A Framework Using Two-Factor Price Lattices for Generation Asset Valuation

• Published in: Operations research Vol. 55; no. 2; pp. 234 - 251
• Main Authors: Tseng, Chung-Li, Lin, Kyle Y
• Format: Journal Article
• Language: English
• Published: Linthicum, MD INFORMS 01.03.2007; Institute for Operations Research and the Management Sciences
• Subjects: Analysis; Applied sciences; Approximation; asset pricing; Dynamic programming; Electric power plants; Electric power production; Electricity; Electricity prices; energy; Exact sciences and technology; Expected values; finance; Fuels; Lattice theory; Market prices; Mathematical lattices; Mathematical moments; Methods; Natural gas; natural resources; Operational research and scientific management; Operational research. Management science; Portfolio theory; Power plants; real options; Real options analysis; Sensitivity analysis; Startup costs; Stochastic models; Studies; Valuation; United States; Branching; Natural resources; natural resources: energy; finance: asset pricing; Stochastic model; Electric power plant; Itô equation; Sensitivity analysis; Probabilistic approach; Finance; real options; Optimization; Lattice; Real option; Stochastic integral; Stochastic programming; Energy resources; Electrical network; Refining; Fuel; Pricing; Discrete time; Profit; Feasibility; Dynamic programming

In this paper, we use a real-options framework to value a power plant. The real option to commit or decommit a generating unit may be exercised on an hourly basis to maximize expected profit while subject to intertemporal operational constraints. The option-exercising process is modeled as a multist...