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Structural estimation of switching costs for peaking power plants

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  • Fleten, Stein-Erik
  • Haugom, Erik
  • Pichler, Alois
  • Ullrich, Carl J.

Abstract

We estimate costs associated with mothballing, restarting, abandoning and maintaining peaking power plants. We develop a real options model to explain switching and maintenance behavior of plant managers. The constrained optimization approach to estimate crucial costs accommodates non-parametric dynamics for the expectations of the plant managers regarding future profitability. The empirical analysis is based on the status of power plants reported annually to the United States Energy Information Administration (EIA) during 2001–2009. We arrive at economically meaningful estimates of maintenance costs and switching costs, and discuss these in light of rates used in the Pennsylvania-New Jersey-Maryland capacity market.

Suggested Citation

  • Fleten, Stein-Erik & Haugom, Erik & Pichler, Alois & Ullrich, Carl J., 2020. "Structural estimation of switching costs for peaking power plants," European Journal of Operational Research, Elsevier, vol. 285(1), pages 23-33.
    • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:23-33
    DOI: 10.1016/j.ejor.2019.03.031
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    Cited by:

    1. Stein‐Erik Fleten, 2021. "Remarks on “Network Structure and Its Impact on Commodity Markets”," Production and Operations Management, Production and Operations Management Society, vol. 30(12), pages 4575-4576, December.
    2. Zhao, Xian & Chai, Xiaofei & Sun, Jinglei & Qiu, Qingan, 2021. "Joint optimization of mission abort and component switching policies for multistate warm standby systems," Reliability Engineering and System Safety, Elsevier, vol. 212(C).

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