Valuation of Power Generation Investments in Deregulated Capacity Markets

Abstract

Electricity is a very unique product that has yet to become efficiently storable, and it is uniform in its nature independent of what technology is being used to produce it. This factor makes the valuation of a power generator asset very complex, particularly in a deregulated capacity market environment. While the value of a power generator asset depends heavily on the price of electricity and the cost of fuel, the price of electricity itself is defined by the price and volume bids submitted to the market.

This research is aimed at studying the valuation of a power generator asset in a deregulated capacity market environment. The analysis performed in this study follows a three-step procedure: (1) investigating the distribution of demand in the Pennsylvania- New Jersey-Maryland electricity market within specific time intervals, (2) modeling the behavior of market participants with a set of generator technologies and with in-depth analysis of the various fuel cost scenarios that affect the actual price of electricity, and (3) implementing real options valuation to assess the value of a power generator operating within the capacity market environment. Cournot game theoretical model is assumed in all three studies. Transmission congestion and availability of the generators are not considered.