Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty
AbstractThis 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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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0650.
Date of creation: Jul 2006
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Web page: http://www.econ.cam.ac.uk/index.htm
investment; uncertainty; Monte-Carlo simulation; operating flexibility;
Find related papers by JEL classification:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-16 (All new papers)
- NEP-CMP-2006-09-16 (Computational Economics)
- NEP-ENE-2006-09-16 (Energy Economics)
- NEP-FMK-2006-09-16 (Financial Markets)
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