Evaluating the enhanced flexibility of lignite-fired power plants: A real options analysis

In this paper the authors develop a decision tool that is based on real options analysis and that supports flexibility investment decisions concerning upgrades of conventional lignite-fired power plants. The value of the power plant is influenced both by technical and economic variables, the latter including subsidies. The four-step approach proposed allows to determine the optimal operation strategy in light of electricity and fuel price developments, to simulate the expected project value, to determine the expected changes of the project value over time, and finally to derive the optimal management (investment/disinvestment) decision. For the case of an existing lignite-fired power plant in Germany, we find that the plant can only be operated profitably without any modifications until the end of its technical lifetime if current government subsidies persist. In the absence of subsidies, however, it is preferable to stop operation immediately. The analysis also shows that profitable investments in a number of flexibility retrofit measures are possible, the ranking of which depends, however, on the costs and benefits related to the retrofitting measures, as well as their implementation time.