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Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis

Author

Listed:
  • 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

In this paper we develop a decision tool that is based on real options analysis and that supports flexibility investment decisions concerning conventional lignite-fired power plants. The value of the power plant is influenced both by technical and economic variables, the latter including subsidies. The four-step approach proposed allows to determine the optimal operation strategy in light of electricity and fuel price developments, to simulate the project value, to determine the binomial lattice of the expected project value, and finally to infer the optimal management decision (based on the option to choose). For the case of an existing lignite-fired power plant in Germany, we find that the plant can be operated profitably without any modifications until the end of its technical lifetime only if current government subsidies persist. In the absence of subsidies, however, it is preferable to stop operation immediately. The analysis also shows that profitable reinvestments in a number of flexibility retrofit measures are possible, the ranking of which depends, however, on the costs related to the retrofitting measures and their implementation time.

Suggested Citation

  • Barbara Glensk & Reinhard Madlener, 2017. "Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis," FCN Working Papers 107/2016, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2016_107
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    Cited by:

    1. is not listed on IDEAS
    2. Julius Frieling & Reinhard Madlener, 2017. "Fueling the US Economy: Energy as a Production Factor from the Great Depression until Today," FCN Working Papers 2/2017, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Hendrik Schmitz and Reinhard Madlener, 2020. "Direct and Indirect Energy Rebound Effects in German Households: A Linearized Almost Ideal Demand System Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5), pages 89-118.

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    Keywords

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    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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