Technology choices for new entrants in liberalized markets: The value of operating flexibility and contractual arrangements
AbstractNew 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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Bibliographic InfoArticle provided by Elsevier in its journal Utilities Policy.
Volume (Year): 16 (2008)
Issue (Month): 4 (December)
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Web page: http://www.elsevier.com/locate/inca/30478
Fuel and electricity price risks Monte Carlo simulation Operating flexibility;
Other versions of this item:
- Roques, F.A., 2007. "Technology Choices for New Entrants in Liberalised Markets: The Value of Operating Flexibility and Contractual Arrangements," Cambridge Working Papers in Economics 0759, Faculty of Economics, University of Cambridge.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
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