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Technology Choices for New Entrants in Liberalised Markets: The Value of Operating Flexibility and Contractual Arrangements

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  • Roques, F.A.

Abstract

New entrants in liberalised 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 most 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

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0759.

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Length: 24
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:cam:camdae:0759

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

Related research

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. Finon, D. & Roques, F., 2008. "Financing arrangements and industrial organisation for new nuclear build in electricity markets," Cambridge Working Papers in Economics 0850, Faculty of Economics, University of Cambridge.
  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. Jean-Michel Glachant & Adrien de Hauteclocque, 2009. "Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy," EUI-RSCAS Working Papers 6, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).

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