Investment analysis of power producers under reliability option scheme

Abstract

Reliability Options (ROs) are one type of Capacity Remuneration Mechanisms (CRMS) to meet generation adequacy requirement, and it has been applied in some power markets. When a power producer sells a RO, he will receive an option fee but have to sell power at a price below the strike price which is set by the buying side. This mechanism may have some impacts on the investment decisions of power producers. In this paper, the investment timing of power producers is studied. A stochastic differential electricity price model and an investment decision model are built. Some characteristics, such as mean-reversion, multi-periodic and gradual growth are considered in the price model. Real option pricing model is used to make generation investment decision and it is equivalent to a linear complementarity problem. The numerical solution is obtained by the Successive Over Relaxation (SOR) method. The example results show that the different settings of strike price and option fee will lead to early or late investment.

Keywords

• Reliability options
• Power market
• Investing timing
• Real option
• Linear complementarity problem