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

Barbara Glensk () and Reinhard Madlener
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Barbara Glensk: E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), http://www.fcn.eonerc.rwth-aachen.de/

No 107/2016, FCN Working Papers from 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.

Keywords: real options; exibility options; energy market; lignite-fired power plants (search for similar items in EconPapers)
JEL-codes: Q40 Q48 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2017-06-01
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Working Paper: Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2016_107

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