Deregulation of electricity industries has created wholesale markets with uncertain prices and offered greater flexibility to investors to make decisions. In this chapter, we consider the problem of a typical investor who has discretion over not only the timing, but also the sizing of a new power plant. The interaction between these two types of managerial flexibility may be addressed analytically using the real options approach. Since an investor may also have discretion over technology choice, we allow for an investment opportunity in two mutually exclusive projects with embedded timing and sizing options. Via numerical examples, we illustrate how an investor may make decisions about timing, sizing, and technology choice. Sensitivity analyses to key parameters also highlight the intuition for how decisions are made.
Electricity price natural gas-fired power nuclear power optimal investment decision real options technology choice
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The authors would like to thank two anonymous referees for providing valuable comments.
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