Investment in new power generation under uncertainty: Benefits of CHP vs. condensing plants in a copula-based analysis
AbstractIn this paper, we apply a spread-based real options approach to analyze the decision-making problem of an investor who has the choice between an irreversible investment in a condensing power plant without heat utilization and a plant with combined heat-and-power (CHP) generation. Our investigation focuses on large-scale fossil-fueled generation technologies and is based on a stochastic model that uses copula functions to provide the input parameters of the real options model. We define the aggregated annual spread as assessment criteria for our investigation since it contains all relevant volatile input parameters that have an impact on the evaluation of investment decisions. We show that the specific characteristics of CHP plants, such as additional revenues from heat sales, promotion schemes, specific operational features, and a beneficial allocation of CO2 allowances, have a significant impact on the option value and therefore on the optimal timing for investment. For the two fossil-fueled CHP technologies investigated (combined-cycle gas turbine and steam turbine), we conclude from our analysis that a high share of CHP generation reduces the risk exposure for the investor. The maximal possible CHP generation depends significantly on the local heat demand in the surroundings of the power plant. Considering this, the size of the heat sink available could gain more relevance in the future selection process of sites for new large-scale fossil power plants.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 34 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/eneco
Combined heat and power; Real options; Investment under uncertainty; Copula function;
Other versions of this item:
- Westner, Günther & Madlener, Reinhard, 2010. "Investment in New Power Generation under Uncertainty: Benefits of CHP vs Condensing Plants in a Copula-Based Analysis," FCN Working Papers 12/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
- C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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