Model Risk and Power Plant Valuation
28 Pages Posted: 4 May 2013
Date Written: April 29, 2013
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: Suggested Citation