Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment

Stein-Erik Fleten and Erkka Näsäkkälä
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Stein-Erik Fleten: Norwegian University of Science & Technology
Erkka Näsäkkälä: Helsinki University of Technology

Finance from EconWPA

Abstract: We analyze investments in gas fired power plants under stochastic electricity and gas prices. We use a real options approach, taking into account the economic information in futures and forward prices. A simple but realistic two-factor model is used for price process, enabling analysis of the value of operating flexibility, the opportunity to sell and abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study, using real data, indicates that when the decision to build is considered, the plant’s flexibility and abandonment option do not have significant value.

Keywords: Real options; spark spread; gas fired power plant; forward prices (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2004-04-21
Note: Type of Document - pdf; pages: 29

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0404010

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