Real Options Approach to Investment in Base Load Coal Fired Plant

Abstract

Using real options framework I analyze investment in base load coal fired power plant. Analysis is done using real options framework and assuming option to invest is a perpetual American option. I assume profitability of the power plant depends upon the value of dark spread. The paper has two objectives. First, to determine the most appropriate stochastic process to model evolution of dark spread prices. Second, to asses how does the choice of stochastic processes affect investment decision within the real options framework.

Keywords: real options, electricity generation, dark spread

JEL Classification: C13, G31, Q4