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Investment in New Power Generation under Uncertainty: Benefits of CHP vs Condensing Plants in a Copula-Based Analysis

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  • Westner, Günther

    () (E.ON Energy Projects GmbH)

  • Madlener, Reinhard

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

Abstract

In this paper, we apply a spread-based real options approach to analyze the decision-making problem of an investor who has the choice between an irreversible investment in a condensing power plant without heat utilization and a plant with combined heat-and-power (CHP) generation. Our investigation focuses on large-scale fossil-fueled generation technologies and is based on a stochastic model that uses copula functions to provide the input parameter of the real options model. We define the aggregated annual spread as assessment criteria for our investigation since it contains all relevant volatile input parameters that have an impact on the evaluation of investment decisions. We show that the specific characteristics of CHP plants, such as additional revenues from heat sales, promotion schemes, specific operational features, and a beneficial allocation of CO2 allowances, have a significant impact on the option value and therefore on the optimal timing for investment. For the two fossil-fueled CHP technologies investigated (combined-cycle gas turbine and steam turbine), we conclude from our analysis that a high share of CHP generation reduces the risk exposure for the investor. The maximal possible CHP generation depends significantly on the local heat demand in the surroundings of the power plant. Considering this, the size of the heat sink available could gain more relevance in the future selection process of sites for new large-scale fossil power plants.

Suggested Citation

  • Westner, Günther & Madlener, Reinhard, 2010. "Investment in New Power Generation under Uncertainty: Benefits of CHP vs Condensing Plants in a Copula-Based Analysis," FCN Working Papers 12/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  • Handle: RePEc:ris:fcnwpa:2010_012
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    Cited by:

    1. Mancarella, Pierluigi, 2014. "MES (multi-energy systems): An overview of concepts and evaluation models," Energy, Elsevier, vol. 65(C), pages 1-17.
    2. Bartela, Łukasz & Skorek-Osikowska, Anna & Kotowicz, Janusz, 2015. "An analysis of the investment risk related to the integration of a supercritical coal-fired combined heat and power plant with an absorption installation for CO2 separation," Applied Energy, Elsevier, vol. 156(C), pages 423-435.
    3. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
    4. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    6. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    7. Dahlgren, Eric & Leung, Tim, 2015. "An optimal multiple stopping approach to infrastructure investment decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 251-267.
    8. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    9. Wen, Xiaoqian & Wei, Yu & Huang, Dengshi, 2012. "Measuring contagion between energy market and stock market during financial crisis: A copula approach," Energy Economics, Elsevier, vol. 34(5), pages 1435-1446.
    10. Palzer, Andreas & Westner, Günther & Madlener, Reinhard, 2013. "Evaluation of different hedging strategies for commodity price risks of industrial cogeneration plants," Energy Policy, Elsevier, vol. 59(C), pages 143-160.
    11. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    12. Daniel Ziegler & Katrin Schmitz & Christoph Weber, 2012. "Optimal electricity generation portfolios," Computational Management Science, Springer, vol. 9(3), pages 381-399, August.

    More about this item

    Keywords

    Combined heat and power; Real options; Investment under uncertainty; Copula function;

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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