Investments in Flexibility Measures for Gas-Fired Power Plants: A Real Options Approach

The promotion of electricity from renewable energy in Germany by means of guaranteed feed-in tariffs and preferential dispatch leads to difficulties in the profitable operation of many modern conventional power plants. Nevertheless, conventional power generation technologies with enhanced flexibility in their operational characteristics can contribute to balancing electricity supply and demand. For this reason, the operational flexibility of conventional power plants becomes important for the system and has an inherent economic value. The focus of this research is on high efficiency gas-fired power plants; we tackle the following three research questions from a plant owner’s perspective: (1) How can already existing conventional power plants be operated more flexibly and thus be made more profitable? (2) Which flexibility measures can be taken under consideration? (3) What is the optimal timing to invest in flexibility measures? To answer these questions we propose an optimization model for the flexible operation of existing gas-fired power plants that is based on real options analysis (ROA). In the model, the economic and technical aspects of the power plant operation are explicitly taken into account. Moreover, the spark spread, which is an important source of uncertainty, is used for the definition of the flexible plant operation in terms of different load levels and corresponding efficiency factors. The usefulness of the proposed model is illustrated with a case study mimicking the retrofitting decision process.