IDEAS home Printed from https://ideas.repec.org/p/ris/fcnwpa/2015_009.html
   My bibliography  Save this paper

A Real Options Model for the Disinvestment in Conventional Power Plants

Author

Listed:
  • Glensk, Barbara

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Madlener, Reinhard

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

The liberalization of the energy markets and the merit order effect lead to difficulties in the operation even of modern, highly energy-effcient conventional power plants ('missing money problem'). Their operation often becomes unprofitable, so that sometimes the only remaining option is to liquidate the plant altogether. Decisions about further operation or shut-down can be supported by applying real options analysis. This approach has been used successfully for assessing investment projects in different sectors of the economy including the energy supply industry. In this paper, we develop a real options model for the disinvestment in conventional, fossil-fuelled power plants. Applying the proposed real options approach, we aim to determine the optimal timing for the shut-down of unprofitable gas-fired power plants as well as the probability level for all possible decisions. The results show that the decision and its probability value regarding continued operation, or the optimal timing for shutdown of the power plant, depend strongly on the volatility level of the capacity factor.

Suggested Citation

  • Glensk, Barbara & Madlener, Reinhard, 2015. "A Real Options Model for the Disinvestment in Conventional Power Plants," FCN Working Papers 9/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2015_009
    as

    Download full text from publisher

    File URL: http://www.fcn.eonerc.rwth-aachen.de/global/show_document.asp?id=aaaaaaaaabdbyyn
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Glensk, Barbara & Madlener, Reinhard, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Ihli, Hanna Julia & Maart, Syster Christin & Musshoff, Oliver, 2012. "Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124532, Agricultural and Applied Economics Association.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
    5. Feil, Jan-Henning & Musshoff, Oliver, 2013. "Investment, disinvestment and policy impact analysis in the dairy sector: a real options approach," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 159229, Humboldt University Berlin, Department of Agricultural Economics.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
    9. Fontes, Dalila B.M.M., 2008. "Fixed versus flexible production systems: A real options analysis," European Journal of Operational Research, Elsevier, vol. 188(1), pages 169-184, July.
    10. Barbara Glensk & Reinhard Madlener, 2018. "Flexibility Options for Lignite-Fired Power Plants: A Real Options Approach," Operations Research Proceedings, in: Andreas Fink & Armin Fügenschuh & Martin Josef Geiger (ed.), Operations Research Proceedings 2016, pages 157-163, Springer.
    11. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637, Decembrie.
    12. Oliver Musshoff & Martin Odening & Christian Schade & Syster Christin Maart-Noelck & Serena Sandri, 2013. "Inertia in disinvestment decisions: experimental evidence," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 40(3), pages 463-485, July.
    13. Peter Zweifel & Aaron Praktiknjo & Georg Erdmann, 2017. "Energy Economics," Springer Texts in Business and Economics, Springer, number 978-3-662-53022-1, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
    2. Glensk, Barbara & Madlener, Reinhard, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Glensk, Barbara & Madlener, Reinhard, 2019. "The value of enhanced flexibility of gas-fired power plants: A real options analysis," Applied Energy, Elsevier, vol. 251(C), pages 1-1.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glensk, Barbara & Madlener, Reinhard, 2017. "Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis," FCN Working Papers 107/2016, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Barbara Glensk & Reinhard Madlener, 2019. "Energiewende @ Risk: On the Continuation of Renewable Power Generation at the End of Public Policy Support," Energies, MDPI, vol. 12(19), pages 1-25, September.
    3. Glensk, Barbara & Madlener, Reinhard, 2019. "The value of enhanced flexibility of gas-fired power plants: A real options analysis," Applied Energy, Elsevier, vol. 251(C), pages 1-1.
    4. Mahmoud A. Eissa & Boping Tian, 2017. "Lobatto-Milstein Numerical Method in Application of Uncertainty Investment of Solar Power Projects," Energies, MDPI, vol. 10(1), pages 1-19, January.
    5. Schachter, J.A. & Mancarella, P., 2016. "A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 261-271.
    6. Lin, Boqiang & Wesseh, Presley K., 2013. "Valuing Chinese feed-in tariffs program for solar power generation: A real options analysis," Renewable and Sustainable Energy Reviews, Elsevier, vol. 28(C), pages 474-482.
    7. Glensk, Barbara & Madlener, Reinhard, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    8. Fabianek, Paul & Glensk, Barbara & Madlener, Reinhard, 2021. "A Sequential Real Options Analysis for Renewable Power-to-Hydrogen Plants in Germany and California," FCN Working Papers 1/2021, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    9. Fleten, Stein-Erik & Linnerud, Kristin & Molnár, Peter & Tandberg Nygaard, Maria, 2016. "Green electricity investment timing in practice: Real options or net present value?," Energy, Elsevier, vol. 116(P1), pages 498-506.
    10. Martín-Barrera, Gonzalo & Zamora-Ramírez, Constancio & González-González, José M., 2016. "Application of real options valuation for analysing the impact of public R&D financing on renewable energy projects: A company′s perspective," Renewable and Sustainable Energy Reviews, Elsevier, vol. 63(C), pages 292-301.
    11. Pringles, Rolando & Olsina, Fernando & Penizzotto, Franco, 2020. "Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method," Renewable Energy, Elsevier, vol. 151(C), pages 846-864.
    12. Kim, Amy M. & Li, Huanan, 2020. "Incorporating the impacts of climate change in transportation infrastructure decision models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 134(C), pages 271-287.
    13. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    14. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    15. Gordon G. Sollars & Sorin Tuluca, 2012. "The Optimal Timing of Strategic Action – A Real Options Approach," Journal of Entrepreneurship, Management and Innovation, Fundacja Upowszechniająca Wiedzę i Naukę "Cognitione", vol. 8(2), pages 78-95.
    16. Dapena, Jose Pablo, 2003. "On the Valuation of Companies with Growth Opportunities," Journal of Applied Economics, Universidad del CEMA, vol. 6(1), pages 1-24, May.
    17. Geoffrey Poitras & John Heaney, 2015. "Classical Ergodicity and Modern Portfolio Theory," Post-Print hal-03680380, HAL.
    18. Jacco Thijssen, 2008. "A computational study on general equilibrium pricing of derivative securities," Annals of Finance, Springer, vol. 4(4), pages 505-523, October.
    19. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    20. Cuypers, I.R.P., 2009. "Essays on equity joint ventures, uncertainty and experience," Other publications TiSEM 8dc79e86-c625-467f-a450-8, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Real Options; Renewables; Gas-fired Power Plants; Flexibility; Energy Market;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:fcnwpa:2015_009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hendrik Schmitz (email available below). General contact details of provider: https://edirc.repec.org/data/fceonde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.