According to FOCUS Online [2010], gas- as well electricity-prices will increase substantially. Both price processes did not go hand in hand in the past and so will not in the future. As prices may even move in opposite directions, the opportunity to change the on / off-mode of a power plant gains importance. This means, if gas prices are high and electricity prices are low, it makes no sense to turn on a gas fired power station. Of course, the suppliers prefer earning nothing to making a loss. As gas-prices decrease and electricity-prices reach a higher level, the suppliers want to earn the revenues again by selling power generated with gas fired power plants. However if suppliers calculate, whether an investment in a power plant is profitable or not, flexibility often is not taken into account. As standard evaluation techniques neglect changes of the specific project during its lifetime, another evaluation method is needed. In this paper, the value of the flexibility to switch the mode of a gas-fired power plant is analyzed by using Real Options. So called Switching Options cover the opportunity to switch from on- to off-mode and vice versa. For the pricing of these switching options, Monte Carlo Simulation techniques are used. To apply monte carlo evaluation methods, spark spreads (difference between electricity- and gas-prices) need to be simulated. Here nonparametric identification and estimation procedures are applied for an Ito diffusion process based on historical data. Approaches introduced by Ait-Sahalia [1996] and Jiang and Knight [1997] are applied on historical spark spreads, to generate possible cash flow streams. A switching algorithm was applied on these cash flows to derive a present value for the switching option. Furthermore, the present value of a power station was calculated without considering flexibility. The difference of these present values is the value of the flexibility to change the on/off-mode of a gas fired power station.     «

According to FOCUS Online [2010], gas- as well electricity-prices will increase substantially. Both price processes did not go hand in hand in the past and so will not in the future. As prices may even move in opposite directions, the opportunity to change the on / off-mode of a power plant gains importance. This means, if gas prices are high and electricity prices are low, it makes no sense to turn on a gas fired power station. Of course, the suppliers prefer earning nothing to making a loss. A...     »