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

Author

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  • Glensk, Barbara

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Madlener, Reinhard

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

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.

Suggested Citation

  • Glensk, Barbara & Madlener, Reinhard, 2015. "Real Options Analysis of the Flexible Operation of an Enhanced Gas-Fired Power Plant," FCN Working Papers 11/2015, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2015_011
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    References listed on IDEAS

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    6. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
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    Cited by:

    1. Glensk, Barbara & Madlener, Reinhard, 2017. "Evaluating the Enhanced Flexibility of Lignite-Fired Power Plants: A Real Options Analysis," FCN Working Papers 107/2016, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    2. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
    3. Dominik Kryzia & Michał Kopacz & Katarzyna Kryzia, 2020. "The Valuation of the Operational Flexibility of the Energy Investment Project Based on a Gas-Fired Power Plant," Energies, MDPI, vol. 13(7), pages 1-16, March.

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    More about this item

    Keywords

    Real Options; Renewables; Gas-fired Power Plants; Flexibility; Energy Market;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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