Valuation of Generation Assets with Unit Commitment Constraints under Uncertain Fuel Prices

Market based valuation of generation assets is a critical problem in competitive power markets. Previous approaches to this problem has included modeling the cash flow from a generator as a spread option between electricity and fuel prices, which ignores the effect of flexibility and startup costs. Simulation based approaches with full unit commitment constraint have been presented, but they are computationally extremely demanding. In this report, a principal component based model for electricity prices is applied. It is shown how this approach can reduce the unit commitment problem to two stage dynamic programming (DP) problem. The information gained by solving the DP for possible electricity and fuel price states, is stored in a lookup table. This table is used to map simulated fuel and electricity price states to generator cash flow. As a result we are able to perform simulation based valuation of generators over multi-year periods, with minimal computational complexity.