Before joining KYOS Energy Consulting, Hans van Dijken worked as risk analyst for Reliant Energy, senior quantitative analyst within the risk department of NUON, and head of valuation within the business development department of NUON. Published in: World Power
Publication year: 2010
Co-author 1: Dirk van Abbema, ING Bank
Co-author 2: Henk Sjoerd Los, KYOS Energy Consulting
Co-author 3: Cyriel de Jong, KYOS Energy Consulting
Gas-fired power plants provide the primary source of production flexibility in many power markets. An economically optimal use of the start-stop flexibility of gas plants is paramount to retrieving the maximum value from the asset. With the increasing penetration of wind power, this flexibility will become essential to balance the system. While starts and stops allow the owner to choose the production hours with the largest margin, they are also associated with various explicit and implicit costs. In this article we demonstrate the impact of various start-stop constraints and costs. This impact analysis is possible by applying advanced techniques for generating realistic Monte Carlo price simulations in combination with techniques for optimizing the production pattern.
An important insight that we gain is that different ways to limit starts lead to subtle differences in the actual use of the power plant and the corresponding value. We also find that the common modeling assumption of having perfect foresight about the future spark spreads may lead to a significant overstatement of plant value. This latter result contrasts our previous belief [Los et al, 2009], and statements of some other researchers [cf Clewlow et al, 2009] who claim that perfect foresight is a reasonable assumption. In particular, when there is a fixed limit to the number of allowed starts, as is common in many VPP contracts, uncertainty about future margins is definitely reducing plant value. We are able to show this result using the concept of least-squares Monte Carlo as applied to energy assets in e.g. Deng (2006, power plants) and De Jong and Boogert (2008; gas storage).
Keywords: power plant valuation, VPP, plant start, dynamic programming, Monte Carlo simulations, least squares Monte Carlo
Published in: World Power
Publication year: 2010
Co-author 1: Dirk van Abbema, ING Bank
Co-author 2: Henk Sjoerd Los, KYOS Energy Consulting
Co-author 3: Cyriel de Jong, KYOS Energy Consulting
Gas-fired power plants provide the primary source of production flexibility in many power markets. An economically optimal use of the start-stop flexibility of gas plants is paramount to retrieving the maximum value from the asset. With the increasing penetration of wind power, this flexibility will become essential to balance the system. While starts and stops allow the owner to choose the production hours with the largest margin, they are also associated with various explicit and implicit costs. In this article we demonstrate the impact of various start-stop constraints and costs. This impact analysis is possible by applying advanced techniques for generating realistic Monte Carlo price simulations in combination with techniques for optimizing the production pattern.
An important insight that we gain is that different ways to limit starts lead to subtle differences in the actual use of the power plant and the corresponding value. We also find that the common modeling assumption of having perfect foresight about the future spark spreads may lead to a significant overstatement of plant value. This latter result contrasts our previous belief [Los et al, 2009], and statements of some other researchers [cf Clewlow et al, 2009] who claim that perfect foresight is a reasonable assumption. In particular, when there is a fixed limit to the number of allowed starts, as is common in many VPP contracts, uncertainty about future margins is definitely reducing plant value. We are able to show this result using the concept of least-squares Monte Carlo as applied to energy assets in e.g. Deng (2006, power plants) and De Jong and Boogert (2008; gas storage).