Valuing Flexibility: The case of an Integrated Gasification Combined Cycle Power Plant
AbstractIn this paper we analyze the valuation of options stemming from the flexibility in an Integrated Gasification Combined Cycle (IGCC) Power Plant. First we use as a base case the opportunity to invest in a Natural Gas Combined Cycle (NGCC) Power Plant, deriving the optimal investment rule as a function of fuel price and the remaining life of the right to invest. Additionally, the analytical solution for a perpetual option is obtained. Second, the valuation of an operating IGCC Power Plant is studied, with switching costs between states and a choice of the best operation mode. The valuation of this plant serves as a base to obtain the value of the option to delay an investment of this type. Finally, we derive the value of an opportunity to invest either in a NGCC or IGCC Power Plant, that is, to choose between an inflexible and a flexible technology, respectively. Numerical computations involve the use of one- and two-dimensional binomial lattices that support a mean-reverting process for the fuel prices. Basic parameter values refer to an actual IGCC power plant currently in operation.
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Bibliographic InfoPaper provided by Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I in its series IKERLANAK with number 2005-21.
Date of creation: Oct 2005
Date of revision:
Postal: Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
Other versions of this item:
- Abadie, Luis M. & Chamorro, José M., 2008. "Valuing flexibility: The case of an Integrated Gasification Combined Cycle power plant," Energy Economics, Elsevier, vol. 30(4), pages 1850-1881, July.
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G3 - Financial Economics - - Corporate Finance and Governance
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