Valuation of Flexible Power Plants in Brazil: a Real Options Approach

Resumo

In this paper we discuss the real options valuation of investments in flexible power plants. After the energy supply crisis lived in 2001, new investments in gas fired power plants were made to increase electricity generation in the short term, due to the reduced maturity time of these investments. More recently, the nationalization of the Bolivian natural gas reserves raised uncertainties over the prices and supply of this commodity. First we analyze an operating power plant which can switch fuels among natural gas and oil. Second, we study the option to temporarily shut down the plant. Finally, we assess the interaction between these two flexibilities. Valuation involves the use of two quadranomial trees, supporting correlated GBM for the fuel prices.