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The value of gas-fired power plants in markets with high shares of renewable energy


Hörnlein, Lena (2019). The value of gas-fired power plants in markets with high shares of renewable energy. Energy Economics, 81:1078-1098.

Abstract

Using a real options model, this paper quantifies a gas-fired power plant’s operating value and the value of a new investment against the background of a market transition to renewable electricity. The model is run with recent data for Germany’s power sector and for different types of gas-fired power plants.
The result is twofold. First, the paper achieves a more realistic value by improving on existing models: it models electricity and gas prices as a two-dimensional stochastic process, each component consisting of the sum of a seasonal pattern and a mean-reverting process; it uses high granularity by modelling hourly time-steps; and it incorporates power plant ramping times and costs. Second, it compares two types of power plant models, one with daily and one with hourly operating decisions, and thereby quantifies the value of a plant’s intraday flexibility. The hourly model replicates operators’ and investors’ decision making accurately. This is evidenced by the fact that the results trace current major developments like the recent decline and come-back of gas-fired generation in Germany.
The paper contributes to a better understanding of the choices operators and investors face in current electricity markets. In the absence of large scale storage solutions flexible supply of electricity, as provided by gas, is important in the transition to renewable energies in Germany and across Europe.

Abstract

Using a real options model, this paper quantifies a gas-fired power plant’s operating value and the value of a new investment against the background of a market transition to renewable electricity. The model is run with recent data for Germany’s power sector and for different types of gas-fired power plants.
The result is twofold. First, the paper achieves a more realistic value by improving on existing models: it models electricity and gas prices as a two-dimensional stochastic process, each component consisting of the sum of a seasonal pattern and a mean-reverting process; it uses high granularity by modelling hourly time-steps; and it incorporates power plant ramping times and costs. Second, it compares two types of power plant models, one with daily and one with hourly operating decisions, and thereby quantifies the value of a plant’s intraday flexibility. The hourly model replicates operators’ and investors’ decision making accurately. This is evidenced by the fact that the results trace current major developments like the recent decline and come-back of gas-fired generation in Germany.
The paper contributes to a better understanding of the choices operators and investors face in current electricity markets. In the absence of large scale storage solutions flexible supply of electricity, as provided by gas, is important in the transition to renewable energies in Germany and across Europe.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 June 2019
Deposited On:03 May 2019 08:01
Last Modified:07 Apr 2020 07:20
Publisher:Elsevier
ISSN:0140-9883
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.eneco.2019.04.013
Official URL:https://www.sciencedirect.com/science/article/pii/S0140988319301276?dgcid=rss_sd_all
Other Identification Number:merlin-id:17773

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