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Modelling the underlying factors for flexible power plant valuation

Author

Listed:
  • Aristeidis Samitas
  • Aggelos Armenatzoglou
  • Ioannis Kinias
  • Stathis Polyzos

Abstract

In this article the value of a gas fired power plant is estimated through the decision of the power plant's operator to produce electricity. Spark spread options are used as a tool for cash flow evaluation, based on simulated electricity and natural gas prices. We choose to model electricity spot prices through the Schwartz-Smith two factor model and natural gas prices through a mean reverting model. Special characteristics of the plant are those of a typical combined cycle gas turbine power plant, which incorporates flexible and efficient technology. Decisions concerning at starting and running the power plant are made daily and for this reason, plant evaluation is crucial for power plant owners and potential investors. Moreover, investments in installing capacity are extremely costly, making the proper evaluation of the investment vital. We calculate annual profits under different cost scenarios and finding a more than 50% profit decrease when incorporating capacity factors.

Suggested Citation

  • Aristeidis Samitas & Aggelos Armenatzoglou & Ioannis Kinias & Stathis Polyzos, 2019. "Modelling the underlying factors for flexible power plant valuation," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 18(2), pages 155-172.
    • Handle: RePEc:ids:ijecbr:v:18:y:2019:i:2:p:155-172
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