Valuation of Generation Assets using Risk Management Methods

The development in the energy sector in Europe during the last decade results in a large gap of installed generation capacity which needs to be closed up in the near future. Furthermore the deregulation process put a high cost pressure on generation and trading companies and increased the uncertainties of planning processes. Therefore adequate methods to support investors in their decision process for investing into new generation assets as well as for valuing existing plants are necessary. These methods must consider stochastic input data as well as the technical and economic properties of the energy sector. In this paper a method for the valuation of new and existing thermal and hydraulic generation assets is presented. In addition to the method to value the assets for the depreciation range using generation and trading planning tools, a stochastic planning tool optimizing the commitment of the generation assets and the market decisions is presented. The valuation methods are based on a decomposition of the valuation horizon of power plants into sub-periods for which the possible revenues and costs are quantified successively. The determination of the contribution margin for each period is based on applications of an optimization tool for generation and trading planning, in order to consider the technical and economic properties of the system. In addition to the models for the emerging markets for reserve and options on electrical energy, a risk management method is included in the tool. The paper presents the stochastic valuation method considering the market for electrical energy and the different markets for reserve. The exemplary results show that the consideration of the different marketing opportunities leads to an increase in the contribution margin of about 10 %, which proves the necessity to consider these markets. Furthermore, different risk management strategies are considered by optimizing the unit commitment as well as the market decisions by means of- different risk preferences.