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Real options and the value of generation capacity in the German electricity market
Author(s) -
Hlouskova Jaroslava,
Kossmeier Stephan,
Obersteiner Michael,
Schnabl Alexander
Publication year - 2005
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2004.12.001
Subject(s) - electricity market , electricity , economics , profit (economics) , value (mathematics) , microeconomics , turbine , econometrics , business , computer science , engineering , mechanical engineering , machine learning , electrical engineering
In this paper we implement a real options model for the unit commitment problem of an electricity producing turbine in a liberalized market. The model accounts for various operating constraints of the turbine. Price uncertainty is captured by a mean reverting process with jumps and time‐varying means to account for seasonality. We demonstrate how the model can be used to value an electricity producing turbine, make profit‐maximizing commitment decisions and compute risk profiles of generating assets for risk management purposes.