The evaluation of power plant investments in the Korean electricity industry

Yun, T

Abstract

The purpose of this thesis is to use real option methodologies to assess
capital investment decisions of near future projects that will be made in Korea.
I compare two base load plants burning different fuels such as coal and
uranium within the CO2 allowance trading context to provide prominence to a
nuclear power plant. Nuclear power plants have recently been rising to the
surface as one of the leading alternatives to the generation plants using fossil
fuels. To consider the flexibilities and uncertainties in a competitive market
environment, I employed the real options approach, due to its superiority in
dealing with uncertainties and incorporating management's flexibilities into the
valuation process. Furthermore, I tried to evaluate the investment opportunity
contingent on at least two underlying assets featuring different price evolution
behaviours. As main pricing skeletons, I adopted the mean reversion model for
the evolution of electricity prices and the gBm model for that of the COi
allowance prices and construction costs of a nuclear power plant. In addition, I
used the Monte Carlo simulation approach as the approximation tool to
overcome a limitation of the analytic approach. Our findings confirmed that the
real options approach uncovered hidden strategic value and provided critical
insights to the investment decision making process.
Keywords: Investment Analysis, Real Option Approach, Base Load Plant, CO2
Allowance, Electricity Price

• Thesis Type: Thesis
• Deposit Date: Oct 3, 2012
• Award Date: Jan 1, 2010