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Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty

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Author Info
Roques, F.A.
Nuttall, W.J.
Newbery, D.M.

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Abstract

This paper reviews the limits of the traditional ‘levelised cost’ approach to properly take into account risks and uncertainties when valuing different power generation technologies. We introduce a probabilistic valuation model of investment in three base-load technologies (combined cycle gas turbine, coal plant, and nuclear power plant), and demonstrate using three case studies how such a probabilistic approach provides investors with a much richer analytical framework to assess power investments in liberalised markets. We successively analyse the combined impact of multiple uncertainties on the value of alternative technologies, the value of the operating flexibility of power plant managers to mothball and de-mothball plants, and the value of mixed portfolios of different production technologies that present complementary risk-return profiles.

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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0650.

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Length: 31
Date of creation: Jul 2006
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Handle: RePEc:cam:camdae:0650

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Related research
Keywords: investment; uncertainty; Monte-Carlo simulation; operating flexibility;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
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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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. Marsiliani, Laura & Renstrom, Thomas I, 2000. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Economic Journal, Royal Economic Society, vol. 110(462), pages C123-38, March. [Downloadable!] (restricted)
  2. Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 107-129, Spring. [Downloadable!] (restricted)
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  1. 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. [Downloadable!]
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