World Power: Realistic power plant valuations with cointegration

29 June 2009

World Power, 2009

KYOS publication on power plant valuation

Realistic Power Plant Valuation

How to Use Cointegrated Power & Fuel Prices.

iStock_45212852_XXXLARGEThe large investments in new power generation assets illustrate the need for proper financial plant evaluations. Traditional net present value (NPV) analysis disregards the flexibility to adjust production decisions to market developments, and thus underestimate true plant value. On the other hand, methods treating power plants as a series of spread options ignore technical and contractual restrictions, and thus overestimate true plant value. In this article we demonstrate the use of cointegration to incorporate market fundamentals and calculate dynamic, yet reasonable, spread levels and power plant values. A practical case study demonstrates how various technical and market constraints impact plant value. It also demonstrates that plant value may contain considerable option value, but 64% less than with the usual real option approaches. We conclude with an analysis of static and dynamic hedges affecting risk and return profiles.

Power plant valuation software

This paper is based on the methodologies that are implemented in the KyPlant software. KyPlant can be used for pricing, risk managing and optimizing power plants. For more information about KyPlant, click here.

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