Operating flexibility at power plants: A market valuation

This paper addresses the valuation of an operating coal-fired power plant and a natural gas power plant when they operate as base load, independently of margins, and when the plant is cycling, running only when the electricity price is higher than the variable costs (fuel, emissions and variable O&M). Three sources of risk are considered: electricity prices, the fuel used and carbon allowances. Parameters are calibrated with market data and well-known valuation techniques such as contingent claim analysis are used. The results show the importance of operating flexibility in the appraisal of power plants as a result of price volatility. The effect of setting an increasing floor for emission allowance prices is also analysed. The model used is a general one which includes the existence of correlations also obtained via market trading prices. (C) 2014 Elsevier Ltd. All rights reserved.