Title: Modelling the underlying factors for flexible power plant valuation

Authors: Aristeidis Samitas; Aggelos Armenatzoglou; Ioannis Kinias; Stathis Polyzos

Addresses: College of Business, Zayed University, P.O. Box 144534, Abu Dhabi, United Arab Emirates ' Department of Business Administration, Business School, University of the Aegean, 8 Michalon Str, Chios, 82100, Greece ' Department of Business Administration, Business School, University of the Aegean, 8 Michalon Str, Chios, 82100, Greece ' College of Business and Economics, United Arab Emirates University, P.O. Box 15551, Al Ain, United Arab Emirates

Abstract: In this article the value of a gas fired power plant is estimated through the decision of the power plant's operator to produce electricity. Spark spread options are used as a tool for cash flow evaluation, based on simulated electricity and natural gas prices. We choose to model electricity spot prices through the Schwartz-Smith two factor model and natural gas prices through a mean reverting model. Special characteristics of the plant are those of a typical combined cycle gas turbine power plant, which incorporates flexible and efficient technology. Decisions concerning at starting and running the power plant are made daily and for this reason, plant evaluation is crucial for power plant owners and potential investors. Moreover, investments in installing capacity are extremely costly, making the proper evaluation of the investment vital. We calculate annual profits under different cost scenarios and finding a more than 50% profit decrease when incorporating capacity factors.

Keywords: energy markets; electricity prices; natural gas prices; power plant valuation; combined cycle gas turbine; CCGT.

DOI: 10.1504/IJEBR.2019.101308

International Journal of Economics and Business Research, 2019 Vol.18 No.2, pp.155 - 172

Received: 25 Oct 2017
Accepted: 21 Jul 2018
Published online: 31 Jul 2019 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article