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A Real Options Model for the Disinvestment in Conventional Power Plants

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  • Barbara Glensk

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

  • Reinhard Madlener

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

Abstract

The liberalization of the energy markets and the merit order effect lead to difficulties in the operation even of modern, highly energy-effcient conventional power plants ('missing money problem'). Their operation often becomes unprofitable, so that sometimes the only remaining option is to liquidate the plant altogether. Decisions about further operation or shut-down can be supported by applying real options analysis. This approach has been used successfully for assessing investment projects in different sectors of the economy including the energy supply industry. In this paper, we develop a real options model for the disinvestment in conventional, fossil-fuelled power plants. Applying the proposed real options approach, we aim to determine the optimal timing for the shut-down of unprofitable gas-fired power plants as well as the probability level for all possible decisions. The results show that the decision and its probability value regarding continued operation, or the optimal timing for shutdown of the power plant, depend strongly on the volatility level of the capacity factor.

Suggested Citation

  • Barbara Glensk & Reinhard Madlener, 2015. "A Real Options Model for the Disinvestment in Conventional Power Plants," FCN Working Papers 9/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2015_009
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    References listed on IDEAS

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    1. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
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    4. Fontes, Dalila B.M.M., 2008. "Fixed versus flexible production systems: A real options analysis," European Journal of Operational Research, Elsevier, vol. 188(1), pages 169-184, July.
    5. Barbara Glensk & Reinhard Madlener, 2018. "Flexibility Options for Lignite-Fired Power Plants: A Real Options Approach," Operations Research Proceedings, in: Andreas Fink & Armin Fügenschuh & Martin Josef Geiger (ed.), Operations Research Proceedings 2016, pages 157-163, Springer.
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    11. Barbara Glensk & Reinhard Madlener, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
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    Cited by:

    1. Barbara Glensk & Reinhard Madlener, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Glensk, Barbara & Madlener, Reinhard, 2019. "The value of enhanced flexibility of gas-fired power plants: A real options analysis," Applied Energy, Elsevier, vol. 251(C), pages 1-1.
    3. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.

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    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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