Modelling thermal power plants as real options applying stochastic mixed-integer programming

This paper describes a novel approach for strategic investment planning based on real options analysis and its application to a single investor within the German electricity sector. It takes into account the long-term uncertainty in fossil fuel prices of natural gas and coal as well as the power plant´s short-term flexibility to react on fluctuating electricity prices by means of its actual operation. In contrast to existing methods for real options analysis, unit commitment is modelled based on a mixed-integer formulation, and electricity prices come from a data-link with a fundamental model of the electricity market. The application focuses on the profitability and timing of two selected investment alternatives and the influence of a variation in specific investment costs and CO₂ allowance prices.