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Exercising Real Unit Operational Options Under Price Uncertainty, Chung-Li Tseng
Exercising Real Unit Operational Options Under Price Uncertainty, Chung-Li Tseng
Engineering Management and Systems Engineering Faculty Research & Creative Works
In this paper, we use the real options framework to value the operation flexibility of a power plant. The power plant operation is formulated as a multi-stage stochastic problem. We assume that there are hourly spot markets for both electricity and the fuel used by the generator, and that their prices follow some Ito processes. At each hour, the power plant operator must decide whether or not to run the unit so as to maximize expected profit. However, the unit operation is subject to decision lead times and minimum uptime and downtime constraints, so the commitment decision must take into …