Gas fired power plants: Investment timing, operating flexibility and abandonment

We analyze investments in gas-fired power plants under stochastic electricity and natural gas prices. A simple but realistic two-factor model is used for price processes, enabling analysis of the value of operating flexibility, the opportunity to abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study uses representative power plant investment and operations data, and historical forward prices from well-functioning energy markets. We find that when the decision to build is considered, the abandonment option does not have significant value, whereas the operating flexibility and time-to-build option have significant effect on the building threshold. Furthermore, the joint value of the operating flexibility and the abandonment option is much smaller than the sum of their separate values, because both are options to shut down. The effects of emission costs on the value of installing CO2 capture technology are also analyzed.