Risk assessment of generation investment

Abstract

This paper proposes an improved approach to risk assessment of generation investment in the new deregulated environment using the option pricing theory. A more realistic model for electricity price in the application of real option pricing method for generation asset valuation is proposed, which takes into account its fluctuation and uncertainties, and, more importantly, its daily, weekly and annual cyclic patterns, which is a unique characteristic of electricity price. Base on such a price process, the generation asset can be evaluated by the application of real option method. In order to manage the risks of the investment on generation expansion project, risk assessment tools such as Value at Risk (VaR) and Conditional Value at Risk (CVaR) may be used to provide the investors with tools for more informed decisions. A numerical example is given to illustrate the proposed method.