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Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty

  • Roques, F.A.
  • Nuttall, W.J.
  • Newbery, D.M.

This paper reviews the limits of the traditional ‘levelised cost’ approach to properly take into account risks and uncertainties when valuing different power generation technologies. We introduce a probabilistic valuation model of investment in three base-load technologies (combined cycle gas turbine, coal plant, and nuclear power plant), and demonstrate using three case studies how such a probabilistic approach provides investors with a much richer analytical framework to assess power investments in liberalised markets. We successively analyse the combined impact of multiple uncertainties on the value of alternative technologies, the value of the operating flexibility of power plant managers to mothball and de-mothball plants, and the value of mixed portfolios of different production technologies that present complementary risk-return profiles.

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File URL: http://www.electricitypolicy.org.uk/pubs/wp/eprg0625.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0650.

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Length: 31
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:cam:camdae:0650
Note: IO
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 107-129, Spring.
  2. Lisandro Abrego & Carlo Perroni, 2002. "Investment subsidies and Time-Consistent Environmental Policy," Oxford Economic Papers, Oxford University Press, vol. 54(4), pages 617-635, October.
  3. Marsiliani, Laura & Renstrom, Thomas I, 2000. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Economic Journal, Royal Economic Society, vol. 110(462), pages C123-38, March.
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