Model Risk and Power Plant Valuation

28 Pages Posted: 4 May 2013

See all articles by Karl Bannor

Karl Bannor

Technische Universität München (TUM)

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science

Anna Nazarova

University of Oslo; University of Duisburg-Essen

Matthias A. Scherer

Technische Universität München (TUM)

Date Written: April 29, 2013

Abstract

We consider the model risk inherent in the valuation procedure of fossil power plants. To capture model risk we use risk-capturing functionals, a methodology recently established in a series of papers. As gas-fired power plants are seen as flexible and low-carbon sources of electricity which are important building blocks in terms of the switch to a low-carbon energy generation, we consider the model risk in this asset class in detail. Our findings reveal that spike risk is by far the most important source of model risk.

Keywords: Power Plant Valuation, Spread Options, Model Risk

JEL Classification: Q40, G13

Suggested Citation

Bannor, Karl and Kiesel, Ruediger and Nazarova, Anna and Scherer, Matthias A., Model Risk and Power Plant Valuation (April 29, 2013). Available at SSRN: https://ssrn.com/abstract=2259615 or http://dx.doi.org/10.2139/ssrn.2259615

Karl Bannor

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Ruediger Kiesel (Contact Author)

University of Duisburg-Essen - Faculty of Economic Science ( email )

Essen, 45117
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/

Anna Nazarova

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

Matthias A. Scherer

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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