Generation Asset Valuation Under Market Uncertainties

Energy industry deregulation has made generation asset valuation a significant challenge. Billions of dollars have been invested in the acquisition of power generation assets. In order to manage financial risks, market participants require both detailed market structure analyses and efficient valuation methodologies as part of their due diligence processes. This paper introduces the concept of using price-based unit commitment for generation asset valuation, within the framework of Monte Carlo simulations. The method can capture the uncertainties of energy markets as well as complex generation operation characteristics. Functionality requirements of effective software tools for asset valuation are also discussed. Applying the fundamentals of stochastic simulation and generation unit commitment to asset valuation is an essential part of overall portfolio management for energy market participants.