & Tesser, Matteo, 2009. "Structural estimation of real options models," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 798-816, April.
    9. Fleten, Stein-Erik & Haugom, Erik & Ullrich, Carl J., 2017. "The real options to shutdown, startup, and abandon: U.S. electricity industry evidence," Energy Economics, Elsevier, vol. 63(C), pages 1-12.
    10. Andrés Musalem & Marcelo Olivares & Eric T. Bradlow & Christian Terwiesch & Daniel Corsten, 2010. "Structural Estimation of the Effect of Out-of-Stocks," Management Science, INFORMS, vol. 56(7), pages 1180-1197, July.
    11. Whitney K. Newey & James L. Powell & Francis Vella, 1999. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Econometrica, Econometric Society, vol. 67(3), pages 565-604, May.
    12. King, Gary & Zeng, Langche, 2001. "Logistic Regression in Rare Events Data," Political Analysis, Cambridge University Press, vol. 9(2), pages 137-163, January.
    13. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    14. G. Atuncar & C. Dorea & C. Gonçalves, 2008. "Strong consistency of Kernel density estimates for Markov chains failure rates," Statistical Inference for Stochastic Processes, Springer, vol. 11(1), pages 1-10, February.
    15. Fleten, Stein-Erik & Näsäkkälä, Erkka, 2010. "Gas-fired power plants: Investment timing, operating flexibility and CO2 capture," Energy Economics, Elsevier, vol. 32(4), pages 805-816, July.
    16. Alberto Moel, 2002. "When Are Real Options Exercised? An Empirical Study of Mine Closings," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 35-64, March.
    17. Tong Li & Isabelle Perrigne & Quang Vuong, 2002. "Structural Estimation of the Affliated Private Value Auction Model," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 171-193, Summer.
    18. Keswani, Aneel & Shackleton, Mark B., 2006. "How real option disinvestment flexibility augments project NPV," European Journal of Operational Research, Elsevier, vol. 168(1), pages 240-252, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stein‐Erik Fleten, 2021. "Remarks on “Network Structure and Its Impact on Commodity Markets”," Production and Operations Management, Production and Operations Management Society, vol. 30(12), pages 4575-4576, December.
    2. Zhao, Xian & Chai, Xiaofei & Sun, Jinglei & Qiu, Qingan, 2021. "Joint optimization of mission abort and component switching policies for multistate warm standby systems," Reliability Engineering and System Safety, Elsevier, vol. 212(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lamy, Laurent, 2012. "The econometrics of auctions with asymmetric anonymous bidders," Journal of Econometrics, Elsevier, vol. 167(1), pages 113-132.
    2. Michele Fioretti, 2022. "Caring or Pretending to Care? Social Impact, Firms' Objectives, and Welfare (former title: Social Responsibility and Firm's Objectives)," SciencePo Working papers hal-03393065, HAL.
    3. Luo, Yao & Xiao, Ruli, 2023. "Identification of auction models using order statistics," Journal of Econometrics, Elsevier, vol. 236(1).
    4. Hu, Yingyao & McAdams, David & Shum, Matthew, 2013. "Identification of first-price auctions with non-separable unobserved heterogeneity," Journal of Econometrics, Elsevier, vol. 174(2), pages 186-193.
    5. Ying-Ying Lee, 2018. "Partial Mean Processes with Generated Regressors: Continuous Treatment Effects and Nonseparable Models," Papers 1811.00157, arXiv.org.
    6. Enache, Andreea & Florens, Jean-Pierre & Sbai, Erwann, 2023. "A functional estimation approach to the first-price auction models," Journal of Econometrics, Elsevier, vol. 235(2), pages 1564-1588.
    7. Timothy P. Hubbard & Rene Kirkegaard, 2015. "Asymmetric Auctions with More Than Two Bidders," Working Papers 1502, University of Guelph, Department of Economics and Finance.
    8. Sweeting, Andrew & Bhattacharya, Vivek, 2015. "Selective entry and auction design," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 189-207.
    9. Shneyerov, Artyom & Wong, Adam Chi Leung, 2011. "Identification in first-price and Dutch auctions when the number of potential bidders is unobservable," Games and Economic Behavior, Elsevier, vol. 72(2), pages 574-582, June.
    10. Gamba, Andrea & Tesser, Matteo, 2009. "Structural estimation of real options models," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 798-816, April.
    11. Muehlenbachs, Lucija, 2012. "Testing for Avoidance of Environmental Obligations," RFF Working Paper Series dp-12-12, Resources for the Future.
    12. Tong Li, 2005. "Econometrics of first-price auctions with entry and binding reservation prices," Journal of Econometrics, Elsevier, vol. 126(1), pages 173-200, May.
    13. Ian Fillmore, 2021. "Price Discrimination and Public Policy in the U.S. College Market," Working Papers 2021-028, Human Capital and Economic Opportunity Working Group.
    14. Lucija Muehlenbachs, 2015. "A Dynamic Model Of Cleanup: Estimating Sunk Costs In Oil And Gas Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 155-185, February.
    15. Li, Tong, 2010. "Indirect inference in structural econometric models," Journal of Econometrics, Elsevier, vol. 157(1), pages 120-128, July.
    16. Zheng, Xiaoyong, 2009. "Quantifying the cost of excess market thickness in timber sale auctions," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 553-566, September.
    17. Henderson, Daniel J. & List, John A. & Millimet, Daniel L. & Parmeter, Christopher F. & Price, Michael K., 2012. "Empirical implementation of nonparametric first-price auction models," Journal of Econometrics, Elsevier, vol. 168(1), pages 17-28.
    18. Lu, Jiaxuan, 2023. "The economics of China’s between-city height competition: A regression discontinuity approach," Regional Science and Urban Economics, Elsevier, vol. 100(C).
    19. Waisman, Caio, 2016. "Identification and estimation of discriminatory auctions when bidders have private values and singleton demand," Economics Letters, Elsevier, vol. 144(C), pages 1-3.
    20. Hickman Brent R. & Hubbard Timothy P. & Sağlam Yiğit, 2012. "Structural Econometric Methods in Auctions: A Guide to the Literature," Journal of Econometric Methods, De Gruyter, vol. 1(1), pages 67-106, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:23-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.