In this paper, we use the real options framework to value the operation flexibility of a power plant. The power plant operation is formulated as a multi-stage stochastic problem. We assume that there are hourly spot markets for both electricity and the fuel used by the generator, and that their prices follow some Ito processes. At each hour, the power plant operator must decide whether or not to run the unit so as to maximize expected profit. However, the unit operation is subject to decision lead times and minimum uptime and downtime constraints, so the commitment decision must take into account inter-temporal effects. In this paper, we present power asset valuation using discrete-time price trees for correlated price processes for both electricity and fuel, such as geometric mean reverting processes. With price trees, the valuation problem is solved using stochastic dynamic programming. Numerical results are also presented.
C. Tseng, "Exercising Real Unit Operational Options under Price Uncertainty," Proceedings of the IEEE Power Engineering Society Winter Meeting, 2000, Institute of Electrical and Electronics Engineers (IEEE), Jan 2000.
The definitive version is available at https://doi.org/10.1109/PESW.2000.850003
IEEE Power Engineering Society Winter Meeting, 2000
Engineering Management and Systems Engineering
Keywords and Phrases
Ito Processes; Commitment Decision; Correlated Price Processes; Costing; Decision Lead Times; Discrete-Time Price Trees; Dynamic Programming; Electricity; Expected Profit Maximisation; Fuel; Geometric Mean Reverting Processes; Hourly Spot Markets; Inter-Temporal Effects; Minimum Downtime Constraints; Minimum Uptime Constraint; Multi-Stage Stochastic Problem; Power Asset Valuation; Power Generation Economics; Power Generation Scheduling; Power Plant Operator; Power Stations; Price Uncertainty; Real Unit Operational Options; Stochastic Dynamic Programming; Stochastic Programming; Unit Operation
Article - Conference proceedings
© 2000 Institute of Electrical and Electronics Engineers (IEEE), All rights reserved.