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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.

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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File URL: http://www.electricitypolicy.org.uk/pubs/wp/eprg0625.pdf
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Bibliographic 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
Date of revision:
Handle: RePEc:cam:camdae:0650

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

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

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References

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  1. 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.
  2. 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.
  3. Lisandro Abrego & Carlo Perroni, . "Investment Subsidies and Time-Consistent Environmental Policy," EPRU Working Paper Series 99-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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Cited by:
  1. Muñoz, José Ignacio & Sánchez de la Nieta, Agustín A. & Contreras, Javier & Bernal-Agustín, José L., 2009. "Optimal investment portfolio in renewable energy: The Spanish case," Energy Policy, Elsevier, vol. 37(12), pages 5273-5284, December.
  2. Sunderkötter, Malte & Weber, Christoph, 2012. "Valuing fuel diversification in power generation capacity planning," Energy Economics, Elsevier, vol. 34(5), pages 1664-1674.
  3. Roques, Fabien A., 2008. "Technology choices for new entrants in liberalized markets: The value of operating flexibility and contractual arrangements," Utilities Policy, Elsevier, vol. 16(4), pages 245-253, December.
  4. Madlener, Reinhard & Wenk, Christioph, 2008. "Efficient Investment Portfolios for the Swiss Electricity Supply Sector," FCN Working Papers 2/2008, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  5. Jamasb, Tooraj & Nuttall, William J. & Pollitt, Michael, 2008. "The case for a new energy research, development and promotion policy for the UK," Energy Policy, Elsevier, vol. 36(12), pages 4610-4614, December.

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