Generation planning for inter-related generation units: a real options approach

The electric power industry is moving away from a regulated monopoly toward an uncertain, competitive environment. This change introduces significant financial risks in generation planning. It is thus highly desirable to quantitatively examine various options available to the generation planner in order to exploit the flexibilities existing in a competitive environment. In this paper, we examine various options such as capacity expansion and capacity reduction when generation units are inter-related. Based an the real options theory, we estimate the values of such options for decision support purposes. Numerous managerial insights and economic implications are also provided