Arnaud Porchet, Nizar Touzi, Xavier Warin
This paper presents a real option valuation model of a power plant, which accounts for physical constraints and market incompleteness. Switching costs, minimum on-off times, ramp rates, or non-constant heat rates are important characteristics that can lead, if neglected, to overestimated values. Existence of non-hedgeable uncertainties is also an important feature of energy markets whose impact on assets value is often neglected. We use the utility indifference approach to define the value of the physical asset. We derive the associated optimal control problems and provide a characterization of their solutions by means of a coupled system of re ected Backward Stochastic Dierential Equations (BSDE).We relate this system to a system of variational inequalities, and we provide a numerical comparative study by implementing BSDE simulation algorithms, and PDE nite dierences schemes.
