Choice of nuclear power investments under price uncertainty: Valuing modularity

This work aims at examining how to compare two investment projects in the electricity market. The first project is a flexible sequence of small nuclear power plants, whereas the second is a nuclear power plant of large capacity. We measure the option value generated by the modularity of the first project, given the uncertain future competitive price of electricity. Using a realistic calibration of the model, we show that the option value of modularity has a sizeable effect on the optimal dynamic strategy of the producer, in particular in terms of the optimal timing of the decision to invest in the first module. (c) 2605 Elsevier B.V. All rights reserved.