Applying real option to the operation of generation assets: a fuzzy approach

Reregulation of the energy market has dramatically changed the way generation assets owners operate and value their assets. Real option analysis sees more and more applications on the valuation of generation assets because it explicitly accounts for the flexibility in operating generation assets. This work examines the impacts of deregulation on the operation and valuation of generation assets. The theory of firm behavior and modified Leontiefs input-output model for GENCOs (Generation Company) are given to illustrate the framework where GENCOs operate. A new method to implement real option analysis to valuate and operate generation assets is introduced. This method, which is bases on fuzzy sets and linear programming, meets the needs of a GENCO in reregulated market, captures the fast-changing characteristics of the deregulated electricity market and reduces the computation efforts needed in dynamic programming and Monte Carlo simulations. A few examples are given to illustrate the capability of the method. The extension of the method and aimed future research are discussed.