Modelling the underlying factors for flexible power plant valuation

Document Type

Article

Source of Publication

International Journal of Economics and Business Research

Publication Date

1-1-2019

Abstract

© 2019 Inderscience Enterprises Ltd. 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.

ISSN

1756-9850

Publisher

Inderscience Publishers

Volume

18

Issue

2

First Page

155

Last Page

172

Disciplines

Business

Keywords

CCGT, Combined cycle gas turbine, Electricity prices, Energy markets, Natural gas prices, Power plant valuation

Scopus ID

85086420111

Indexed in Scopus

yes

Open Access

no

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