Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment
AbstractWe analyze investments in gas fired power plants under stochastic electricity and gas prices. We use a real options approach, taking into account the economic information in futures and forward prices. A simple but realistic two-factor model is used for price process, enabling analysis of the value of operating flexibility, the opportunity to sell and abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study, using real data, indicates that when the decision to build is considered, the plant’s flexibility and abandonment option do not have significant value.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0404010.
Length: 29 pages
Date of creation: 21 Apr 2004
Date of revision:
Note: Type of Document - pdf; pages: 29
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Real options; spark spread; gas fired power plant; forward prices;
Other versions of this item:
- Fleten, Stein-Erik & Näsäkkälä, Erkka, 2003. "Gas fired power plants: Investment timing, operating flexibility and abandonment," MPRA Paper 217, University Library of Munich, Germany, revised Jun 2006.
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-25 (All new papers)
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