Real options and the value of generation capacity in the German electricity market

In this paper we implement a real options model for the unit commitment problem of an electricity producing turbine in a liberalized market. The model accounts for various operating constraints of the turbine. Price uncertainty is captured by a mean reverting process with jumps and time-varying means to account for seasonality. We demonstrate how the model can be used to value an electricity producing turbine, make profit-maximizing commitment decisions and compute risk profiles of generating assets for risk management purposes.