Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant

FCN Working Paper No. 11/2015

50 Pages Posted: 6 Jan 2019

See all articles by Barbara Glensk

Barbara Glensk

RWTH Aachen University

Reinhard Madlener

RWTH Aachen University

Date Written: November 1, 2018


The promotion of electricity from renewable energies in Germany causes difficulties in the profitable operation of many modern conventional power plants. Nevertheless, fluctuating availability of power from renewable energy sources requires flexible conventional plants, i.e. power plants which are able to react fast to these fluctuations and whose start-up and shut-down optimization will help to reduce their running costs. In this paper, we describe various possibilities of enhancing the flexibility of conventional combined cycle gas-fired turbine (CCGT) power plants, which can be achieved by investing in additional technical components or by the upgrading of existing components. The irreversible character of these investments justifies the use of a real options approach. To this end, we present a real options model for the flexible operation of existing gas-fired power plants, taking into account both technical and economic aspects. The proposed model adopts and extends the approach of Deng and Oren (Prob Eng Info Sci, 2003, pp.155-181) to the gas-fired power plant regarding its different operation stages. Moreover, both the electricity price and the spark spread are used as a profitability indicator and source of uncertainty. The simplified definition of the power plant's operation strategy complements the presented model. In a case study, we consider several technical options to improve the minimum load and part-load efficiency by retrofitting a gas-fired power plant. The proposed procedure can help to assess the future role of conventional power plants and supports the decision-making process regarding both reinvestments and optimal operation of power plants. The introduced model can also be easily adapted to other power generation technologies, not only gas-fired power plants.

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

JEL Classification: C44, C63, D24, D89, L94, Q4

Suggested Citation

Glensk, Barbara and Madlener, Reinhard, Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant (November 1, 2018). FCN Working Paper No. 11/2015. Available at SSRN: or

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
Mathieustra├če 10
Aachen, 52074
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)


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