A Real Options Model for the Disinvestment in Conventional Power Plants

FCN Working Paper No. 9/2015

37 Pages Posted: 6 Jan 2019

See all articles by Barbara Glensk

Barbara Glensk

RWTH Aachen University

Christiane Rosen

RWTH Aachen University, E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN)

Reinhard Madlener

RWTH Aachen University

Date Written: October 1, 2015

Abstract

The liberalization of the energy markets and the merit order effect lead to difficulties in the operation even of modern, highly energy-effcient conventional power plants ('missing money problem'). Their operation often becomes unprofitable, so that sometimes the only remaining option is to liquidate the plant altogether. Decisions about further operation or shut-down can be supported by applying real options analysis. This approach has been used successfully for assessing investment projects in different sectors of the economy including the energy supply industry. In this paper, we develop a real options model for the disinvestment in conventional, fossil-fuelled power plants. Applying the proposed real options approach, we aim to determine the optimal timing for the shut-down of unprofitable gas-fired power plants as well as the probability level for all possible decisions. The results show that the decision and its probability value regarding continued operation, or the optimal timing for shutdown of the power plant, depend strongly on the volatility level of the capacity factor.

Keywords: Real Options, Renewables, Gas-fired Power Plants, Flexibility, Energy Market

JEL Classification: C44, C61, D24, D89, L94, Q4

Suggested Citation

Glensk, Barbara and Rosen, Christiane and Madlener, Reinhard, A Real Options Model for the Disinvestment in Conventional Power Plants (October 1, 2015). FCN Working Paper No. 9/2015. Available at SSRN: https://ssrn.com/abstract=3305132 or http://dx.doi.org/10.2139/ssrn.3305132

Barbara Glensk

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Christiane Rosen

RWTH Aachen University, E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 10
Aachen, 52074
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+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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