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Variable capacity utilization, ambient temperature shocks and generation asset valuation


Tseng, CL and Zhu, W and Dmitriev, A, Variable capacity utilization, ambient temperature shocks and generation asset valuation, Energy Economics, 31, (6) pp. 888-896. ISSN 0140-9883 (2009) [Refereed Article]

Copyright Statement

Copyright 2009 Elsevier B.V.

DOI: doi:10.1016/j.eneco.2009.05.013


This paper discusses generation asset valuation in a framework where capital utilization decisions are endogenous. We use real options approach for valuation of natural gas fueled turbines. Capital utilization choices that we explore include turning on/off the unit, operating the unit at increased firing temperatures (overfiring), and conducting preventive maintenance. Overfiring provides capacity enhancement which comes at the expense of reduced maintenance interval and increased costs of part replacement. We consider the costs and benefits of overfiring in attempt to maximize the asset value by optimally exercising the overfire option. In addition to stochastic processes governing prices, we incorporate an exogenous productivity shock: ambient temperature. We consider how variation in ambient temperature affects the asset value through its effect on gas turbine's productivity.

Item Details

Item Type:Refereed Article
Keywords:Electricity generation asset valuation, overfire option, price uncertainty
Research Division:Economics
Research Group:Applied economics
Research Field:Financial economics
Objective Division:Economic Framework
Objective Group:Macroeconomics
Objective Field:Fiscal policy
UTAS Author:Dmitriev, A (Dr Alexandre Dmitriev)
ID Code:83257
Year Published:2009
Web of Science® Times Cited:2
Deposited By:Economics and Finance
Deposited On:2013-03-06
Last Modified:2017-12-06

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