Real option evaluation of generation asset in spot market considering operation constraints

Abstract

An improved method using real option theory is proposed in this paper for evaluation of generation asset investment in spot market under the deregulated environment. The adjusted model for the mean reversion process with long-term periodic mean is employed to describe the special characteristics of electricity price such as fluctuation, uncertainty and periodicity. In particular, the system operation constraints are taken into consideration in the model for the optimization of generators' outputs. Based on the established price model and optimization model, the generation asset to be invested is evaluated by adopting the approach of spread real option. Tools such as Value at Risk(VaR) and Conditional Value at Risk(CVaR) are applied for risk assessment. The validity of the proposed method is illustrated by implementing numerical simulation test on the IEEE 30 bus system. © 2007 IEEE.