The value of enhanced flexibility of gas-fired power plants: A real options analysis

Abstract

The promotion of electricity from renewable energies in Germany causes difficulties in the profitable operation of many modern conventional power plants. Also, fluctuating availability of power from renewable energy sources requires flexible conventional plants, i.e. power plants which are able to react fast to these fluctuations. In this paper, we propose a model which provides some decision support tool for the operators of conventional power plants regarding investments in technical upgrades aimed at enhancing the flexible operation of these power plants. Because of the irreversible character of the investments considered we apply a real options approach to the gas-fired power plant investigated. We compare the electricity price and the spark spread as profitability indicators and sources of uncertainty, and use a simplified 3-stage definition of the power plant’s operation strategy. In a case study for a combined cycle gas-fired turbine plant recently built in Germany, we find that the retrofit decisions depend strongly on economic parameters, such as the level of the operation and maintenance costs, as well as the enabled longer operation time on the maximum level. The proposed procedure can help to assess the expected future profitability role of conventional power plants, and supports the decision-making process regarding both reinvestments and optimal operation of power plants in markets with high shares of variable renewables.