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Technology choices for new entrants in liberalized markets: The value of operating flexibility and contractual arrangements

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Author Info
Roques, Fabien A.

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Abstract

New entrants in liberalized electricity markets which are not vertically integrated and do not operate a large and diversified portfolio of generation technologies are likely to favour technologies which offer the best prospects to manage fuel and electricity price risks through contractual arrangements and operating flexibility. Monte Carlo simulations of a discounted cash flow model of investment in combined cycle gas turbine (CCGT), coal and nuclear power plant are run to compare the impact of fuel and electricity price risks on these different technologies, as well as the value of operating flexibility and contractual hedges. In the absence of long-term fixed-price power purchase contracts, CCGT is the least risky option as its cash flow is "self-hedged" given the high correlation between electricity and gas prices observed in many markets. Moreover, the value associated with operating flexibility and arbitrage between gas and power market is greater for CCGT plant. This makes CCGT particularly attractive to new entrants.

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Publisher Info
Article provided by Elsevier in its journal Utilities Policy.

Volume (Year): 16 (2008)
Issue (Month): 4 (December)
Pages: 245-253
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Handle: RePEc:eee:juipol:v:16:y:2008:i:4:p:245-253

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Web page: http://www.elsevier.com/locate/inca/30478

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Keywords: Fuel and electricity price risks Monte Carlo simulation Operating flexibility;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feretic, Danilo & Tomsic, Zeljko, 2005. "Probabilistic analysis of electrical energy costs comparing: production costs for gas, coal and nuclear power plants," Energy Policy, Elsevier, vol. 33(1), pages 5-13, January. [Downloadable!] (restricted)
  2. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July. [Downloadable!] (restricted)
  3. Roques, F.A. & Nuttall, W.J. & Newbery, D.M., 2006. "Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty," Cambridge Working Papers in Economics 0650, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 27(1), pages 37-54.
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  7. Richard Green, 2007. "Carbon Tax or Carbon Permits: The Impact on Generators' Risks," Discussion Papers 07-02, Department of Economics, University of Birmingham. [Downloadable!]
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  8. Asche, Frank & Osmundsen, Petter & Tveteras, Ragnar, 2002. "European market integration for gas? Volume flexibility and political risk," Energy Economics, Elsevier, vol. 24(3), pages 249-265, May. [Downloadable!] (restricted)
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  9. Colpier, Ulrika Claeson & Cornland, Deborah, 2002. "The economics of the combined cycle gas turbine--an experience curve analysis," Energy Policy, Elsevier, vol. 30(4), pages 309-316, March. [Downloadable!] (restricted)
  10. Borison, Adam & Hamm, Greg, 2005. "Better Power Contracts: Using Flexibility to Increase Value," The Electricity Journal, Elsevier, vol. 18(10), pages 62-69, December. [Downloadable!] (restricted)
  11. David M. Newbery, 2008. "Climate Change Policy and Its Effect on Market Power in the Gas Market," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 727-751, 06. [Downloadable!] (restricted)
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  12. Spinney, Peter J & Watkins, G Campbell, 1996. "Monte Carlo simulation techniques and electric utility resource decisions," Energy Policy, Elsevier, vol. 24(2), pages 155-163, February. [Downloadable!] (restricted)
  13. Roques, F.A. & Nuttall, W.J. & Newbery, D.M. & de Neufville, R., 2005. "Nuclear Power: a Hedge against Uncertain Gas and Carbon Prices?," Cambridge Working Papers in Economics 0555, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  14. Johnston, A. & Amalia, A. & Neuhoff, K., 2007. "Take-or-pay contracts for Renewables Deployment," Cambridge Working Papers in Economics 0723, Faculty of Economics, University of Cambridge. [Downloadable!]
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  15. Watson, Jim, 2004. "Selection environments, flexibility and the success of the gas turbine," Research Policy, Elsevier, vol. 33(8), pages 1065-1080, October. [Downloadable!] (restricted)
  16. Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005. "Choice of nuclear power investments under price uncertainty: Valuing modularity," Energy Economics, Elsevier, vol. 27(4), pages 667-685, July. [Downloadable!] (restricted)
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  17. Soderholm, Patrik, 2001. "Fossil fuel flexibility in west European power generation and the impact of system load factors," Energy Economics, Elsevier, vol. 23(1), pages 77-97, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Finon, D. & Roques, F., 2008. "Financing arrangements and industrial organisation for new nuclear build in electricity markets," Cambridge Working Papers in Economics 0850, Faculty of Economics, University of Cambridge. [Downloadable!]
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