2009
MAS 2009 Proceeding
Monte Carlo valuation of power generating units
Authors: Ivan Ourdev , Simaan M. AbouRizk , Mohammed AlBataineh
Abstract
Electricity deregulation in North America has enabled owners of small electric generators to become independent power producers (IPP) by selling electricity to the grid. Uncertainty affects both the profit maximizing utilization schedule and the related valuation of the underlying asset, the power generating unit (PGU). In addition to price uncertainty, the small sized power generating units are subject to different constraints and fuel supplies compared to those of large power plants, with higher production costs. Monte Carlo simulation is applied to evaluate the profitability of small PGUs as potential electricity producers and stochastic methods are used to model the prices of electricity and fuel. We extended the meanreverting stochastic differential equation for the electricity prices with term modeling the price spikes. The spike distribution was done using the ?peak over threshold? approach of the Extreme Value Theory. The profitability measures, net present value and internal rate of return, were calculated by modeling the term structure of the interest rate with extended Nelson Siegel form.
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