Power plant multistage investment under market uncertainty

Power plants whose production will be sold in a market context must be evaluated, taking into account market variables such as fuel, emissions and electricity prices. These variables have a stochastic behaviour, and therefore the power plant's present value is also stochastic. Using a stochastic process to estimate the power plant's present value, the best plan for investment can be devised to extract the maximum project value. This is achieved by considering multiple investment stages together with the possibility of postponing or abandoning the project when market conditions are unfavourable. The focus of the paper is on establishing the market-based value of a power plant and on determining the best execution of investment when it is done in multiple, modular stages. A comprehensive methodology is developed to establish a process for the plant present value, and to derive the optimal execution policy for investment.