A Real Options Model for Electricity Capacity Expansion

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dc.contributor.author GAHUNGU, Joachim
dc.contributor.author SMEERS, Yves
dc.date.accessioned 2012-02-24T16:53:46Z
dc.date.available 2012-02-24T16:53:46Z
dc.date.issued 2012
dc.identifier.issn 1028-3625
dc.identifier.uri http://hdl.handle.net/1814/20620
dc.description.abstract This paper proposes a real option capacity expansion model for power generation with several technologies that differ in operation and investment costs. The economy is assumed perfectly competitive and the instantaneous payoff accruing from the generation system is the instantaneous welfare defined as the usual sum of consumer and producer surplus. The computation of this welfare requires the solution of a multi- technology optimization problem and the obtained optimal function value is not additively separable in generation capacities, contrary to what is generally assumed in multi asset real option models to prove the optimality of a myopic behavior. Using the geometric Brownian motion as uncertainty driver we propose two regression models to approximate the instantaneous welfare. A first, additively separable approximation implies the optimality of myopia. The second approximation is non separable and hence forces to take myopic behavior as an assumption. Using myopia as an assumption, we propose a semianalytic method which combines Monte Carlo simulations (used to compute the value of the marginal capacity) and analytical treatment (to solve an optimal stopping problem on a regression scheme). en
dc.language.iso en en
dc.relation.ispartofseries EUI RSCAS en
dc.relation.ispartofseries 2012/08 en
dc.relation.ispartofseries Loyola de Palacio Programme on Energy Policy en
dc.subject Real options en
dc.subject capacity expansion en
dc.subject power investment en
dc.subject optimal dispatch en
dc.title A Real Options Model for Electricity Capacity Expansion en
dc.type Working Paper en


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