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Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty

Fabien Roques (), William Nuttall () and David M Newbery ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper reviews the limits of the traditional ‘levelised cost’ approach to properly take into account risks and uncertainties when valuing different power generation technologies. We introduce a probabilistic valuation model of investment in three base-load technologies (combined cycle gas turbine, coal plant, and nuclear power plant), and demonstrate using three case studies how such a probabilistic approach provides investors with a much richer analytical framework to assess power investments in liberalised markets. We successively analyse the combined impact of multiple uncertainties on the value of alternative technologies, the value of the operating flexibility of power plant managers to mothball and de-mothball plants, and the value of mixed portfolios of different production technologies that present complementary risk-return profiles.

Keywords: investment; uncertainty; Monte-Carlo simulation; operating flexibility (search for similar items in EconPapers)
JEL-codes: C15 D81 L94 (search for similar items in EconPapers)
Pages: 31
Date: 2006-07
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-fmk
Note: IO
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