Conventional Generation Asset Management with Renewable Portfolio Standards Using Real Options
- Carnegie Mellon Univ., Pittsburgh, PA (United States)
The transition to a more renewable generation mix under a competitive electricity market will require individual power producers to use sophisticated tools to value conventional generators. Owners will need to understand what market prices signal new investments, temporarily suspending operation, reactivating mothballed generators or permanently abandoning a plant. Net present valuation from a traditional discounted cash flow analysis is limited in capturing the value of generation technologies, and it does not provide an optimal investment criterion. We present and evaluate a closed-form decision support framework using a Spark Spread Real Options approach to value generation assets and to capture optimal market price signals that minimizes financial risks of individual power producers under a transition towards a more renewable energy fleet. We evaluate the Spark Spread options valuation for capital budgeting without capacity payments. As an example, for a fixed heat rate of 10,000 Btu/kWh and a combined electricity and fuel price annual volatility1 of 58%, the Spark Spread option valuation gives a positive value for a unit of installed generating capacity at electricity prices below $$\$$$$40/MWh. Given the same conditions, a traditional net present value (NPV) cash flow has no value for a unit of installed capacity for electricity prices below $$\$$$$40/MWh. Accounting for the inevitable volatility in electricity and fuel prices can allow firms to see more value in fossil plants than does the traditional approach.
- Research Organization:
- National Energy Technology Laboratory (NETL), Pittsburgh, PA, Morgantown, WV, and Albany, OR (United States)
- Sponsoring Organization:
- USDOE Office of Fossil Energy and Carbon Management (FECM); National Science Foundation (NSF)
- DOE Contract Number:
- FE0004000
- OSTI ID:
- 1556898
- Report Number(s):
- NETL/DOE--2013/1619
- Country of Publication:
- United States
- Language:
- English
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