How to Value Electric Generation Assets as Real Options

To attend, Call (412) 279-9298 or Register Online

For further details, contact Dr. Kenneth Skinner at (619) 696-3194 kskinner@semprasolutions.com

Course Description This course begins by exploring the various approaches used to value electric generation assets in a deregulated market.  The course considers the deficiencies of marginal cost valuation and develops a real-options approach based on forward price forecasts of fuel and energy markets. Net present value (NPV), decision analysis (DA), and real options (RO) valuation techniques are compared. The course further considers the role of volatility, portfolio considerations, and risk management implications in valuation. Course Outline 1.      Introduction to Deregulated Market Analysis a.      Why Volatility Modeling? b.      A Brief Comparison of Modeling Techniques c.      Successful Valuation Strategy In Deregulated Markets 2.      The Fundamentals of Valuation Techniques a.      Net Present Value Analysis (NPV) b.      Decision Analysis (DA) c.      Real Options Analysis (RO) 3.      The Fundamentals of Real Options Analysis      a.      Introduction to Real Options Analysis   i.     Black-Scholes, Binomial Trees, and GARCH Models b.     Details of Option Model Implementation   i.     A Generating Unit as a Strip of Options on a Btu Spread  ii.     Measuring Hidden Value in Uncertainty and Optionality Application: Comparing Power Plant Value from ProSym Marginal Cost Analysis vs. Real Option Competitive Price Analysis Example Comparing Base-load, Mid-Merit and Peaking Units c.      Monte Carlo Simulation of Stochastic Prices   i.     What is Volatility  ii.     Modeling Volatility 1.     Quantitative Models – a.      Geometric Brownian Motion b.      Mean Reversion c.      Markov Regime Switching d.      Jump Diffusion e.      AR(3) GARCH(1,1) 2.     Implied Volatility form Black-Scholes Model iii.     Estimating Volatility 1.     Software Considerations 2.     Choosing Explanatory Variables 3.     Model Selection Criteria 4.     Misspecification d.     The Challenge of Forward Price Simulation e.      Mark-to Market via Forward Price Hammers f.       Hourly Unit Commitment and Dispatch Under Price Uncertainty i.     Incorporating Engineering Constraints ii.     Incorporating Rational Dispatch Behavior Application: Valuing Generation Assets Using Real Option Competitive Price Analysis Step-by-Step Valuation Example for a Portfolio of Generation Assets Application: Valuing Ancillary Services Example of Valuing Expected Revenue from Southern California Ancillary Services Markets Application: Minimizing Price Risk through Operational Design Flexibility Example of Valuing the Option of Installing Duel Fuel Capability