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Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment

Author

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  • Stein-Erik Fleten

    (Norwegian University of Science & Technology)

  • Erkka Näsäkkälä

    (Helsinki University of Technology)

Abstract

We analyze investments in gas fired power plants under stochastic electricity and gas prices. We use a real options approach, taking into account the economic information in futures and forward prices. A simple but realistic two-factor model is used for price process, enabling analysis of the value of operating flexibility, the opportunity to sell and abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study, using real data, indicates that when the decision to build is considered, the plant’s flexibility and abandonment option do not have significant value.

Suggested Citation

  • Stein-Erik Fleten & Erkka Näsäkkälä, 2004. "Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment," Finance 0404010, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0404010
    Note: Type of Document - pdf; pages: 29
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    References listed on IDEAS

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    5. Erkka Näsäkkälä & Stein‐Erik Fleten, 2005. "Flexibility and technology choice in gas fired power plant investments," Review of Financial Economics, John Wiley & Sons, vol. 14(3-4), pages 371-393.
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    Cited by:

    1. Sven-Olov Daunfeldt & Matilda Orth & Niklas Rudholm, 2010. "Opening Local Retail Food Stores: A Real-Options Approach," Journal of Industry, Competition and Trade, Springer, vol. 10(3), pages 373-387, September.

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    More about this item

    Keywords

    Real options; spark spread; gas fired power plant; forward prices;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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