Variable Capacity Utilization, Ambient Temperature Shocks and Generation Asset Valuation

Chung-Li Tseng (), Wei Zhu () and Alexandre Dmitriev
Additional contact information
Chung-Li Tseng: Australian School of Business, The University of New South Wales
Wei Zhu: First Choice Power Inc.

No 2009-14, Discussion Papers from School of Economics, The University of New South Wales

Abstract: This paper discusses generation asset valuation in a framework where capital utilization decisions are endogenous. We use real options approach for valuation of natural gas fuelled turbines. Capital utilization choices that we explore include turning on/off the unit, operating the unit at increased firing temperatures (overfiring), and conducting preventive maintenance. Overfiring provides capacity enhancement which comes at the expense of reduced maintenance interval and increased costs of part replacement. We consider the costs and benefits of overfiring in attempt to maximize the asset value by optimally exercising the overfire option. In addition to stochastic processes governing prices, we incorporate an exogenous productivity shock: ambient temperature. We consider how variation in ambient temperature affects the asset value through its effect on gas turbine’s productivity.

Keywords: Electricity generation asset valuation; overfire option; price uncertainty (search for similar items in EconPapers)
JEL-codes: D81 Q40 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-11
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (1)

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Journal Article: Variable capacity utilization, ambient temperature shocks and generation asset valuation (2009)
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