Gas Fired Power Plants: Investment Timing, Operating Flexibility and Abandonment

We analyze investments in gas fired power plants under stochastic electricity and gas prices. A simple but realistic two-factor model is used for price processes, enabling analysis of the value of operating flexibility, the opportunity to abandon the capital equipment, as well as finding thresholds for energy prices for which it is optimal to enter into the investment. Our case study, using real data, indicates that when the decision to build is considered, the abandonment option does not have significant value, whereas the operating flexibility and time-to-build option have significant effect on the building threshold.