Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis

FCN Working Paper No. 10/2016

47 Pages Posted: 8 Nov 2017

See all articles by Barbara Glensk

Barbara Glensk

RWTH Aachen University

Reinhard Madlener

RWTH Aachen University

Date Written: June 1, 2017


In this paper we develop a decision tool that is based on real options analysis and that supports flexibility investment decisions concerning conventional lignite-fired power plants. The value of the power plant is influenced both by technical and economic variables, the latter including subsidies. The four-step approach proposed allows to determine the optimal operation strategy in light of electricity and fuel price developments, to simulate the project value, to determine the binomial lattice of the expected project value, and finally to infer the optimal management decision (based on the option to choose). For the case of an existing lignite-fired power plant in Germany, we find that the plant can be operated profitably without any modifications until the end of its technical lifetime only if current government subsidies persist. In the absence of subsidies, however, it is preferable to stop operation immediately. The analysis also shows that profitable reinvestments in a number of flexibility retrofit measures are possible, the ranking of which depends, however, on the costs related to the retrofitting measures and their implementation time.

Keywords: real options, flexibility options, energy market, lignite-fired power plants

JEL Classification: Q40, Q48

Suggested Citation

Glensk, Barbara and Madlener, Reinhard, Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis (June 1, 2017). FCN Working Paper No. 10/2016, Available at SSRN: https://ssrn.com/abstract=3058070 or http://dx.doi.org/10.2139/ssrn.3058070

Barbara Glensk

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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