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

Dominik Kryzia,Michał Kopacz,Katarzyna Kryzia

doi:10.3390/en13071567

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.

Highlights

The global energy sector is currently facing unprecedented changes associated with the rapid growth in energy demand, the development of new technologies, and the liberalization of energy markets, limiting monopoly and increasing competition
According to the expertise of the International Energy Agency (IEA) in the 21st century, fossil fuels will continue to be the main source of energy in most sectors of the economy around the world, in the electricity sector [1]
The aim of this paper is to measure the value of operational flexibility of cycle gas turbine (CCGT), its impact on the net present value (NPV), and its risk profile

Summary

Introduction

The global energy sector is currently facing unprecedented changes associated with the rapid growth in energy demand, the development of new technologies, and the liberalization of energy markets, limiting monopoly and increasing competition. According to the expertise of the International Energy Agency (IEA) in the 21st century, fossil fuels will continue to be the main source of energy in most sectors of the economy around the world, in the electricity sector [1]. Their acquisition and processing technologies will be improved. Energy companies are characterized by considerable flexibility and the possibility to control the structure and level of variable costs [2]. Power plants can be switched to other operating points, gaining more power with lower efficiency (and increasing the marginal costs)

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Conclusion