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

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  • Roques, Fabien A.

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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Bibliographic 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

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Citations

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Cited by:
  1. D. Finon & F. Roques, 2008. "Financing Arrangements and Industrial Organisation for New Nuclear Build in Electricity Markets," Competition and Regulation in Network Industries, Intersentia, vol. 9(3), pages 247-282, September.
  2. Keyaerts, Nico & Hallack, Michelle & Glachant, Jean-Michel & D'haeseleer, William, 2011. "Gas market distorting effects of imbalanced gas balancing rules: Inefficient regulation of pipeline flexibility," Energy Policy, Elsevier, vol. 39(2), pages 865-876, February.
  3. Adrien de Hauteclocque & Jean-Michel Glachant, 2008. "Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy," Working Papers 0816, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.

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