The Valuation of the Operational Flexibility of the Energy Investment Project Based on a Gas-Fired Power Plant

Abstract

This paper presents an attempt to the valuation of the operational flexibility of the energy investment project based on the example of combined cycle gas turbine (CCGT). For this purpose, the real options approach (ROA), net present value (NPV) method, and the Monte Carlo (MC) simulation have been used. Motivations to take up such a topic result from the fact that traditional valuation methods neglect flexibility embedded in CCGT assets. Operational flexibility was defined as the switching option to dynamically shut down and restart gas units. Valuation of the operational flexibility, the project’s extended net present value (XNPV), was based on a discounted cash flow model. The Monte Carlo simulation, allowing for better replication of the stochastic nature of market factors and some technical parameters, was introduced to the valuation model. The obtained results indicate that the value of the options significantly influences the NPV of the analyzed technology and its risk profile. The NPV was calculated at −169.1 million USD, while the XNPV amounted to 102.5 million USD. This difference, compared to the NPV distribution range at a significance level of 0.05, was more than 8.1% (almost 10.4% for α = 0.1). The results achieved help to explain the significance of the operational flexibility in the modeling profitability of CCGT technologies.

Pathways toward a Decarbonized Future—Impact on Security of Supply and System Stability in a Sustainable German Energy System

“…Figure 4 on the right shows the rule and the technologies that are applied. The model so far does not explicitly model operational flexibilities such as required time for restarts but this could be extended in future research, e.g., using an approach as described in Kryzia et al [42], including the real options approach, the net present value method, and Monte Carlo simulations.…”

Valuation of Decision Flexibility and Strategic Value in Coal Gasification Projects with the Option-To-Switch between Different Outputs

“…Then Abadie [30] continued their studies on valuation of an operating coal-fired power station and a natural gas with the use of switching options exercised in cases when the electricity price was higher than variable costs (emissions, fuel, operation and maintenance). An interesting concept on switching option concerning CCGT (shutting down and restarting of gas-fired blocks) was developed by Kryzia et al [31]. Other papers on fuel switch options were written lastly by Kujanpää and Pursiheimo [32] (switching from coal to biomass, natural gas to biomass, fuel oil to pyrolysis oil), Han et al [33] (replacing coal with alternative fuels-natural gas, biomass, oil, electric boilers), Ghoddusi [34] (option to change gasoline at times to crude oil), Elias et al [35], Fan et al [36], and other authors.…”

Power and Frequency Control in the National Power System of the 370 MW Coal Fired Unit Superstructured with a Gas Turbine

“…In [26] gas turbine power plant is analyzed among others for simultaneous production of electricity by combining steam Rankine cycle using heat recovery steam generator (HRSG) with presentation of economic and environmental benefits. In [27] the authors present an attempt to the valuation of the operational flexibility of the energy investment project based on the example of combined cycle gas turbine (CCGT). For this purpose, the real options approach (ROA), net present value (NPV) method, and the Monte Carlo (MC) simulation have been used.…”